Tax The Rich, But Not Their Businesses

Washington has a problem, or at least the Administration does. It is tempted to allow tax cuts for the rich, those who make more than $250,000 a year, expire. That will put a burden on the well-to-do, but they are a small part of the population–maybe 1% to 2%. The rich may not care. They have a history of avoiding taxes with shelters, gambling losses and gifts to charities.

The Administration also wants to stimulate small businesses, which are the source of wealth for many of the rich. The government may create programs to encourage banks to give small businesses credit. That may work in the face of risks that these enterprises often have because they are supported by a few customers and have extremely modest balance sheets. The government can mitigate that risk as a way to help job creation.

One of the ways that the wealthy stay wealthy is by being cheap.  And a cheap business owner may decide that access to bank capital is a good way to increase his own compensation .  They also will keep expenses down like adding new workers given the state of the economy.

The plan to tax the rich may make a great deal of sense on paper and may be a fair way to redistribute wealth in the US, to the extent to which that is a noble cause and one the works well to bring more cash into the Treasury. But, it is a counterproductive way to get  small businesses to expand their workforces and expenses.

The tax system is already remarkably complex. A credit for the rich to add employees to the companies that they own may make sense. It may allow the wealthy to remain as wealthy as they are. That seems to be a convoluted way to stimulus the economy, but it may be no more so than the programs which have failed to work over the last two years.

Douglas A. McIntyre