Monday, July 9, 2012

A lesson on taxation: middle class tax cuts work better

Infusion of capital into the economy more likely under tax plans that benefit the bottom 80 percent

The debate over tax increases for the wealthy is likely to stir up some strong emotions for many across the country during the remainder of the presidential election year. With President Obama indicating that he's still on board with letting the Bush tax cuts expire for those earning over a quarter of a million dollars (and most of the country supporting his opinion), opposition to such a plan will be fierce and passionate, even if it's only opposed by a vocal minority.

Those that are against Obama's plan make several claims that just don't hold up. They make threats that it's socialism. They contend any tax increase would cripple an already fragile economy. And, perhaps the most ludicrous claim of all, they defend the extremely wealthy as job creators, adding that if we tax the top two percent that we can kiss job creation good-bye.

Those claims, however, are rooted in fears that frankly aren't going to materialize. A modest tax increase won't turn us into Soviet Russia. In fact, our economy thrived under higher tax rates during the Clinton administration, AND we were able to create budget surpluses as a result of the increased revenue.

Arguing that tax increases will stifle job growth is similarly flawed logic. Jobs are tied to demand for a product, not the personal finances of CEOs or business-owners. If demand is high, more workers will be needed to generate more products, which will in turn create greater profits for the company.

Increasing taxes on the rich will have zero effect on the jobs situation because an increase will only affect the individual's income, not their business's. Indeed, tying those two together makes no sense at all -- plenty of CEOs have made millions of dollars while their companies have floundered and workers were laid off.

Furthermore, the top two percent will still have tremendous spending power when they start to pay a more fair share of taxes. The economy won't suffer any worse because, to put it bluntly, the wealthy aren't the class that determines the economic health of the nation -- rather, it's the middle class that does.

Getting more income into the hands of the middle class, even if it's a substantially lower amount at the individual level than what their wealthy counterparts might receive, drives the economy more than "trickle down" economics ever could. Think about it: the wealthy can already make substantial purchases with their incomes, and this won't change with a minor tax increase. Conversely, putting even just a few hundred dollars in the hands of middle class workers WILL put significantly more capital into the economy.

An example may provide a better understanding of what I'm getting at. Suppose a country with 100 million workers is proposing tax cuts for either the working class or the top two percent. The question is this: will a $500 tax rebate for 80 percent of the population yield greater returns for stimulating the economy than, say, $10,000 for the rich?

The answer is yes, as demonstrated below:

Though a working class individual would receive a tax break 20 times less than the amount a wealthy individual would get under this scenario, the middle class as a whole would be able to infuse twice as much capital into the economy under this plan.

Additionally, that capital would more likely be spent while in the hands of the middle class versus the incredibly wealthy, who are more likely to invest or save capital rather than actually spending it on tangible goods. Doing the latter is more likely to create jobs, affecting demand in a positive and direct manner.

The debate over whether we should tax the rich more will no doubt be a contentious one. But it's important to dispel the myths that doing so will be cataclysmic. Those myths will prevent our nation from making the proper decisions, from weighing the true pros and cons against one another rather than the made-up concerns of the wealthy elite, which are derived out of fear-mongering and the dissemination of false information.

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