Tripping over tax rate debate

Published 12:00 am Wednesday, December 12, 2012

No tax rate exceeds 100 percent.Even with higher rates, the taxpayer keeps more than the government.
In the 1930s, rates were raised from the 25 percent to 79 percent. In the 1940s and 1950s, the top rates were above 90 percent. In the 1960s and 1970s, top rates were 70 percent or more. Beginning with President Reagan, the maximum tax rate dropped dramatically and has since been in the 30-40 percent range.
Despite the political rhetoric, when rates were raised in the 1930s during the Great Depression and in the 1940s and 1960s to cover the cost of wars, government revenues increased. When rates were cut in the 1980s and 2000s, government revenues decreased and rose in later years. (The exception occurred in 1964 in the middle of an economic boom when rates were cut. Government revenues slowed, but didn’t decline.)

Taxes are hard to understand.
Many taxpayers think that if they spend or lose $1, it saves $1 or more in tax. It doesn’t. There is an “after-tax” cost. As a college professor for almost 40 years, I always had students who thought “saving taxes” was the answer to all corporate strategy.
If a student said a company did something to save taxes, I’d ask, “Do you have $1.”
“Give it to me.” The student would hand me $1. I’d give him 35 cents, put his $1 in my pocket and say, “Thanks. That’s how taxes work. You just spent $1 and got 35 cents back. Not a good longterm strategy.” When the student realized he had just lost 65 cents, he’d ask for his $1 back. I’d say, “No. That’s the best $1 you’ve spent on your education.”
Two weeks ago, I was sitting in a hotel in Florence, Italy, reading an English newspaper, the International Herald Tribune owned by the New York Times. On the front page was a photo of Kristina, an attractive young chiropractor, wearing a forlorn expression. She lives in McLean, Va., the Washington, D.C., suburb where Ted and Bobby Kennedy lived and where finding a house for less than $1 or even $2 million is challenging.
She was worried about the possible 3.6 percent tax increase on the wealthy and pondering whether to close her practice temporarily to take a vacation — to avoid higher taxes next year!!
Objections to President Obama’s tax increase back to the same rates during the Clinton years is being met by a drumbeat of small businessmen who say that higher taxes will cause them to not hire new employees. In that same article, a businessman said he wanted to hire four new employees but was going to hire only three because the additional 3.6 percent from the Clinton-era would increase his tax bill by $100,000.

Kristina and the businessman are both smart people, but both tripped on my student’s tax wire. If Kristina earns an additional $100,000, her tax bill next year (not this year) rises, at most, from $36,000 to $39,600. Closing her practice to save $3,600 next year on $100,000 this year makes no sense.
If the 3.6 percent tax increase means the businessman’s taxes increase $100,000, he must be earning $3 million. Here’s the math: How much income multiplied by 3.6 percent equals $100,000? The answer: More than $2.75 million. Taxes won’t increase on the first $250,000 of income, so the total net income (after expenses) must be over $3 million.
Kristina should take her vacation instead of working if she wants, but not because of taxes. The business owner should hire that fourth employee if he finds the right person. President Clinton raised taxes and 22 million new jobs were created during his terms in office. Going back to Clinton-era rates is not going to kill jobs.
What this really shows is that the New York Times reporter may not understand taxes. Warren Buffett does. He’s has accumulated $50 billion and says taxes don’t impede any good business decisions.
Like my students, it’s easy to blame everything on taxes because no one likes them. But worrying about tomorrow’s taxes is no reason to make bad business decisions today.

David Post lives in Salisbury. Email: