Maximizing GDP Growth with Minimal Budgetary Cost in the Face of the Fiscal Slope/Cliff

We can maintain momentum, while moving toward budget sustainability, by allowing the Bush tax rate cuts for incomes above $250,000 to expire


Last Thursday, CBO released Economic Effects of Policies Contributing to Fiscal Tightening in 2013. The bottom line is summarized in Figure 1.


approachingcliff1.gif

Figure 1 from CBO (2012).

Note that if one extends “most expiring tax provision, except for the lower tax tates on income above certain thresholds, and Index the AMT for Inflation”, then output will be 1.3 ppts above baseline (which obtains under current law) by end 2013, compared to 2.9 ppts if all expiring provisions were extended, and sequester eliminated (call that the alternative fiscal scenario plus the reduction in the employer portion of payroll tax reduction, plus extended UI; I’ll call this alternative-plus). If in contrast the tax cuts above certain thresholds were also extended, then output will be 1.4 ppts above. In other words, it barely makes a difference to growth whether the tax rates on high incomes are extended, although it makes a big difference to revenue ($56 billion of the total $192 billion associated with the Bush tax cuts). Hence, it is a no-brainer to eliminate the tax cut for high income households.


Another way of making comparisons is to note that if only the tax provisions are extended, then output is 1.5 ppts lower than alternative-plus; if only the low income tax provisions are extended, the output is 1.6 ppts lower – using the midpoints of the ranges of multipliers.


It is arguable that with interest rates at zero, the multipliers are at the higher end of the ranges given. Using the maximum values, output would be2. 5 ppts lower under than the alternative-plus scenario if all tax cuts are extended, and 2.7 ppts lower if only the tax cuts for lower incomes are extended.


Figure 2 below shows the trajectory of GDP under current law (red line), and if some tax provisions are extended.


approachingcliff2.gif

Figure 2: Log GDP (blue), log CBO forecast GDP under current law, from August 2012 (red), and GDP if all Bush tax cuts extended plus AMT fix (green square), and if Bush tax cuts are extended only below threshold (purple inverted triangle). Corresponding open square and inverted triangle use top of the range of multipliers. NBER defined recession dates shaded gray. Source: BEA, 2012Q3 advance release, 2012Q3 value adjusted to 3% growth, SAAR; CBO, Budget and Economic Outlook: An Update (August 2012), CBO, Economic Effects of Policies Contributing to Fiscal Tightening in 2013 (November 2012), NBER, and author’s calculations.

Note that other (private sector) analysts concur that the effects of letting the upper income tax cuts lapse are minor (i.e., the “bang for the buck” of high income tax rate reductions is small); see the estimates from Goldman Sachs in Figure 1 in this post.


In addition, retaining the payroll tax cuts and AMT patch, as Jim proposes, would also be a cost-effective means of sustaining growth.

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34 thoughts on “Maximizing GDP Growth with Minimal Budgetary Cost in the Face of the Fiscal Slope/Cliff

  1. jonathan

    To me, the most sensible thing would be to do exactly as originally promised and keep all tax breaks below the $250k taxable (not gross) income level. Why? Because if we muck with other provisions, we can’t clearly see what happens. If revenues increase and growth increases, we can at least see this result. Conduct the experiment and get closer to settling the arguments on the basis of results not ideology.

  2. Steven Kopits

    This is just on earned income, no?
    So this is the Professionals’ Tax. Warren Buffet, Paulson, the Hedge Fund guys–they will all be untouched, no? Because that’s all capital gains and the expiring law just applies to earned income. Is that right?
    This is essentially geared to punish two-earner professional families, isn’t it?
    And of course it makes no dent in the deficit. So this is essentially to punish Obama supporters in places like NY, CT, NJ, VA and CA.
    Indeed, we could call it the GPS, the Gratiutous Professional Surtax.
    Bring it on. I’ll lord it over my Obama supporting, lawyer brother ’til the end of his days.

  3. Ricardo

    Menzie,
    You usually hide behind quoting someone else and then when it doesn’t come out the way you expect you say you didn’t make the forecast. Will you go on record saying that the CBO forecast is your forecast?

