As the deficit talks ensue, Obama continues to blather on about eliminating tax cuts for the wealthy. In fact, this is shaping up to be a major theme of his reelection campaign as well. Thankfully for the Republicans, this position serves to highlight his continued economic incompetence.
As a practicing CPA for nearly forty years, my clients are mainly those that fall under the category of “wealthy”. They may make the most money, but they are assuredly the ones paying the most taxes. These people in the highest tax bracket basically fall into three categories: 1) Small business owners (200-2000 employees); 2) Executives working for a company; and 3) Wealthy individuals by inheritance or investment. Allowing the tax rate to rise affects each of these groups differently, but the economy and its recovery will be stymied nonetheless.
With the first group, most small business owners are arranged as an Scorp or LLC, which means they pay tax rates at the individual level, not business. Raising the rate to 39.6% raises the rate on these businesses. Most of the money made by these owners is reinvested in their company. They basically take out enough income on which to live and anything more gets put back into their business. So, if you increase their taxes, there is less money to reinvest in their company and back into the economy. This is an important point because spending money as a means of coaxing a recovery is much, much less effective and stimulative than any investment is.
Regarding the second group, most executives working for a company enjoy a large salary; however, much of that salary is fueled by stock options which make their taxes larger. Quite typically, the proceeds of that income is returned the company via more stock, which funnels growth, or cash is reinvested as needed. An increase in taxes will decrease their ability to best allocate their business returns.
Although the third group of individuals often have a lifestyle that is inherited, more money that is taxed out of that lifestyle means there is less to invest in appropriate economic endeavors – i.e. hedge funds, equities, and high risk funds. Those very investments are responsible for an enormous amount of the entrepreneurship in this country. Taking away available capital via tax increases reduces innovation in the economy.
In a time of a recession unprecedented since the Great Depression, economic improvement is crucial. Inflicting tax increases on the segment of the population most able to invest in our economy and businesses will only slow our sluggish recovery. Trying to punish the taxpayers for the sake of campaign sound bites and political gain is both reprehensible and repugnant.