Recently, TACD writer Alan Joel wrote an article titled President Obama’s “Little Bit More,” discussing how the increases in taxes on the wealthy would hurt investment in our country, and by extension, the economy. With all due respect to Alan, there are some issues with the logic of that article that must be addressed.
First, Alan asserts that the increase in taxes on investment income will discourage investment, regardless of what people involved in these investments such as Warren Buffet have said. He claims that, “If taxes go up, the amount left to invest goes down.” The problem with this is that these people aren’t living at or beyond their means. The wealthy are generally investing money that would otherwise be sitting in a bank. By investing the money, they have a chance for much higher returns. If they are living at their means, then they probably aren’t making a wise decision by investing this money anyway.
Alan is correct in his statement that the after-tax return on investment is a key factor when considering a high-risk investment, particularly a start-up. What he didn’t consider is the risk factor and return on alternatives. If I have one million dollars that I want to invest in a high-risk start-up, I will look at the level of risk compared to the anticipated returns. Assume that option A has a slightly higher risk factor than option B. Also, assume that option A has an anticipated return of $500,000 over the cost of my investment while option B only has an anticipated return of $250,000. Let’s assume that I am taxed 25% on my gains from this investment. If I choose option A, I will pay $125,000 in taxes for a net income of $375,000 on my investment. If I choose option B I will only pay $62,500, but I will also only receive an income of $187,500 above my initial investment. Of course, I could simply let the money sit in the bank earning 0.25% annually. That would give me about $2,500.
Finally, to address the continued conservative claim that the Affordable Care Act is going to destroy our economy…it’s just not true. The figures being used by conservatives to stir panic about healthcare reform are very misleading. In his article, Alan says the ACA is estimated to cost $1.85 trillion and only bring in tax revenues of $836 billion leaving a deficit of over $1 trillion. There are many facets of the ACA. One of them is that some of the cost for the law is being covered by reductions in other areas of spending. We don’t need to raise the exact amount of revenue for the ACA that is being budgeted because we will simply be moving the budget from one area to another. You won’t hear about this from conservatives because they would hate to admit that, they want to cause panic. You also won’t hear them explain that some of the funding was taken away when Republicans refused to allow the increase in investment taxes on those making $250,000 or higher as was originally planned. They refuse to allow proper funding then complain about the fact that it is not properly funded. I guess that makes sense in the conservative alternate universe.
The moral of this is that you can’t listen to conservative rhetoric and take it as the truth. Would an investor shy away from making hundreds of thousands of dollars, or potentially millions of dollars, simply because they are going to pay a slightly higher tax rate than they used to on the gains? No. They are in business to make money. They do that by investing. They aren’t going to bank their money and lower their income simply to avoid paying a slightly higher tax rate on their investment returns. The Affordable Care Act is not going to destroy our economy and end investments in the United States. Is the ACA perfect? No. There are many problems. If we want to fix them, we need to completely reform our health care system and move to a single-payer system. In the meantime, take the conservative rhetoric with a ton of salt. They are in sinking ship and are grasping for a lifeline. Be careful they don’t drag you down with them.