  4. Ricardo

    Steven Kopits,
    Not only your “GPS” tax but pass-through businesses are going to really be killed. I talked to an owner of a boat manufacturing business here in Florida and he sees laying of about 25% of his workers. He is already having sales problems and with the increase in taxes he may be underwater. As an S-Corp he knows he will be fighting for his life.

  5. techy

    I am surprised why capital gains/dividend are not getting taxed like normal income.
    Its ridiculous to think that a working man making 50K is equal to a capital gain from a million dollar, adding salt to injury, working man may have to pay higher than 15% in tax.
    Its amazing the way the rich people control the system, looking at the imbalance in wealth ownership you would think that there would be a wealth tax so that the rich does not keep accumulating more money.
    But anyways I think they need to help the bottom 50% and the unemployed by a huge stimulus spending by spending on huge public infrastructure projects like highways, bridges etc. That will inflate the wages which is the only way the bottom 50% can benefit.

  6. techy

    Its kind of funny that GOP wont let you do the stimulus spending and keep hitting you with their supply side economics, which clearly has failed for the 90% population. How about this, please let us spend 2 trillion in the next two years and if that does not work to create new jobs and improve revenue we will listen to your ideas.In other words its time to borrow 2 trillion for infrastructure, education etc. we will pay that back over next 20 years by taxing the filthy rich. In fact I would be tempted to even agree for higher taxes for more than 75k income families if we are allowed to do some massive stimulus works.
    Please do not bring inflation, If my family income goes up from say 100k to 120k, i dont mind paying back 20k in taxes and inflation, because my fellow citizens are able to find work.

  7. Anonymous

    Time for everybody to pay their fair share. Let’s go back to those glorious Clinton tax rates!
    +++++++++++++++++++++++++++++++++++++++++++++
    Fair enough, if we can go back to the inflation adjusted spending of the Clinton years.

  8. Rich Berger

    Amen to the Clinton spending. Looks like just over 2T max versus 3T (2005 $) under Obama I. We would be in surplus soon.

  9. Steven Kopits

    Agreed, Ricardo.
    It’s not clear why working households are the primary target of the President’s ire. Indeed, statistically, professional Asian households are the key target, as they will be more affected by this increase than any other demographic group.
    If you’re looking to tax the really rich, it’s the Top 0.1%, the coupon clippers. If you raised taxes to 36% for unearned income, then these folks would be facing a 20 percentage point rise in taxes, figure $200-$250k increase on average. I personally am not sure why people making $1 m or more can’t pay the same tax rate I do, so I don’t see this as a huge problem in and of itself. But I see no reason to raise this issue to the level of class warfare. It’s just maintaining progressivity thoroughout the taxpayer spectrum (understanding that this will adversely affect equity and bond valuations–particularly for munis).
    But this is only 100,000 households, or about $20 bn in revenue, assuming no avoidance (and there will be plenty of that). This is 2% of the deficit. Why is this the centerpiece of the President’s re-election mandate? Such an amount is roughly the cost of a not-too-important weapons program at the Pentagon. It’s not clear why the President would be so involved hunting for such chump change.
    So if I put all this together and assume Rich Berger is way too pessimistic about the possibilities of actually collecting these amounts, we’re talking maybe $150 billion–on a trillion dollar deficit. That $150 bn is only 1% of GDP, and more realistically (to Rich’s point), about half that will be collected.
    That’s the President’s mandate? That’s his program for his second administration? To reduce a 7% GDP deficit to 6.5%? That’s it?

  10. 2slugbaits

    Steven Kopits This is just on earned income, no?
    My understanding is “no,” effective 1 January capital gains will go to 20% and dividends will be taxed as ordinary income.

