POWIP Piece of Work In Progress – Former Abode of Dan Collins

Why Tax Rates Matter

There’s a simple economic concept that liberals either don’t understand or choose to ignore.  Essentially, it’s risk/reward.  Specifically, it’s the effect of tax rates on the reward side of that equation and how it affects the result of that analysis.  Growing up, I never understood it.  It didn’t make sense how someone would purposefully make less money to avoid paying taxes when the end result would still be more actual income.

Then, my wife and I had a child and started going through the process of deciding whether she would work for pay outside of the home.  At first we figured, even at $10 per hour, it would be worth her working.  Then, however, we started subtracting all the work-related expenses (primarily daycare) that we would incur, and realized she would be working for, essentially, $1 to $2 per hour at best.  It wasn’t worth it.

It dawned on me at that time that any time you reduce the final reward (through taxes or other expenses), you reduce the incentive to work or invest.  It’s even more tricky with investments, as there is actual risk involved as opposed to simply time and effort.  Had my wife worked, we wouldn’t have really risked much, if anything.  Dropping $100,000 into a business, however, is risky.  You risk losing the whole investment, so you expect there is a potential for rewards.  If you’ve analyzed the problem and decided that it’s worth it for potential income of $10,000 per year, but taxes reduce the actual potential down to $8,000, you’re going to put your money somewhere else.  You’ll either put it where the reward is back in line with the risk (a different industry, perhaps), or where the risk is significantly lower (such as a bank account).

Liberals seem to understand this when they talk about “targeted tax cuts,” but ignore it when it comes to discussing over all tax cuts.  When I was liberal, I didn’t understand it; congressional and intellectual leadership on the left do not have that excuse.

Adam Wells

Living life at 84 mph and 7000 feet. All I ask is that you don't block traffic, act like a professional, and don't act all surprised when your actions have consequences. Oh, and don't complain about the refs; trust me, they don't care if your team wins or not.

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