Friday, December 9, 2011

Whom Are We Kidding?

By Lewis Sage


Writing in the current issue (v. 90 no. 6) of Foreign Affairs, George Packer indicts the alliance of conservatives and big money that came together, “beginning in 1978 to begin a massive generation-long transfer of wealth to the richest Americans.”  The US Senate’s refusal to surtax millionaires to finance the extension of workers’ payroll tax-cut is the latest evidence of the success of that alliance.
The oft-heard Republican claim that a tax on the rich would stall the job-creating engine of small business is disingenuous.  Commenting for House Speaker John Boehner, Michael Steele characterized surtax as “a job-killing tax on small businesses” (quoted in The New York Times, 11/29/12).  The premise of his argument is that many small business owners choose to report business profits as personal income – a perfectly legal tax strategy – and that a tax on their income, which amounts to a tax on business profits, discourages those folks from hiring.  I get it that small business owners, like most people, aren’t in a big hurry to pay more taxes for no reason whatsoever, but there’s are good reasons for this increase: the fairness inherent in an intact social contract and a degree of enlightened self-interest in economic recovery.  And surtax is not a job-killer.  Here’s why.
Time for a little algebra.  Suppose that hiring a new employee would increase your profit by $1000 a year after taxes.  Is it worth it to you to hire that employee?  No?  Then you’re not really all that into squeezing for profit.  Your marginal tax rate could increase by two or three percent, and you wouldn't even notice.  But if you would hire that new worker to increase profits by $1000, then you're the sort of person who pays attention to detail and you’ll do whatever it takes to increase your disposable income.  In particular, if that new worker increased your after-tax profits by $980 (98% of $1000), you would still hire them.  Okay. Here’s the algebra.  Whatever it takes to increase pre-tax profits by $1000 automatically increases after-tax profits by $980.  Whatever increases pre-tax profit by $X automatically increases after-tax profit by 98% of $X.  There; that wasn’t so painful.
So here it is in a nutshell.  Surtaxing millionaire business owners reduces their disposable incomes.  But it does absolutely nothing to their profit-maximizing business decisions… nothing!



Dr. Lewis C. Sage (AB Kenyon, PhD U. Maryland) likes intersections. Since 1991, he has taught Law and Economics, Mathematical Economics, and the Economics of Healthcare. A former Fulbright Fellow (Bulgaria 1995-6), he teaches an interdisciplinary Honors seminar, Enduring Questions, and is studying strategy in the NFL draft with faculty and students in Sport Management and Psychology. E-mail: lsage@bw.edu

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This blog lives under the auspices of the Department of Economics whose mission has been to hold high the lantern beaming an "economic way of thinking" onto the world. Selfishness, rationality and equilibrium have been central to the teaching of an economic way of thinking rooted in the Renaissance. And, in this regard, the department has faithfully stayed the course. The intent of this blog, thinking out loud..., however, is to entertain exchanges which may challenge the centrality of economics as we teach it.