With tax day taking place last week, I’ve been thinking about the impact of taxes on the economy, and in particular about the conservative talking point that lowering taxes on small businesses will unleash growth and create jobs.
This is related to, but different than, another classic conservative point: that lower income tax rates will create more tax revenue. Regular readers know well my disdain for this theory (the Laffer Curve), which has never been supported by any research. Read my posts here and here to see more of my laughing at Laffer.
In the case of small business taxes, I decided to build a little model and see what impact reduced taxes would have. You can see the results below:
Reduced taxes on small business
In this case, we have the same small business generating $1,000,000 in annual revenues and $250,000 in annual pre-tax income. Right now, at a 40% tax rate, this business delivers $150,000 to its owner. If taxes were cut in half, to 20%, the business owner would make $200,000 instead. Now, our business owner might be forward thinking, looking to invest in his business, and use the extra $50k to hire a new worker. But more likely, he is going to use that extra $50k to put an addition on his house, or buy a new car, or pay his kid’s college tuition. In short, tons of small business owners are not going to use their tax break to hire people and expand, but rather to buy stuff.
The Wall Street Journal recently gathered a large group of CEOs together to discuss the top issues facing the country. The broad theme was “How to Rebuild Global Prosperity.” Under that theme were four subsections, and in each subsection a committee of CEOs produced five recommendations. What was fascinating to me was how each set of recommendations matched up with generally liberal positions.
The Energy and the Environment committee recommended:
- Diversify U.S. energy
- Promote energy efficiency
- Cap-and-trade bill
- Federal plan for electric grid
- Diversity transportation systems
The Economy and Finance committee recommended:
- Sustainable job creation
- Bring back winning spirit in U.S.
- Build greater certainty
- Enact global trade pact
- Tax reform
The Educated Work Force committee recommended:
- Education is our top priority
- Council for educated work force
- Reward effective teaching
- World-class teacher corps
- Mobilize parents for change
The Health Care committee recommended:
- Reform health-payment system
- Measure health outcomes
- Hold patients accountable
- Reform medical malpractice
- Promote integrated care
I’m not saying that these are a super-liberal set of recommendations. Certainly if Mother Jones or Howard Dean issued a set of recommendations on these topics, they would be different, although there would definitely be some overlap. But if you take the entire set of recommendations, I would say that they match up more closely with the Democratic platform than with the Republican platform. And if you take the Tea Party wing of the Republican Party, I’m not sure that they would agree with any of the CEO recommendations.
What does this all mean? That when you get outside of Washington DC, the country isn’t as polarized as the media makes it seem. A collection of the most powerful CEOs in the country comes up with recommendations that are mainstream liberal. The majority of citizens are sitting solidly in the center, and if politicians and pundits would stop acting like jerks – if they would stop, listen and think – then maybe we could actually solve the big problems that our country faces.
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Tagged Business, ceo, ceo council, economy, education, energy, Environment, finance, health care, jobs, Politics, wall street journal