Economic Incentives of Taxes and Tax Cuts

[ArcticFox]

I think this country looks at the tax burden in isolation and misses the bigger picture. Everything adjusts according to the tax system in place at any given time. I've jotted down a couple fairly obvious results of higher and lower taxes (well, obvious to me at least), and I'm wondering if anyone wants to add, or try to convince me I'm wrong.

For businesses: high taxes on net income = high-value deductions for investments in equipment.
Low taxes on net income = high incentive to maximize the bottom line (by putting off investments, cutting workforce, etc.).

For low to moderate income individuals: high taxes means less to spend on food, housing, etc. While this may sound like a bad thing, higher taxes necessarily result in downward pressure on costs of food, housing, etc. as people have less to spend. Lower taxes on income lead to the opposite: upward pressure on goods and services. Any landlord can do a quick calculation and figure out that he can charge his renters another $100 per month if he knows their tax burden is that much less. (The problem is that this calculation is made across the board, resulting in costs rising more than the taxes were lowered).

For high income individuals: high taxes means less money to spend on toys, and it also means deductions for investment losses have a larger value, which should lead to greater risk-taking (i.e., starting a new business or investing in new technology that could improve our lives). Necessities of life are pretty much taken care of at some income level (I would say a good metric would be $250,000), so why do rich people need a tax cut again?

[Igel]

1. High corporate taxes have other effects.

Investment is one deduction; passing on profit to shareholders is another. If investors have high taxes, this keeps the rate of return on investment high.

High taxes on income leads to downward pressure on prices. However, this reduces the profits needed for investment; it also makes it harder to keep businesses in business--in other words, prices aren't infinitely elastic.

For investors, deductions for investment losses are only handy if they have investment profits to set them against. If profits are low for the business, or the business reinvests them, they will be facing losses with no offsetting benefits.

It's as important to look at counterarguments and counterevidence as it is to come up with a bit of evidence to support your position. It's damnably easy to adduce a few facts and draw inferences from them. We tout critical thinking to the heavens--and then assume that we have no obligation to toughen up our own arguments by thinking critically about them, weighing their weaknesses and strengths. It's like saying screwdrivers are a good thing, but only when used to spot flaws in other people's machinery; we must never use them on our own, even as all the screws come falling out.