  11. tj

    Why does Obama insist on $250K defining “rich”? It makes no sense.
    The $250,000 threshold was first mentioned in a campaign speech by President Obama in 2008. “It’s an historical accident,” Williams says. “I don’t think there was any thought given to why $250,000 — (but) it became a mantra.”
    It clearly matters where you live.
    Consider the tax profile of the Joneses when based in Huntington, a suburb of New York City. Thanks to all of their smart pretax contributions and a fat deduction for mortgage interest and state and local taxes, the couple’s federal income tax is only $29,344. But what often goes overlooked is the toll taken by state and local taxes. In this case, it exceeds the federal income tax bill: $31,066.
    State income taxes, taken alone, are just $10,557. But factor in the gas tax ($2,679), property tax ($15,222), phone service taxes and surcharges ($350) and sales tax ($2,258), and the picture looks very different. Their total tax bill, including the alternative minimum tax and payroll taxes: $78,276.

  12. Steven Kopits

    Slugs -
    Are those capex and div numbers firm? I haven’t seen anything definite.
    If there’s a wedge between cap gains and dividends, then money will be handed back primarily by buy-backs, and cash-rich companies will tend to hoard even more cash. Not sure why that’s good.
    And the cap gain tax goes to 20%? So Mr. and Mrs. Indian professional couple are crushed by taxes and Mitt Romney’s rate goes from 15% to 20%?
    And carried interests are still treated like capital gains instead of earned income (which is what they are)?
    That doesn’t fix a damn thing in tax progressivity, other than punishing two earner professional households and S-Corps.

  13. Joseph

    Steven Kopits: Are those capex and div numbers firm? I haven’t seen anything definite….That doesn’t fix a damn thing in tax progressivity, other than punishing two earner professional households and S-Corps.
    You are talking out of your, uh, hat.
    Income, dividend and capital gains taxes simply revert to their Clinton rates, which everyone but you seems to know and remember. The top ordinary income bracket goes up 39.6%, most capital gains go up to 20% and dividends are taxed as ordinary income.
    This doesn’t affect dual earner households or S-corps in any unusual way. S-corp earned income will still be S-corp earned income, just as before. S-corp dividends will be ordinary income just as before. Nothing changes other than slightly higher marginal tax rates for ordinary income.
    For someone like Romney who has mostly unearned income as dividends and capital gains, the tax increase would be 33% for capital gains and 260% for dividends. For the typical high income household or S-corp, the tax increase would be somewhat less than 10%. It would definitely increase tax progressivity, which is why Republicans are so violently opposed to it.

  14. Joseph

    Ricardo: “I talked to an owner of a boat manufacturing business here in Florida and he sees laying of about 25% of his workers. He is already having sales problems and with the increase in taxes he may be underwater. As an S-Corp he knows he will be fighting for his life.”
    Once again you demonstrate that neither you nor your S-corp owner have a clue about how taxes work for S-corps. The Clinton tax rates add not one single dime to the cost of operating his business because S-corps do not pay income taxes. It only affects the the amount of after-tax money he takes home if he decides to take money out of the business instead of investing in growing the business. I work with a lot of small business owners and they are pretty clueless about taxes. But if their business is failing, they will seize on any imagined excuse to blame for the problem except themselves. Income taxes on S-corps is among the stupider excuses since S-corps don’t pay taxes.

  15. Rich Berger

    Joseph-
    Your “analysis” seemed fishy so i looked on the inter web. This is what I found:
    The general rule for S corporation taxation works like this. An S corporation calculates its income just like a regular corporation. However, rather than taxing the corporation the corporation on those profits, the corporation’s owners get taxed on their shares of the corporation’s profit.
    Suppose, for example, that an S corporation is equally owned by Tom, Dick and Harry. Each shareholder owns one-third of the corporation’s stock. In this case, if the corporation makes $300,000 in profit, the corporation doesn’t pay the income tax on this profit. Instead, each shareholder includes his share of the corporation profit–$100,000 per man—in his taxable income. The shareholders pay the taxes owed on the $100,000 of corporate profit on their individual income tax returns.
    So, when individual rates are raised, the tax on S-Corp owners is increased.
    Go sit over in the corner with sluggo.

