Why Tax Cuts Work…

I’m sick and tired of the tax cut argument.  They work.  I’m going to explain in very simple terms why they work.  Most conservatives are going to understand this very easily…liberals might have a tougher time and I understand that because they can’t get the word “greed” out of their head for more than two seconds to read this.

 I’m going to use simple numbers.  Not just for the readers sake, but for my own as well while writing this piece.

Let’s say the investment tax rate is 50%.  First of all not very many people are going to invest with this higher rate because the risk of investing can be great and now even if you win, half of your money goes to the government.  But let’s say there are 2 people that decide to invest.  Doesn’t matter what amount they invest with let’s say they both equally make 100 dollars in profit.  The tax rate is 50% so the government takes 50 dollars from each of them and collects 100 dollars total while both of the investors keep 50 dollars a piece.  So people keep less money at these rates and the government doesn’t collect as much as it could have in revenue and I’m about to show you why.

 The tax cuts work because of percentages and incentive.  At a 50% rate the incentive to invest is low.  Meaning less people will invest.  This is where the beauty of tax cuts takes hold.  Let’s say a republican President(a true republican conservative) gets elected and lowers the rate to 35%.  Now the incentive to invest becomes higher.  Now let’s use a conservative(mathematically not politically) figure and say now 4 people want to invest rather than just 2 because of the new rates are attractive to investors.  All 4 investors each make 100 dollars profit a piece.  Now the tax rate is 35% so 35 dollars from each of the 4 investors profits(35% of 100 dollars is 35 dollars) is equal to 140 dollars of revenue for the Government.  Not only that, but each investor keeps 65 dollars of their investment.

To recap:  With the lower rates and more incentive the government collects more in revenue and the investors keep more money to invest more or build more in the way of jobs and business.

Under the 50% rate the incentive is lower so the government does not collect as much nor do the investors whom do actually invest keep as much.  Not only that, but I would argue that the higher rates actually help the rich and hurt the poor.  At a higher rate who can afford to invest?  The super rich because they have the capital available to actually make money on their investments.  The poor or middle class do not have the capital to make a sizable enough profit to increase their incentive toward investment on the higher rates.

Once again with 2 investors at a 50% tax rate the government collects 100 dollars in revenue and the investors only keep half of their profit.

With the 4 investors at a 35% tax rate the government collects 140 dollars in revenue and the investors keep 65% of their profit.  This is why tax cuts work.  Percentages and Incentive.