The Tax Cut Argument

I'm really, really, sick of hearing about tax cuts for rich people meaning more jobs from small businesses. There is no reason to suspect those things are connected. In fact, it makes much, much more sense for the opposite to be true. Just think of what can happen with more/less money...

When people get tax cuts:

1. Poor tend to spend the money: food, clothing, bills, entertainment, whatever. They don't have much so giving them more will increase what they spend.

2. Middle class is a broad ranging group, but some will spend more, some will save more (debt reduction counts for saving so far as the economy is concerned). Middle class small business owners (the vast majority of small business owners) that operate debt free may be able to expand business somehow, say marketing or more R&D. There is an outside possibility that they could afford to directly hire, but probably not. Still this is a group that can really help out the economy if given tax cuts.

3. Rich is tricky for a few reasons. First, pinpointing where "rich" begins is a bit tricky, but I'll go with the $250k/year group. Second, many, many rich people are just rich. They don't own business, many don't even work! Some rich, however, are business owners and do "create jobs" so the question becomes what is the utility of giving them extra money...

It's important to note first that when the above $250k tax bracket is cut by say 1% that someone making $260,000/year only sees a tax reduction of $100/year. That's not enough to do anything meaningful with and is likely to disappear into some savings/investment account without any notice by the tax payer. So there isn't any real meaningful difference until you get to people making significantly more than the break point. Then, you have to figure what the incentives are.

If a very successful business owner is receiving $500k/year compensation, and they get an extra $25k back in taxes (that same 1%), then they could, arguably, hire a worker ($12.50/hr full time). But if that was worthwhile, wouldn't they already be hiring that worker with some of the take home they are already receiving? What kind of crappy successful business person would see investing in a new employee as worthwhile but refuse to do so when they are already getting $500k compensation? If it is worthwhile (that is, it will pay off) then it is the proper business decision anyway, and the individual clearly has the wherewithal to do it as is!

More, if a business person is really motivated to make as much money as possible, (and this is the assumption) wouldn't raising their taxes, then, force them to work harder to bring their after tax income up? Wouldn't tax increases mean that they would need to invest more, hire more, expand more so that they could make the same as if taxes were lower?

It makes less sense every time I hear it. If business owners become successful due to that combination of smarts and greed, then higher taxes should force them to work harder. Lower taxes would mean they need to work less/expand less/hire less.

I feel the same way about cap gains taxes: if cap gains taxes go up people need to invest more to earn the same rate of return...higher taxes should be an incentive to invest more, not less.

I wish someone could explain to me why this thinking is wrong and cutting taxes for rich people means unicorns for everyone, but it looks like the history of tax cutting for rich people actually bolsters my position.