Democrats don't understand the effect of income taxes

The unintended consequences of tax and spend policies

Published on October 25, 2007 By Draginol In Democrat

Democrats, in general, are extremely ignorant about economics. It's difficult to even find a Democrat with any serious experience in running a business or having actually produced anything at all. Elected Democrats tend to be lawyers. At best, lawyers help honest business men and individuals settle a dispute. At worst, lawyers are parasites on society.

It is usually without irony that Democrats decry how much doctors make and how health care costs need to be controlled while ignoring that it is because of greedy lawyers and their lawsuits that have a major impact on the cost of health care.

I rarely hear Democrats complain about how much lawyers make. Democratic Presidential candidate, John Edwards had a net worth of over $60 million. Consider that. John Edwards doesn't produce anything. He makes no products or goods.

And it is because Democrats are so rarely involved in producing anything that they have such a lack of understanding in economics.

For example, Democrats always seem to fixate on earned income when it comes time to "tax the rich". Yet they seem oblivious to the implications of their policies. When you tax the earned income of the rich, you are really hurting the most vulnerable Americans. The "rich" who are earning their income simply pass on that tax to their least productive workers in the form of lost jobs and lower wages.

According to the New York Times (that right wing rag..) the richest Americans are:

Mostly self employed
Mostly run businesses

So what happens when you increase their taxes? You increase their expenses. And what happens if you increase expenses? You either have to make more money or cut other expenses. Most companies have "fat" they can trim -- employees whose employment are tenuous. There's basically a layer of the American workforce that I'd say is only borderline employable. During the good times, they have jobs because their marginal productivity is still worth it. But when times are tough, they're the first to get cut.

Raising taxes on the rich simply adds to the bottom line cost and it is those at the bottom that suffer first. Yet Democrats never seem to get this even though it's been demonstrated time and time again. It is one of the reasons why lowering taxes increases government revenue. It isn't due to "trickle down" economics but rather because the cost of doing business for the bulk of employers goes down allowing them to hire more people and invest more which in turn generates income at a greater rate than inflation. It's not rocket science -- unless you're a Democrat I guess.

Comments (Page 5)

Dr Guy

on Oct 28, 2007

So you don't actually lose the money! I see now. Why not just negotiate with your employer to pay your own tax? That way you can make the decisions about how much to pay when and can make up the remainder at tax time. If it's possible to do that in the US it may well be worth it.

This has been done. But when taxes get to the point that it is costing the company more than the benefits bestowed on the employee, they figure out how to compensate them without incurring a tax burden. Like buying them a house to live in, for a paltry rent, or paying for their meals - ala business expenses, or .....

You get the picture. What all of these solutions have in common is that the government does not get squat, regardless of the rate. And the employee (often the upper crust) lives like they are getting paid a lot, when on paper, they are not.

SO go ahead and raise the taxes. There are more ways to avoid them than to pay them, and they will find those ways.

Draginol

on Oct 28, 2007

I read about it in the paper. The Howard government cut tax rates in 2002 and the Reserve Bank of Australia has warned that any further cuts will result in inflation and they will be forced to increase interest rates to compensate.

I'm not trying to say our situations are the same, but the economists all work from the same textbooks so I figured there must be something universal to this. Sorry if I have it all the wrong way around!

The inflation rates and the tax rates are both knowns. They have no relation.

The US could have massive inflation at the drop of a hat by printing more money.

Similarly, the highest inflation rates we had in recent years was in the 70s -- when taxes were very high.

Apart of course from a wide variety of extremely lucrative government contracts across the world. Much of a lawyer's work is done away from the courts anyway - you probably have experience of that. How many lawyer's hours of work have you been billed for outside of court time in comparison to court time?

We're not talking about lawyers. We're talking about Edwards in particular. A lawyer doesn't make $20 million doing legal analysis. They do it via lawsuits.

Moreover, Microsoft's success is not due to government contracts.

