Saturday, March 07, 2009

Tax Argument Dodgers

There's an interesting debate going on over President Obama's outline for new tax rates and deductions. Interesting in that so little of it seems to be based on fact.

For example, Chuck Grassley, the top-ranking Republican on the Senate's tax writing committee, opposes Obama's plan to raise tax rates on the top 2 percent of incomes in America. Obama argues that these are the very individuals who most benefited from the Bush tax cuts of recent years, reaping enormous untaxed profits during the real estate fueled bubble. Grassley argues that Obama's proposed tax changes would discourage the small business owners who create most of the jobs in America and thereby harm the economy.

But taxes are only paid on "profits," not business expenses. So if an entrepreneur hires a new worker, that salary is a business expense and would be deducted from gross revenues. The same is true for investments in equipment, buildings, inventory, training, etc., etc. The only thing that is taxed is the amount left over AFTER all of that job creating, salary paying, America building effort by the employer.

In other words, there may be a lower after-tax profit for the employer but there is no tax increase on any aspect of actual job creation.

There is no argument over whether or not taxes can influence behavior. And the federal tax code has been used to promote public policies since it was first imposed. The real question should be which approach best delivers on the public policy goals such as job creation, deficit reduction, etc.

Marginal tax rates do matter, but when it comes to job creation and deficit reduction Bill Clinton's marginal rate tax increases were followed by far stronger job creation -- and the first balanced budget in a generation -- than Bush's tax cuts on the wealthiest Americans. It would be helpful if the mainstream media reported the facts behind the arguments of both sides of the debate.

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