Do Economists “Know” That Personal Tax Rates Don’t Matter for the Economy?

Here is what Business Week writer Brendan Greeley tells us about the effect of personal taxes on our economy: “Economists have known for a while that personal marginal tax rates, and in particular those on the rich, don’t seem to have much of an effect on the economy.”

So… economists all agree, is that right Mr. Greeley? And you personally know what they all say, is that right? And economists have sure fire tools with which to measure this question, is that right? And what exactly is the question? Is it about tax rates or the government’s take as a percent of the economy, which can be quite different.

Mr. Greeley also says that cuts in corporate tax rates do stimulate economic growth. He thinks he and his “economists” do know that. Of course most business employers in the US aren’t corporations and don’t pay corporate taxes. They run their businesses through sole proprietorships, limited liability companies (LLC’s) and the like whose income is reported and taxes are paid on the individual 990 tax form. So taking less money from a corporation does lead to business hiring and expansion, but taking less money from LLC’s and other businesses does not. Is that right, Mr. Greeley?

Here is some math. It’s hard to argue about math. If my LLC earns a profit of $100,000 and I pay no taxes, I have $100,000 with which to hire new employees or contractors or plant or equipment or otherwise try to grow my business. If I decide not to do that, I spend the $100,000 on a yacht which gives the yacht makers more business so they hire. If instead I buy stocks, that frees up $100,000 in cash which will also get spent or invested. In thinking about this, tax rates matter but the government’s actual take after all deductions would seem to matter more, and the government total take has varied a lot less than rates in American history, thanks to the special deals that usually accompany very high rates in a crony capitalist system.

There are a lot of different factors here, some objective and more measurable, some subjective and completely immeasurable. Business owners will be more likely to invest and in particular commit to long term productivity enhancing investments if they don’t worry about their profits being taken away from them, either by higher taxes or by inflation or both. One thing we do know. If we don’t invest and innovate and improve our productivity, there won’t be raises and new jobs. And businesses can’t make the investments if they can’t make and keep profits.

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