Don't get lost in intellectual minutia. Rich lawyers are rich because of lawsuits. Edwards was a personal injury lawyer. He didn't make his money by producing anything. He made his money abusing the government legal system.

Or more to the point, Edwards made his money through NON-voluntary financial transactions. I.e. one party was forced to pay the money that went into his pockets. No wonder he was a natural for politics.

Jythier

on Oct 28, 2007

I believe LW at one time filed exempt and paid exactly what was owed quarterly to the state and feds. As long as you don't forget to make the payment, you'll be all right.

Noumenon72

on Oct 28, 2007

I still don't believe the "losing out on overtime" thing. It's been five years, but I heard this complaint from my coworkers a lot and I saved paychecks with just one hour of overtime and checks with 30-40 hours of overtime. I was keeping like 83% of the no-overtime checks and 75% of the overtime checks, IIRC which I probably don't. Even if the government thinks you make $3,000 every week because you made $3000 this week... you still made $3,000 and that's enough to pay the taxes. For example if the tax on a $10 paycheck is 20% ($2) and the tax on a $1000 paycheck is 99% ($990), if you earn $1000 instead of $10, you're going to pay $990 in tax, but you still keep $10 instead of $8 -- you still come out ahead. Unless the government looked back and saw that it didn't collect $990 last week and tried to collect it twice this week... but it doesn't do that.

Draginol, I didn't realize what cacto was saying at first either, but now it makes sense. It's the Keynesian idea that the government can use fiscal policy to stimulate the economy. The government doesn't have to physically print money to cause inflation. If they lower taxes, giving people more money to spend, while spending the same themselves (deficit spending), there is more money chasing the same amount of goods -- inflation. You don't always see the inflationary effect show up in higher prices because there may be deflationary forces going on at the same time, such as a recession, or the Fed raising interest rates.

Dr. Guy, you're right. If I add an assumption that there's no trade deficit, then what I'm saying could work, because the amount of the debt repayment that goes to foreign bondholders and the amount of Brad's consumer spending that goes to foreign exporters should be exactly equal -- I hope. I'm no economist.

Moreover, Microsoft's success is not due to government contracts.

It's a real boon for liberals that Bill Gates is no longer the world's wealthiest man. People would think about him when they thought about wealth and think that all rich people were somewhat the same way. Now we have Carlos Slim, whose success is due to government contracts. Maybe that will get people thinking of all the people who do make their money with political connections: in healthcare, in the energy business, in public utilities, in telecommunications, in the airline industry, among defense contractors, in the agricultural sector -- instead of thinking about the entrepreneurs who noodle around in the undeveloped margins of our economy where the free market actually exists.

Draginol

on Oct 28, 2007

The majority of the wealth created in the United States is produced by entrepreneurs.

As for Mexico, what can you expect?

cactoblasta

on Oct 29, 2007

SO go ahead and raise the taxes. There are more ways to avoid them than to pay them, and they will find those ways.

In the US' case it would probably be better to simply close the loopholes or ban riders to bills. Banning riders would enforce a little fiscal responsibility.

Draginol, I didn't realize what cacto was saying at first either, but now it makes sense. It's the Keynesian idea that the government can use fiscal policy to stimulate the economy. The government doesn't have to physically print money to cause inflation. If they lower taxes, giving people more money to spend, while spending the same themselves (deficit spending), there is more money chasing the same amount of goods -- inflation. You don't always see the inflationary effect show up in higher prices because there may be deflationary forces going on at the same time, such as a recession, or the Fed raising interest rates.

Exactly. Keynesianism may have been discredited to make way for neoliberalism, but it's still alive and well in most Federal Reserve Banks.

Dr Guy

on Oct 29, 2007

In the US' case it would probably be better to simply close the loopholes or ban riders to bills. Banning riders would enforce a little fiscal responsibility.

