Perhaps the most common misunderstanding of the tax cut situation is that the benefits of tax cuts accrue overwhelmingly to the individuals whose taxes are cut. Because a disproportionately large share of tax revenue is paid by high-income individuals, and because corporations pay more taxes when they thrive than when they struggle, it seems to follow that when the government cuts taxes, it privileges the rich and successful at the expense of the public.
Progressives and other opponents of tax cuts also believe that whatever benefits may accrue to lower tax rates for the economy as a whole come primarily from the greater spending that tax cuts encourage the rich and successful to do. It is thought that some of this spending may “flow” into ordinary workers and families, but these gains to the masses (the progressive anecdote concludes) pale in comparison to the enormous gains for the wealthy and the damage to the masses. Public treasury.
But this piecemeal approach to the economic issue of lowering tax rates is completely wrong. The economic case for tax cuts is Not that the economy would be “stimulated” by higher spending by higher-income workers and shareholders who, as a result of tax cuts, have higher disposable incomes. Instead, the economic argument for lowering taxes is that productive activity (not least investment) is discouraged by taxes and thus encouraged when tax rates are lowered.
The government gets most of its revenue from taxes on productive activities. As proponents of taxes on carbon emissions and proponents of protective tariffs on imports correctly realize, when you tax an activity, little of that activity happens. Income tax reduces the amount of productive work that is done in the marketplace. Corporate taxes reduce companies’ efforts to increase their efficiency and ability to innovate. Capital gains taxes reduce productive investment and risk taking. And so it follows that these taxes are really lowered Increases The amount of productive activity that occurs in the market.
Cardiovascular surgeon Jones, who, when income taxes are reduced, performs three more surgeries a year, of course takes advantage of it. But the biggest and most important economic benefits accrue to people who enjoy the resulting increase in health care. Acme shareholders benefit, of course, when corporate taxes are lowered and the business succeeds in cutting operating costs by 2%. But the largest and most important economic gains are accrued by Acme customers, who pay lower rates, and Acme workers, whose wages rise because those workers become more productive. Among the consumers who benefit from Acme’s improved operating efficiency are also Acme customers competitors who, to compete successfully with Acme, must lower their prices or improve the quality of their products.
The investor Smith who, because of lower capital gains tax rates, is induced to invest $1 million in entrepreneur Williams’ idea to build a better mousetrap, is of course rewarded if Williams’ new company proves to be profitable. But the largest and economically significant rewards are reaped by the entrepreneur Williams, and even more so by the employees of Williams and (sorry mice!) By the buyers of the mousetraps.
These facts are often hidden from the general public, not only by simple ignorance of economics, but also by poor language.
The main culprit here is a commonly used descriptor of the free market: “private enterprise system”. A free market is private only in the sense that decisions of what and how to produce are made by individuals who spend their own resources rather than by government officials who spend those of others. But in a free market, any entrepreneur or investor who produces and invests only to directly satisfy his own desires—any entrepreneur or investor who ignores the desires of the public—will not last long as an entrepreneur or investor.
Lady Gaga earns millions of dollars a year not because her performance directly satisfies her, but because her performance pleases millions of people (almost all of them strangers to her) that each of her fans willingly pays her to perform. Jeff Bezos is a billionaire today not because he has found great personal satisfaction in doing online retail, but instead, because his online retail skills and efforts satisfy the desires of hundreds of millions of us in the general public. Warren Buffett’s fortune exceeds $100 billion today not because of his personal and non-economic affiliation with the companies in which Berkshire Hathaway invests, but because he is extraordinarily adept at directing resources to companies that are themselves adept at producing the goods and services they so passionately crave. It has been purchased by countless members of the public.
In the marketplace, activities that are economically profitable (and therefore taxable) are mostly those that successfully improve the welfare of the general public.
Ironically, the only one really Special Corporations are those that exist and continue because of the special privileges granted to them by the government. A sugarcane plantation in southern Louisiana or Florida earns its huge income not by satisfying the common people, but instead because our government forbids us, the common people, to buy imported sugar. The United States government hurts public opinion in order to bestow unearned fortunes on American sugar planters. Only through interventions such as protective tariffs, subsidies, and professional licensing restrictions can business owners satisfy their own desires without having to cater to the general public. Only through such interventions are the “profits” and incomes of the producers protected extracted from common people rather than being their rewards Contributes to the public.
Ordinary men, women, and children will prosper only if, and only to the extent that taxation and other government interventions do not unduly discourage productive activities. Income taxes, corporations, and capital gains are taxes on General Good. Protective tariffs and similar restrictions on how people spend their money peacefully also harm the public welfare.