Tuesday, October 12, 2010

Tax Increases = Employment Cost Increases

Campaign rhetoric about Republicans supporting "tax cuts for the rich" demonstrates economic ignorance and/or intentional incitement of class warfare. Either way, it's bad for our country.

Let's get one thing straight: increasing taxes on the top bracket kills job creation. Why? Because—surprise, surprise—the highest earning Americans tend to be the job creators, and increasing taxes deprives them of business capital and effectively increases the cost of employment.

Free market economist and investment adviser Donald Luskin clearly illustrates this point by describing how a tax increase would affect his company, TrendMacro:
Little companies like mine don't pay corporate taxes like big companies. They are organized as sole proprietorships, S-corporations, or limited liability corporations (like TrendMacro), so the profits are passed on to the people who own them (me, in the case of TrendMacro), who in turn pay taxes on them as personal income. . . . Under the Bush tax policy, that means paying 35%. If those cuts expire at year-end, next year the top rate will rise to 39.6%.

Now, suppose I want to hire a new employee at TrendMacro. I'd only do it if I thought I could make enough money on it to justify the trouble of recruiting, training, supervising -- and taking the risk that it might not work out. So, just for example, let's say I'd have to think I could make an extra $65,000 a year with my new employee.

At the current tax rate of 35%, my new employee would have to generate profits of $100,000 to leave me with $65,000. If that rate climbed to 39.6%, I would keep only $60,400. So to hit my $65,000 target for hiring, I would have to expect my new employee to generate profits of $107,616.

So what do you know? Raise my taxes, and all of a sudden it's not as easy for me to hire someone. The guy or gal who could make me only $100,000 wouldn't get the job. And unless I met someone who could make me $107,616, no one would get the job.
Asking Congress to stick it to your boss may feel good, but ultimately our workforce will feel the pain.

Thursday, October 7, 2010

Judge Steeh: participation in the "health care market" through abstention

Federal Judge George Steeh dismissed a legal challenge to Obamacare's individual mandate in Michigan. Specifically, Judge Steeh held that choosing not to purchase a medical plan constitutes "Commerce . . . among the several States" under the Commerce Clause.

Oddly, Judge Steeh does not characterize not purchasing insurance as "inaction," but rather as a delayed action. Which may or may not occur. But probably will. He supposes. Right? Bueller? Bueller?

The health care market is unlike other markets. No one can guarantee his or her health or ensure that he or she will never participate in the health care market. Indeed, the opposite is nearly always true. The question is how participants in the health care market pay for their expenses—through insurance, or an attempt to pay out of pocket with a backstop of uncompensated care funded by third parties.

This phenomenon of cost-shifting is what makes the health care market unique. Far from "inactivity," by choosing to forgo insurance plaintiffs are making an economic decision to try to pay for health care services later . . . .
The Pacific Legal Foundation argues that this reasoning is flawed because "we are not active participants in the market for medical care until we seek medical attention."

Or, think about it like this: the fact that I will inevitably become hungry does not immediately make me a participant in the food market. After all, I have no idea what time I will want to eat, where I will eat, what I will want to eat, how much I want to spend on food, or any number of other decisions that affect the supply-demand mechanism inherent in the food market.

PLF also argues that the individual decision of whether to purchase insurance "is simply a decision against one possible way of financing health care, which one may or may not ever need."

Yes, that's right: it is entirely possible (and hopefully the case) that an individual who chooses not to purchase insurance will either not get sick, or will incur minor medical costs. Moreover, as PLF notes, "Congress could regulate" individuals who choose not to purchase insurance but attempt to shift their costs onto the public. This is a critical point because many people who do not have health insurance can afford it, but calculate that they can better spend their money elsewhere. And what right do we have to question such a decision?

Oh, of course, proponents of socialized medicine argue that we wind up paying for the health care of the uninsured anyway. This reveals its circular absurdity: they claim they want socialized medicine because they want everyone to receive medical care, but respond to criticism by alleging that it's better for society to provide everyone with insurance because the uninsured will receive medical care anyway. Pretty soon, they're going to need to make up their minds on this.

Regardless, the statists reason that engaging in an activity that may impose a future cost upon society (in this case, life) merits federal regulation. Doesn't this place us on a slippery slope? Since so many of our decisions can affect our health, providing us with medical care will give the government ample pretext to regulate . . . well, just about any decisions we make.

Let me count my medical sins for today: I started off with an inadequate breakfast; stressed out over a trial (that I eventually won); inundated my system with caffeine; ate a high-cholesterol steak salad for lunch; consumed more caffeine; and I've been typing this blog with my hot laptop resting on my legs (which probably isn't good for me). Oh yeah, and I'm skipping the gym for the second day in a row.

Those are my decisions, right? Well, using Judge Steeh's logic, perhaps my (and your) personal habits are quickly becoming society's business. If society pays for our health care, then society gets to regulate behaviors that affect our health.

I'm pretty sure this is not what the Founding Fathers had in mind.

Wednesday, October 6, 2010

It's the Business Capital, Stupid!

Check out this video showing a fantastic Kudlow Report debate over the ramifications of allowing the Bush tax cuts to expire. It features conservative pundit Herman Cain, liberal pundit Mark Walsh, and free market economist Donald Luskin.

Cain and Luskin make an extraordinarily strong case for extending the tax cuts in their entirety, including the top-end earners. Cain in particular argues (starting at 4:02) that raising taxes on the top bracket will cost Americans jobs: "Small business people—two thirds of them—file their taxes as sub-S corporations."

Cain hits the nail on the head!

Increasing taxes increases the cost of business, thereby leaving less capital for business owners to use to hire (or maintain) their employees. And by what voodoo economics will

Walsh responds by making the terribly false assertion that this will tax business owners' incomes, not their working capital. Absolutely untrue. Sub-S corporations do not file tax returns; instead, their shareholders report the corporation's profits and losses as personal income. If you don't believe me, look up Section 1363 of the Internal Revenue Code.

It's pretty simple: taking money away from job creators kills job growth.