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Why Not Soak The Rich? Part II

April 7, 2009

My internet buddy Matt Veckman makes an interesting suggestion in response to my earlier missive on taxes via Google Reader:

Why is the cut-off $250k? That’s probably the exact number it takes to raise a family in the yuppie-class.
Why not have significant incentives for these people to fund start-ups (or run their own business) while making capital gains tax equal to the tax rate on their income?

First, though $250k is a lot of money compared to the incomes of the vast majority of Americans, it is still not enough to retire with.  That level of income still means they are attached to their job sand therefore might be more risk averse when it comes to letting any additional wages escape to other ventures in order to save in the case of a layoff or a paycut.

Is it really accurate for “yuppie class” to be the highest level of income an American can reasonably achieve?  There needs to be more of a distinction between upper class (whose tax rates could be increased more than 5 percentage points and would be hardly noticed) and upper middle class.  A more graduated rate would also make sense.

Second, incentives are definitely a good idea, and some even exist in the status quo.  I see this solution almost like an insurance scheme; lower the downside risk (the initial investment) while cutting the upside (the return if the venture is successful) in half.

I would be more confident in this approach if people were generally more aware of tax breaks available to them, but if we imagined a new law being passed in a gigantic omnibus budget, likely minor adjustments to the tax code wouldn’t even be picked up by most news outlets.  How else would that guy with the question mark suit have a job?

Rather, what would be advertised is the increase in the marginal tax rate on gross adjusted income.  Psychologically, this represents an unexpected 5% decrease in wealth for many from fiscal year 2008 to 2009.

Will this break the bank for those in this bracket?  No.  But with credit cards already stretched thin, I would think that in family budgets these folks would rather cut back on investing in risky strategies or stocks than on even somewhat significant lifestyle changes — especially if the payoff is limited by an increase in the capital gains tax.

If one accepts the premise that a recession is one of the prime opportunities for entrepreneurs to flourish (or that discouraging investment risks accelerating the fear spiral currently gripping our markets), then this would be undesirable to say the least.

At the same time, not running up gigantic long-term defecits is a more important goal, so if the taxes were going to be used responsibly I think the trade-off would be worth it.  Not holding my breath on that one though.

But, what the hell, the budget predictably passed on party lines.

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One Comment leave one →
  1. April 7, 2009 9:53 am

    Nice Site layout for your blog. I am looking forward to reading more from you.

    Tom Humes

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