OK so I know this is a little out of date now, but the point remains worth making.
Let’s talk about the Republican economic hypocrisy. This could be a long litany of the many examples of this (increasing the deficit during every administration since Eisenhower, and by exponentially more than the only 4 Dems to increase it at all since Wilson (in 1913) comes to mind), but no, I just want to mention the recent “taxes kill jobs” obsession that pervades despite all the evidence to the contrary. The tagline of the 2010 election was “jobs jobs jobs” and the causal “tax reduction” cry. The story goes like this: business aren’t hiring because of “tax uncertainty” so the economy remains sluggish and all those multinational corporations are sitting on obscene piles of cash because they’re just terrified that they might have to face a tax increase – ANY tax increase.
Let’s start with that statement just by itself and take a whiz-bang tour through federal taxation.[1]
1. The “tax rate” is actually the marginal tax rate. It’s not the rate that a payor actually pays, it’s the rate applied only to the income in that bracket. So if your marginal tax rate is 20% (I’m making up numbers) because you made $100,001 last year and the 20% tax rate is for the “$100,000 - $150,000” bracket, then you pay 20% tax on that $1. Not on $100,001 -- on $1. Below that you pay exactly what everyone else does on that money. Thusly:
a. $0 - $20k 5%
b. $20,001 - $50k 10%
c. $50,001 - $100k 15%
So if you made $100,001, your taxes will be:
20,000*5%=1000
30,000*10%=3000
50,000*15%=7500
1*20%=0.20
Total: $11,500.20 (or 11 ½% of your taxable income)
(This is the basic model of how income tax works. Corporate taxes are understandably much more complex, but let’s start there)
Which is the next point. This is NOT “I made $100,001 last year so I pay tax on that.” No you don’t. No one does, and they shouldn’t. Because when you do your taxes, you take either a standard deduction or itemized deductions. And the truth is that the higher your tax bracket, the greater percentage of your income is deductions, owing partly to the things that you may be doing with your money (charity, employees, health care, etc.) and partly to the fact that the wealthy generally have lawyers, accountants, and/or tax advisors who are skilled at shuffling income to reduce taxable income. So of that $100,001 you made last year, you may be reporting something like $75,000 in taxable income (again – making up numbers). So not only are you NOT actually PAYING the 20% tax rate on your income, you’re not paying ANYTHING on a portion of that income to begin with.
This is even more significant for corporations who, despite endless weeping and wailing and gnashing of teeth over the high corporate tax rates, almost never pay those rates on anything, and often pay nothing at all due to the multitude of loopholes and deductions available.
Which brings me back to my initial point. The GOP spent vast sums of corporate money in 2010 to convince people that companies weren’t hiring because the Bush tax cut issue was unsettled. Let’s put aside the absurdity of that for a moment (companies hire who they need to do what they need when they need it based on demand and economic outlook, not based on a largely fictional tax rate) and look at the reality of the landscape. Lo and behold, the GOP may actually be right about this one. But not for the reasons they’ve been peddling. Companies may have actually been delaying hiring decisions (in small part) pending the tax package outcome, but consider this: nearly[2] all of the costs of having employees are deductible. So, in fact, the tax rate has little or no effect on hiring at all, since almost nothing a company pays to an employee (or for them) is taxable. But also consider the impact of a REDUCED tax rate on that same dynamic. The deduction you get for payments to employees is reduced, so the benefit of hiring a tax deduction is diminished. So what the GOP says is “if they have to pay more taxes, they won’t pay employees” but what businesses are looking at (whether they admit it or not) is “if the tax rate goes UP, the benefit of the deduction is more, but if the GOP cuts the tax rate DOWN, then I won’t get as much of a benefit.”
Now, let’s get into a little more advanced stuff. The capital gains rate, which was slashed under Bush and is on the table for an increase now. Villainized, of course, as stifling investment. Capital gains tax is paid on investment income like interest or increased value of assets you sold (subject to lots more exclusions, but that’s the idea). Put them together, and the picture becomes: increase the tax (and thus decrease the incentive to buy assets hoping they will generate income) and increase the tax on taxable income (thus incentivizing deductions) and you’ve got a double-edged sword creating double-edged incentives to hire employees rather than sending money off-shore to foreign banks and investments.
So where does that leave us? Besides, of course, with a GOP that has shown absolutely zero interest in doing anything related to jobs or the economy two months into their reign. It leaves us with the Citizens United decision granting unfettered influence over elections to companies who want to hang onto their cash, send jobs overseas, cut benefits to workers (and hire illegal immigrants for less than that – Smithfield Pork, I’m looking at you), and tell you that it’s all the fault of the people trying to stop these very behaviors by using the tax system to motivate positive behaviors.
Which is, after all, what tax deductions are all about in the first place. They’re a way to encourage socially beneficial behavior without requiring it. So higher tax rates on imports, on American companies’ overseas operations, and closing loopholes that allow companies to earn billions in profits by taking advantage of American society while paying a fraction of the cost of maintaining that society have always been relevant and proper uses of the tax code. Unfortunately the GOP has been manufacturing the Kool-Aid that some Democrats seem to be drinking. And certainly it’s been sold to the public so forcefully that a significant number of Americans seem to be believing this plot. (Remember? The one that says a 3% increase in the income tax rate kills babies jobs?
I am reminded of the first tenant of film and TV: suspension of disbelief. Convince your audience that it’s more fun or beneficial to just lose themselves in the story, and they will follow along with you as you introduce implausible decision points and have bored housewives suddenly become super-spies. I see a similar dynamic here using the economic fear that pervades our country right now. People are looking for a handle on incredibly complex and dynamic situations, and the GOP is right there with a simple, bumper-sticker-worthy answer; it’s the taxes, stupid! In the frightfully effective strategy of Glenn Beck, they’ve concocted an “C-B = A (and don’t look at anything else” formula that, in isolation, appears to at least make sense. Even if it’s only a tiny portion of the story and told backwards.
{In the interests of full disclosure, I’m not fully convinced that the tax cuts affected hiring at all either way, but I write this to inject a framework into the conversation and at least introduce the idea. So please, by all means, disagree. But don’t do it just because of the aforementioned weeping and wailing and gnashing of teeth, do it because you considered the actuality of the policy and business motivations and other factors. Thank you, and good night.}
[1] I wish to thank BoJack (if you need to know, you know) for teaching me everything I know about tax. Which may amount to 1/10 of 1% of what there is to know, but considering I knew absolutely nothing before, I owe my knowledge to him. However, he is not to blame for what I’ve done with that knowledge. All of the facts about operative tax policy are to his credit, but he is not to blame for my opinions about how to use that policy. Kthxbai.
[2] I say “nearly” and “almost” just to hedge bets and allow a margin of error. I think payroll taxes paid on employees are not deductible, but I’m not certain about that, and even so, they amount to something like 4% of a portion of salary and are not at issue in the Bush tax package. (BoJack: if you read this, could you clarify the deduction issue?)
No comments:
Post a Comment