We break from our regularly scheduled pastoral musings for an economics lesson. I have no agenda except to vent my frustration of being considered an idiot by our political elite. “They” have made our electoral process a circus and forced us to buy tickets to it. I’m afraid the accountant I’d long buried in my soul has resurrected this election season. I can’t take it anymore! I hereby remove my clerical collar and don my little green banker’s hat for this post.
The two main candidates throw around statistics and numbers that are irrelevant to the average voter. They speak in macro-economical terms so as to distract from the micro-economical affects. For example, one candidate blames the other for proposing $4 billion in tax breaks for “Big Oil.” Whether that’s actually true or not doesn’t matter. It just sounds scary and assumes we won’t investigate further. In the end, it’s simple rhetorical sensationalizing.
One candidate blames the other for voting a certain way so many times in Congress. This is disingenuous. For example, assume you had to vote to deny pedophiles from teaching elementary school. But proposed in the same legislation was government-sponsored free interstate abortion services. You would vote yes to deny teaching opportunities to pedophiles, but no to the free abortion services. No matter which way you vote you’ll be accused of supporting either pedophile teachers or free abortions. Obviously, not every piece of legislation is that dramatic but it is reflective of the manipulative affect of earmarks and pork barrel projects. So when one candidate accuses the other being for or against certain things, we must know the details of the legislation. We’re not that stupid.
Now, one of the main candidates has promised to raise taxes on the top 5% of corporate earners in order to provide relief for 95% of Americans. (Please know that I didn’t vote for his main opponent, either.) Those are abstract numbers that have no meaning to voters. It’s just rhetorical flair. He claims those making less than $250,000 will see no increase in taxes. We’re not that stupid. Economics 101 is enough to explain why this plan is a smoke screen to garner votes. Corporations don’t pay taxes . . . people do! Let’s break this down into simple numbers we can understand; follow the simple logic:
Assume I manufacture and sell widgets. It costs me $.50 to make one widget that I then sell you for $1. I’ve made a $.50 profit on which I pay 10% in taxes, or $.05. I’ve netted after taxes $.45.
Now, assume Congress raises the tax rate to 20%. It now costs me more to manufacture and sell my widget. Do you think I’m going to eat that cost out of the goodness of my heart? Of course not! I’m going to sell my widget for $1.12. Why? The taxes on my suppliers has gone up so it now it costs them more and they pass that cost on to me. It now costs me $.55 to make a widget. So I sell you a widget for $1.12 which makes for a profit of $.57. I must now pay 20% taxes, netting after taxes $.45. So, has the corporation really paid more taxes? No! They’ve still taken home the same amount. The consumer has paid for it via higher prices.
This 95 percentile who drooled over a government check must now pay (in my scenario) 12% more in goods and services. The government has forced me to raise my prices rather than the market. Essentially, by tax hikes the government creates price floors (companies won’t sell goods at a loss) that ultimately hurt the consumer. Higher taxes on “the rich” actually becomes an oppressive tax on the poor.
So, should this candidate get elected and he’s able to follow through on his promise then expect the following logical results:
1. Inflation. Higher corporate taxes inevitably means goods and services will cost more. Companies will simply pass along their higher costs to the consumer.
2. The more expensive goods and services get the more consumers will cut down and avoid paying the higher prices. They stop buying as much. If they stop buying as much then companies stop making as much (they are for-profit organizations!). When companies stop making as much then they lay folks off and stop hiring. People without jobs don’t buy as much and the downward cycle spirals further downward.
3. If I plan to make more than $250,000 next year and suffer a promised tax hike then there is no motivation for producing more goods and services. It will cost me more to make an extra $1,000 than if I’d not made it at all. For example, if I make $249,999 I pay no taxes. If I make $250,001 I pay 10% in taxes. I will pocket more money by making less of it. So I cut back on my production.
4. If my capital gains rate is going up next year then I will pocket less money in 2009 than in 2008 by selling any appreciated property (stocks, real estate, etc.). Knowing this higher rate may last 4 or 8 years, I will sell at a time that nets me more money. If the tax-raising candidate is elected November 4 then expect a massive sell-off before January. That will drive the economy further downward. Then capital activity will drastically decrease in the next 4 to 8 years. In fact, the stock market’s current roller coaster ride is evidence that folks are trying to make last-minute money while the capital gains rates are lower.
This is not a partisan issue. It’s a simple economic one. Lower taxes motivates companies to make more money which leads to more capital investments, which means hiring more people, which means creating more consumers (not co-dependent borrowers!). The market’s “invisible hand” will determine how much is made by controlling whether they price themselves out of the market or not. The more money companies make the more taxes they collectively pay, and consumers pay lower competitive prices. That’s spreading the wealth.
Frankly, neither main candidate offers the necessary, radically market-driven strategy that would really help. And there are more important reasons to vote for any particular candidate. But don’t be duped by economic banalities. If you vote, do so with eyes wide open and hands on your wallet.