  16. Ricardo

    Steven Kopits,
    You are spot on. The Obama plan is actually influencing the “rich” to take their capital gains this year (have you notice the crash in the stock market, more sellers than buyers). That means significantly less to tax, and what can be taxed is what can’t easily be converted. That means the pass-through businesses. The “rich” will skate will little impact to their wealth while small businesses will be strangled. That is why I believe that unemployment will rise rapidly next year. Small businesses will not be able to hire.

  17. tj

    It only affects the the amount of after-tax money he takes home if he decides to take money out of the business instead of investing in growing the business.
    Forgive my question, I am not a business owner or a tax accountant – How much tax does the business owner in your example pay on his salary?

  18. Joseph

    Rich Berger Well that’s an improvement. At least you are going to the inter webs before spouting off about something you apparently know nothing about. Owners of S-corps pay taxes on their income just like anyone else. There is nothing special about S-corps or other pass-throughs. The S-corp does not pay income taxes. The owners pay income taxes on money they take out of the business either as salaries or as dividends just like the guy working at McDonald’s or the CEO of JP Morgan. If, instead of taking dividends out of the business, they decide to spend the money on new equipment or new employees, they pay no tax at all — nothing. In your example each owner — Tom, Dick and Harry — receive $100,000 in dividends from the company. They pay taxes on those dividends just like you do for your mutual fund dividends. Nothing special about that. The dividends are non-qualified which means they are taxed at the ordinary income rate. When the Bush tax cuts expire, their marginal rates go up by three percentage points so they each pay an extra $3000 in taxes, nothing that is going to bankrupt a company. And if they want to avoid those extra taxes, all they have to do is spend the money in their business instead of taking it home and putting it in their pocket.
    Richardo: “The Obama plan is actually influencing the “rich” to take their capital gains this year (have you notice the crash in the stock market, more sellers than buyers). That means significantly less to tax, and what can be taxed is what can’t easily be converted. That means the pass-through businesses. The “rich” will skate will little impact to their wealth while small businesses will be strangled.”
    Like Rich, you have never run a business and apparently don’t know how pass-through taxes work. There are generally no capital gains for pass-through businesses unless you decide to sell the business. Your statement is gobbledygook that means nothing. Owners of pass-through businesses pay income taxes on their income just like everyone else. The expiration of the Bush tax cuts means that their marginal rate goes up by three points, just like the auto worker. There is no strangling involved. These are the same rates that were in place during the record economic expansion during the Clinton years.
    tj: “Forgive my question, I am not a business owner or a tax accountant – How much tax does the business owner in your example pay on his salary?”
    Thank you tj. The way to learn is to ask questions. Instead, most Americans really don’t understand taxes and just parrot whatever misleading stuff they hear from Fox News or Paul Ryan. I bet less than one in ten Americans could correctly answer the question “Have tax rates gone up or down in the last four years?”
    The answer to your question is very simple. The business owner pays exactly the same income taxes as anyone else pays for their salary, from the McDonald’s guy to the CEO. The income brackets go up by three points to the level they were during the Clinton years.
    This idea that the tax increase will strangle small businesses is really weird. There is nothing special about small businesses. The owners are taxed on their income just like anyone else. When an small business owner says that taxes are driving them out of business they are lying. Their businesses pay no taxes. The tax increase does not increase their operating costs by one dime. If their business is underwater, it isn’t because of the personal income tax rate.

  19. Steven Kopits

    Joseph -
    You have confirmed my point.
    Earned income will be heavily taxed; capital gains, lightly. Dividends will be restructured as capital gains–this is not particularly hard to do–except of course for the average investor, like retirees. But for a Top 0.1%-er, it’s bread-and-butter stuff.
    Thus, a two earner professional family will be crushed, while the likes of Mitt Romney will be forced to pay (the horror!) a 20% tax rate.
    Now, as you know, I am a small government guy, but I’m still not sure I understand why the idle rich would be paying tax at half the rate of the working professional.
    If you want to be radical, make everything over $250k treated as ordinary earned income. Of course, you’ll trash the stock market, but at least it’s consistent. And as I have earlier commented, this will net you all of $20 billion or so with exceptionally high avoidance.
    If you look at the numbers, it’s not hard to conclude that we are still a middle class country. If not, we could simply tax the rich more and the problem would disappear.
    But as my and others’ analyses show, a very heavy tax on the Top 1% will get you about 10-12% of the way through the deficit. Extend this concept through the top 20%, and you’re about 1/4-1/3 of the way there.
    The middle class has to do the rest.
    Like it or not, a trillion dollars is still not a number this economy can digest. Hundreds of billions, yes; but a trillion, no. To pay back a trillion dollars, everyone in the boat must be pulling on the oars.

