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Why the "millionaires tax" is a job killer
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The new 1990 page health care reform bill released by the House this past week includes a 45% top federal tax rate, which is expected to raise about $500 billion to help pay for heath care. The thinking is that the rich can certainly afford to pay a bit more in taxes. The reality is that they wont. It’s not a matter of whether they can afford it. They’re not going to do things that just don’t make sense mathematically.
Suppose you run a large business that finds itself in the top tax bracket. Maybe you have a healthy business model that nets you 15% operating profit. That means if you were to put an additional $10 million to work, you could expect to net $1.5 million before taxes. Now subtract the 45% federal tax and state and local taxes from somewhere like California or NY and you’re up to around 60% in taxes. So, for a $10 million investment, your net after-tax return is $600,000, or 6%.
Does it make sense to put that much money at risk in an uncertain market place for a possible 6% return when you can make a similar return by simply putting it in a tax-free municipal bond fund? You may have noticed that the financial markets, commodities, stock indices, bonds, are having a very good year thus far while the economy at the ground level remains stuck in the mud. That’s because it’s safer, more profitable and therefore more responsible to trade paper in the global casino than to actually create and produce something new. This is also why interest rates have not soared despite government debt of Biblical proportions. The demand for a safe place to stash cash, rather than putting it to work, has actually outpaced government spending.
To get money flowing into actual real-world production again, we have to create a situation where it makes more sense to take that risk than it does to play it safe. That means higher potential returns, not lower. You can make emotional arguments about income inequality and fairness all day. In the end, math rules.
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