One Way Raising Taxes Depresses the Economy and Lowers Tax Receipts

Obama is planning on raising taxes on the rich. There’s no secret to this plan. He’s also planning on raising taxes on the middle class, despite his campaign promises, but that’s a topic for another post.

Liberal economic theory posits that when you take a dollar from an individual, that individual gets more than a dollar’s worth of value back, because the government knows how to spend that dollar in such a way as to provide such benefits. Not only that, but Liberals conclude, in their actions if not in spoken theory, that the individual who has a dollar taxed from them will get more value from that dollar than they would have gotten from any other option available to them for the use of that dollar. Here’s at least one example of how this is hogwash.

I’ve got business debt. Not imaginary debt made up for the sake of this argument, but real debt. Without bothering you with irrelevant details, I’ll tell you that this debt is no longer business debt but has technically become personal debt. That means in order to pay the debt off I have to pay myself from the business, incurring payroll taxes as I do. Let’s say I’m going to pay myself $30,000 per month this year (this is definitely an imaginary figure), in order to pay off debt. Unfortunately, because I’m paying myself that much, I’m classified as being “rich”, nevermind that I’ll only keep $4K per month of that for myself, and the rest of what I will take home will go towards paying off debt.

$30,000 per month is $360,000 per year. That means I will pay $96K in taxes. Now, imagine that Obama raises taxes. Let’s say he raises taxes on the rich such that instead of $96K, I’m paying $130K on that $360K. That’s a $34K difference. However, let’s suppose that I have the flexibility to pay off less of my debt if I want to. What is going to cost me more money, paying myself $360K so I can pay off a bunch of debt, or letting interest accrue on that debt and waiting to pay it off until tax rates go down? At some point it makes sense to not pay off the debt, or only make the minimum payments, instead of paying off the debt early.

What does this mean? It means that money I would have used to pay off that debt is frozen. Rather than going to a bank where it can be loaned out again, it’s tied up. And instead of paying more taxes to the IRS, I’m paying less. Multiply this by a few hundred thousand times, and you can see how when the government raises tax rates on the rich, sometimes they end up collecting less taxes than they did with lower rates. There’s nothing sneaky about it, and it has nothing to do with tax havens or fishy accounting. It’s perfectly legal for me to choose to pay myself less in order to defer the taxes until a future date when I believe the tax rate may be lower. Would you do any differently?