  20. William

    Rich,
    I’m not sure the econ folk on this website understand your comment. I’ll offer a practical and real example of why small business has already been hurt.
    My father runs a growing manufacturing company (an S-corp). As the business grows, it requires more and more working capital, which comes from profits taxed at the individual level.
    Sensing a tax increase, my father has limited new orders to cut growth and is reducing headcount. Why? He’ll have to pay higher taxes on capital that stays in the business. In 2013, he will write a check to the US Treasury to keep as many of the 1500 or so people he employs in their jobs.
    Indisputable fact: My father is shrinking his business and reducing headcount as a result of higher taxes. His 2013 budget is already set.
    He’s close to retirement. He doesn’t want to take on more risk by leveraging up (ie financing the working capital). He’s not happy with the direction our country is taking and sees it as largely my generation’s problem.
    To the economists here that don’t see this as a problem, what is your recommendation? What would you like me to tell my father?

  21. Joseph

    Rich: “The business is taxed on its income, whether or not it leaves it in the business.”
    Wrong again. The business pays no taxes. There is no such thing as retained earnings for an S-corp. If the business earns money, it is the owner’s money and the owner’s income. The owner pays tax on their income, just like the guy at McDonald’s.
    If S-corps were allowed to have retained earnings, it would be an enormous loophole. It would be like you being able to keep all your salary in a bank account at your employer and claim that you had no income because you have received no money. (This is effectively what a 401(k) does but there are limits on 401(k) deductions. S-corp owners can also have a 401(k) with limited deductions. What owner’s can’t do is use the business as a vehicle to hide their income from taxation.)

  22. Rich Berger

    If you increase the taxes on small business, they have less to invest, less to hire and a lower return on their efforts. Tack on state taxes (esp in CA) and at the margin some decide it’s not worth it. All to support Obama’s profligate spending.

  23. 2slugbaits

    Ricardo The Obama plan is actually influencing the “rich” to take their capital gains this year (have you notice the crash in the stock market, more sellers than buyers).
    Interesting comment. It tells us a lot about the supposed rationality of those investors. All of the in-trade markets on the election were showing that investors saw Obama as a near prohibitive favorite to win re-election, so why would a rational and forward looking investor wait until after the election to sell? Answer…they wouldn’t. Let me offer an alternative theory: the post-election sell off was the invisible hand’s way of culling the herd and wiping out dim witted investors. The smart ones already knew that Obama would win re-election and sold before the collapse. Were you part of the herd?
    Rich Berger if you increase the taxes on small business, they have less to invest, less to hire and a lower return on their efforts.
    If they invest the profits, then those profits have not been taken out of the business and are not taxed.
    You also don’t seem to understand the economic argument for cutting capital gains taxes. The argument isn’t that people won’t invest; the rationale for cutting capital gains taxes is that taxes inhibit people from disinvesting away from less productive and otherwise “locked in” enterprises. Cutting capital gains taxes supposedly makes it easier to shift resources towards more producitve uses.
    Steven Kopits But as my and others’ analyses show, a very heavy tax on the Top 1% will get you about 10-12% of the way through the deficit. Extend this concept through the top 20%, and you’re about 1/4-1/3 of the way there.
    Since the Great Recession 37% of GDP growth has gone to the top 0.01%…that’s one in ten thousand. And about 70% has gone to the top 1%. Virtually 100% has gone to the top 20%. This may be a middle-class country, but it’s definitely been an upper class recovery. My heart dearly bleeds for the top 1%. Obama is talking about letting the Bush tax rates expire for those in the single-earner bracket making a taxable income over $250K. For married couples it is more like $400K. And they will still get a tax cut for income below those levels.
    I agree that taxing the very top will not fully close the revenue gap; but it will make a pretty good dent. I believe most estimates say something like $50B/yr, give or take. That’s a good start. I also think Obama is wrong to insist that the middle-class tax cuts be made permanent. He’s just flat wrong about that. The middle-class tax cuts should be extended for another year or two and then phased-out once the economy is near full employment. We also need to look at new sources of revenue. Tops on my list would be a 2% VAT, higher gasoline taxes, carbon taxes, and WTO approved tariffs for countries that do not comply with “green” cap&trade standards.
    BTW, there’s a recent study showing that a permanent increase in the gasoline tax has a much stronger elasticity effect on demand than a comparable market price increase. In other words, a 10 cent tax increase reduces demand for gasoline much more than a 10 cent price hike due to normal market forces. One of the reasons is that people perceive a tax hike as permanent while a market price increase is seen as transient. The elasticity effects are not symmetric.

