Jeff  Carter

Obama has been all out in his assertion that we need to tax the rich to bring in more revenue so that we can get this pesky deficit under control. He doesn’t mention that he accelerated the level of deficit spending so we are now careening off a fiscal cliff. His logic and thought process to higher taxes equating higher levels of revenue are also very much off base.

Much is being made of his new proposal to lower corporate tax rates. Like most things Obama, the headline is good but the details leave a lot to be desired. This is a President that hates private industry and believes solely in big government solutions to fix problems. Remember, he destroyed the bankruptcy process with car companies and we are left with government holding 26% of GM equity. It’s a loser, just like his new plan.

Instead of a blanket lowering of the rate on all corporations, Obama picks winners and losers and offers incentives for things like green energy. He eliminates loop holes for his least favorite kinds of companies, and opens or extends them for his favorite kinds of companies. The corporate tax proposal is simply another campaign document that gives Obama a good soundbite for the uninformed.

It brings us back to the question I proposed at the top of this post. Why don’t higher taxes bring in higher amounts of revenue? It has to do with calculus. Think of tax revenue as a curve. Here is a parabola. A parabola that looks like this is the way most people think of tax rates.
 

The lower you make the rate, the lower amount of revenue you generate. That is the accountants way to look at taxes, and why government numbers are always wrong no matter which party is quoting them. Even in the Republican numbers designed to poke holes in the Obama budget, I see usage of accounting numbers to make their point when convenient.

In reality, people's behavior changes significantly in response to tax rates. "At the margin" is what you need to focus on and get familiar with. Will the incentive to increase production and income increase if tax rates decrease on the next dollar made? Of course they do. More production then leads to higher amounts of revenue generated, even at lower rates. Of course, there is a limit to how low the rate can go before the curve starts to turn the other way.


Jeff Carter

Jeffrey Carter is an independent speculator. He has been trading since 1988. His blog site, Points and Figures was named by Minyanville as one of The 20 Most Influential Blogs in Financial Media.