The standard approach for funding any new program coming out of Washington these days is to "tax the rich." Take for instance the plan now in play to fund socialized healthcare. This approach, although appealing for sound bites and bumper stickers, will soon have a devastating impact on our economy. A return to a much more progressive tax structure will inhibit job creation for years to come.
Let's start with who creates jobs in our economy. For the past twenty years it has been overwhelmingly entrepreneurs -- over 75% of all new jobs came from small businesses during this time period.
One of the incentives to take the risk to create a new business is to build wealth. Most entrepreneurs take a significant hit on their short-term income potential, but are willing to do this with the hope that at the back end their will come a big payday as a reward for their hard work and personal risk-taking.
When an entrepreneur sells his business, we must remember that much if not all of the proceeds from the sale are treated like ordinary income, which like all profits from the business pass directly to the owner.
With all of the "soak the rich" plans in place to pay for our new found fascination with socialism in the US, I would not be shocked to see marginal rates soon top 50% or more. Maybe not immediately, but as the true costs of all of these new programs become real the answer to soaring deficits will undoubtedly be to tax the wealthy even more.
Remember, capturing the wealth out of a private business is usually a one time event at the time of the sale of the business. These are almost always asset purchases that result in a huge one-time bump in income.
With higher marginal rates, we will see fewer entrepreneurs willing to take the risks and put in the effort to launch new ventures. In fact one study I have used often in class suggests that for every one percent increase in marginal tax rates we see a 1.4% decrease in start-up activity in the economy.
So in the frenzy to pass program after program that will be paid with higher taxes on "the rich", you can bet that we will see fewer entrepreneurs starting businesses that would create the jobs we need to revitalize the economy. On top of that, there will be fewer of these one-time "rich" people who get a one year bump in income when selling a business. This will create tax short-falls that will only further escalate the deficit.
Let's start with who creates jobs in our economy. For the past twenty years it has been overwhelmingly entrepreneurs -- over 75% of all new jobs came from small businesses during this time period.
One of the incentives to take the risk to create a new business is to build wealth. Most entrepreneurs take a significant hit on their short-term income potential, but are willing to do this with the hope that at the back end their will come a big payday as a reward for their hard work and personal risk-taking.
When an entrepreneur sells his business, we must remember that much if not all of the proceeds from the sale are treated like ordinary income, which like all profits from the business pass directly to the owner.
With all of the "soak the rich" plans in place to pay for our new found fascination with socialism in the US, I would not be shocked to see marginal rates soon top 50% or more. Maybe not immediately, but as the true costs of all of these new programs become real the answer to soaring deficits will undoubtedly be to tax the wealthy even more.
Remember, capturing the wealth out of a private business is usually a one time event at the time of the sale of the business. These are almost always asset purchases that result in a huge one-time bump in income.
With higher marginal rates, we will see fewer entrepreneurs willing to take the risks and put in the effort to launch new ventures. In fact one study I have used often in class suggests that for every one percent increase in marginal tax rates we see a 1.4% decrease in start-up activity in the economy.
So in the frenzy to pass program after program that will be paid with higher taxes on "the rich", you can bet that we will see fewer entrepreneurs starting businesses that would create the jobs we need to revitalize the economy. On top of that, there will be fewer of these one-time "rich" people who get a one year bump in income when selling a business. This will create tax short-falls that will only further escalate the deficit.
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