  24. Joseph

    Rich Berger: “If you increase the taxes on small business, they have less to invest, less to hire and a lower return on their efforts.”
    You still don’t seem to get it. There is no tax on small business and therefore it isn’t being increased. Business owner’s pay personal income tax that is exactly the same as any other employee. Taxing the business owner does not leave less to invest because they can simply reduce their taxes by investing the money in their business. This idea that small businesses are having their taxes increased is a myth.
    William: “Indisputable fact: My father is shrinking his business and reducing headcount as a result of higher taxes… To the economists here that don’t see this as a problem, what is your recommendation? What would you like me to tell my father?”
    Tell your father to see an accountant because he does not understand his taxes. Cutting back his business to avoid taxes is like refusing a $10,000 raise that your boss offers because it will increase you taxes. It is not rational. There is no tax on working capital. There is only income tax on the net income from the business which your father pays as personal income tax. Your father may have other rational reasons to reduce his business, for example he wants to retire or reduce his own hours, but increasing business taxes is not one of them.
    It is difficult to have a substantive conversation about taxes when there are so many misunderstandings about how taxes work. Republicans have been very diligent about cultivating those misunderstandings in order to further their agenda of lower taxes for the rich.

  25. Joseph

    Steven Kopits,
    We don’t have to imagine what will happen if we revert to the Clinton tax rates because, guess what, we actually experienced those tax rates back in the 90s. There was no substantial shift from capital gains to dividends when the Bush tax cuts were put in place so one wouldn’t expect there to be much change when we revert to the Clinton rates.
    A quick look at Mitt Romney’s 2011 tax return shows that under the Clinton rates his taxes would increase by about $1.3 million, an increase of about 40%.
    For a high income household earning about $250,000, their taxes would go up by about three to five thousand dollars, depending on their deductions, a 5% to 10% increase.
    People don’t seem to be aware that the Bush tax cuts gave enormous benefits to the wealthy like Mitt Romney, saving them millions of dollars each year. No wonder the wealthy are fighting so violently to keep them.

  26. Ricardo

    Joseph,
    I was probably in business before you were born.
    You absolutely do not understand the structure of pass-through taxation and business. I have posted this report by E&Y before but apparently you either did not see it or your reading comprehension is terrible.
    C-Corps have retained earnings that they can dip into to fund maintenance, expansion, employment and general business expenses including dividends. For pass-through businesses their “retained earnings” are personal income. That means that by increasing the tax on personal income you increase the tax on capital producing earnings. Less resources will be available to the business owner to fund such things as maintenance and expansion and importantly employment.
    Don’t forget that the owner of an S-Corp must pay everyone else first. If he has experienced a decrease in sales due to the economic contraction and then a tax increase on top of that his whole strategy must change. He will definitely not expand not knowing what tomorrow will bring and he will probably reduce his labor force in anticipation of increased health care costs.
    I work in a C-Corp so it is not anticipated that we will see this kind of increase. Both Romney and Obama have proposed cutting C-Corp taxes. That will not be true for my friends who run S-Corps. Everyone I have talked with has said that if Obama gets his tax increases on pass-throughs, something I believe is baked in the cake, they will lay off people.
    And that does not even address the professional person who is being required to hire more people to deal with the government red tape involved in health care and Dodd/Frank. These poor guys are being squeezed from both sides.
    You apparently are also overlooking depreciation. The theory of depreciation is that capital will be expensed over its life, but to replace the equipment at the end of its life requires that enough be saved over the life of the capital. When taxes are increased on resources being saved to replace such capital you reduce the necessary savings to fund the replacement.
    When you say it will only amount to 3%, as if that is nothing, you demonstrate your ignorance. If your mortgage rate was 6% would you think refinancing at a rate of 6% would be a good business investment? Why worry about refinancing? It is only 3%.
    There are just a lot of things that you are missing. I hope if you run an S-Corp that you have good accountants making your financial decisions.