Here's the problem with that. Just as McCain Feingold was SUPPOSED to take money out of elections, the money found a way in. And closing loop holes will just open up new avenues. It is not unique to the US. In higher tax societies like Scandanavia, the big wigs get their due through non-monetary means. That are not taxed. And the simple rule is, you cant close all loopholes. The money will find a way. It will not show up in a pay stub, but then getting free rides to work from the company limo is not money the employe can report, but still helps them spend their money on other things.

Back in the 70s and early 80s, when tax rates were very high, the rich found ways to shelter their money. That was not a unique endeavor, it is the nature of money. Stupid people dont earn a lot, and smart ones dont waste it by getting large taxable paychecks.

Dr Guy

on Oct 29, 2007

Keynesianism may have been discredited to make way for neoliberalism, but it's still alive and well in most Federal Reserve Banks.

Actually no. Keynesian is alive and well in government. The Fed is a moneterist organization (influencing the supply of money by changing interest rates).

danielost

on Oct 29, 2007

Just as McCain Feingold was SUPPOSED to take money out of elections,

no it was supposed to look like it was going to take money out of elections.

Noumenon72

on Oct 29, 2007

The majority of the wealth created in the United States is produced by entrepreneurs.

That may be true for wealth created but the majority of the income earned is wages, even in the top 0.01%. I'm going off a single table in Piketty and Saez that may not mean exactly what I think it means. But it makes sense -- how much of the economy every year is new products created by entrepreneurs and how much is previously existing institutions doing what they did last year, paying employees to find ways to do it more efficiently? Even if 20% of businesses are destroyed every year and economic growth is 5%, that only leaves 25% for entrepreneurs to work in.

Gideon MacLeish

on Oct 29, 2007

How many kids did you say you have? You're a single guy, right?

The problem, as Jythier said, is with withholding, not actual taxes, but it DOES occur, noumenon.

What happens is, when you claim all of your deductions, you get very little taken out if your wage is in the sub-$10/hour range. As you get overtime, your withholding is calculated as if those earnings are the same throughout the year, and extra taxes are withdrawn. Because you paid no taxes on the base (non-OT) earnings, you're going to be paying a good chunk on the extra OT. Like I said, I'm willing to chalk it up to poor accounting, but I have seen it happen too often for it to be a fluke.

If you keep 83% of the non-OT checks, you live in a state with a low tax rate, because 6.5% automatically comes out for your SS cut. Or somewhere along those lines.

Don't assume everyone else's withholding is the same as yours. It gets stickier with dependents.

Noumenon72

on Oct 29, 2007

I was just going by memory. My rule of thumb was that 1/6 of my check went to withholding. I just checked my spreadsheet for how much state, federal, and FICA I actually paid and it's ranged between 17 and 22 percent even with all the deductions I take, so it seems like the withholding should have averaged more like 20%.

This March I started putting 43% of my pay in the 401(k), so my withholding is down to 1/6 of my check for real now...

Frogboy

on Oct 29, 2007

Entrepreneurs pay themselves wages. How else do you surmise they're paid?

Entrepreneurs don't (as you said) "noodle around" the edges of our economy. They ARE the economy. You take away the entrepreneurs and most of the jobs disappear.

Most people work for entrepreneurs (statistically).

Frogboy

on Oct 29, 2007

This March I started putting 43% of my pay in the 401(k), so my withholding is down to 1/6 of my check for real now...

Very smart thing to do. You will be pleased with the results in the long term.

Noumenon72

on Oct 30, 2007

The table I was looking at separated income into wages, capital income, and "entrepreneurial income" -- income from self-employment, small businesses/farming, and partnerships. It's figure 6 at this Link -- I think, I can't check it here at work.

We're going to have to hash out our definition of "entrepreneur." I'll be back later...

Welcome Guest! Please take the time to register with us.
There are many great features available to you once you register, including:

Richer content, access to many features that are disabled for guests like commenting on the forums.
Access to a great community, with a massive database of many, many areas of interest.
Access to contests & subscription offers like exclusive emails.
It's simple, and FREE!