Bob Thomas: Income tax revenue choices simplified
October 25, 2012
Today I’m going lion-hunting with a fly swatter. In 700 words I’m going to attempt to remove the smoke from this tax revenue stuff so you’ll no longer be snowed by politicians. Income taxes provide revenue for our federal and most state governments. One of the uses is to employ tax-takers (government employees) with tax dollars from taxpayers. Remember, if your net income comes from tax dollars you are a tax-taker even though you give some back via your own income taxes. And it requires the tax revenues of at least five taxpayers to pay the salary and benefits of one tax-taker — federal, state or local. Adding tax-taker (government) jobs during this recession is where the stimulus money went. Somehow, we must add five private-sector taxpaying jobs to offset the cost of every tax-taker. Who are they? Armed forces, federal, state, county and municipal employees at all levels, public educators, firemen, police and sheriffs.OK! Before we look at Option 2 which increases federal revenues without injuring our economy any further, expanding it to full employment, let’s look at what most politicians want to do: Option 1: Raise income tax rates to increase government revenue to add more tax-taking jobs. But as previously explained, those jobs are net income tax losers that add to our national debt. And since the vast majority of businesses in the U. S. are small (LLCs), and are taxed at ordinary income rates like the rest of us, every dollar we take from them by raising taxes is a dollar their businesses don’t have for expansion — hiring employees. Businesses must expand or contract because it’s impossible to remain static in an ever-changing economy.If we increase corporate income tax rates — ours are already the highest in the free world at 35 percent — again, we reduce expansion and hiring. It is an ironclad fact that because of ongoing corporate overhead in a negative economy, such as maintaining buildings, machines, tools, office equipment, vehicles, utilities, property taxes, etc., corporations are forced to lay off employees at the first signs of a recession to minimize losses. We can’t expect companies to go broke while trying to keep employees they no longer need.Option 2: I’m going to ask you a silly question that, believe it or not, most politicians either refuse to acknowledge the correct answer or they just don’t get it. Pretend you are a village chief with 1,000 subjects who have jobs earning $10,000 per year each, and the tax rate you charge them is 30 percent of that $10,000. Your take is $3,000 from each taxpayer, times 1,000, equaling $3 million. But you need more revenue for education, so to get more people working and paying taxes you cut tax rates to 20 percent, giving businesses the same break, and eventually you have 2,000 subjects with jobs earning $10,000 each per year. At the new 20 percent tax rate, your take is now $2,000 each, times 2,000, equaling $4 million. You can see that by lowering the tax rate you gained 1,000 new jobs, doubling the tax base and increasing your take by 25 percent to $4 million. Which option makes the most sense, 1 or 2? This is supply-side economics, which pulled us out of two nasty recessions (1960s, President Kennedy, and 1990s, President Reagan). This always holds true. Only the numbers change. Politicians don’t like reducing tax rates because it dilutes their power to make you more dependent on them.Now, I’ve heard both Republicans and Democrats agree that we have 23 million people looking for work. Reducing tax rates, which will save businesses at every level money for rehiring and expansion, and leaving taxpayers with more money to fuel a demand for goods and services, will automatically broaden the tax base. Every rehire and new hire becomes a taxpayer. Can you imagine what our revenues will be like when we put those 23 million souls to work in the private sector? That, plus a new income tax code eliminating loopholes at the top and bottom, plus holding the line on spending, is the only way we’ll ever pay our $16 trillion national debt.• Bob Thomas is a retired high-tech industrialist who later served on the Carson City School Board, the state welfare board, the airport authority and as a state assemblyman. His website is http://www.worldclassentrepreneur.com. These endorsements are Thomas’ and not those of the Nevada Appeal.