  27. Joseph

    Ricardo, once again you demonstrate your ignorance of how taxes work and also basic accounting principals.
    Most small businesses choose the S-corp form because they ultimately have lower tax rates for owners than C-corps, so this idea that small businesses will be harmed by personal income tax rates is ridiculous. If S-corps were so tax disadvantaged, business owners would simply choose C-corps — but generally they don’t because the S-corp is much a better deal for business owners.
    “If your mortgage rate was 6% would you think refinancing at a rate of 9% would be a good business investment? Why worry about refinancing? It is only 3%.”
    Again you don’t understand. S-corps are no different than C-corps that have to pay taxes on earnings they save for capital improvements (and generally at a higher marginal rate than S-corps). But the really absurd part of your refinance analogy is your failure to recognize that saved profits are only taxed once. It is not a tax paid every year like loan interest. Profits saved for capital improvements are not different than any other earnings and are taxed for S-corps just like C-corps — once. There is nothing special about S-corps.
    It’s pretty apparent that you know little about what you are talking about. The idea that small businesses will be strangled by a small personal income tax increase is a myth. The increase is exactly the same for anyone earning a salary who is not a business owner. The idea that S-corps have some unusual type of tax burden that makes them fundamentally different is false.

  28. Ricardo

    Joseph,
    I cannot believe you are so dense.
    If you have a choice between paying higher taxes as a C-Corp than an S-Corp of course you are going to choose an S-Corp. But for some reason you don’t believe that these lower taxes allow a business owner to have more funds to operate his business.
    For some reason you believe that raising taxes on an S-Corp is not really raising taxes because C-Corps pay the higher taxes. That is absurd. That is like saying raising taxes on someone making $20K to the same level as someone making $500K is not really raising taxes because it is less of an increase.
    It is obvious you did not read the analysis I linked because you keep repeating that S-Corps and C-Corps are taxee the same. You reason like someone in government. “Don’t worry about the tax increase. Everybody is paying it so it won’t hurt you.”

  29. Joseph

    Richardo: But for some reason you don’t believe that these lower taxes allow a business owner to have more funds to operate his business.
    Income spent on operating expenses for C-corps and S-corps are taxed the same — zero.

  30. Ricardo

    Once again, before you can spend it you have to save it. If it is taxed away from earnings you cannot save. Certainly money spent can be deducted but if you don’t have it to spend…Well…!

  31. Joseph

    Richardo: “Once again, before you can spend it you have to save it.”
    No. No, you do not have to save before you can spend. Every household and business in America knows this basic fact except you.
    Please stop humiliating yourself on this topic. It’s embarrassing.

  32. Ricardo

    I admit that I am apparently out of step with today’s America.
    I always considered America great because it was a land where industrious people could come and create wealth. Today wealth is evil and anathema. Wealth must be taken from those who are successful.
    I always considered America great because it was a land where men could be free do make their own choices in life. Today choices are made by government bureaucracy, what light bulb you can buy, what toilet you can buy, what kind of health care you deserve, whether you are too old to receive health care or just a pill for the pain.
    I always considered America great because producers were allowed to make a profit to increase their production. Today businesses must only generate sales to cover cost. Savings is evil and consumption is kink. Any one who saves is considered wicked.
    So, Joseph, I admit that you are in step with contemporary America.

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