Imagine for a moment that you are an entrepreneur, and a successful one at that. Let’s pretend that you own a chain of coffee shops that you have built up over time so you have $10 million invested in them. Before this economy, your business was very profitable and your taxes were minimal (under Bush). Now, in this economy, your sales have decreased drastically, but you are still doing relatively well. Let’s say you are going to make $400,000 this year in profit for yourself.
Under Obama’s tax policy, let’s guess that your taxes will be an additional 10% (so 40% rather than 30% just to make the numbers easy), so your after tax income will be $240,000 rather than $280,000. Not what you’re used to, but still a comfortable amount. Now Obama is going to take that extra $40,000 (or the entire $160,000 if you want to think of it that way) and use it to pay people to do a public work. For this hypothetical, we’ll say that the money goes to fund road construction in your area.
Now those people who then get hired to build that road will have an income they otherwise wouldn’t. And now that they have expendable money, they begin to purchase things they used to before the recession, like coffee. So your sales go back up, and your profit slowly returns.
Let’s see what would happen under the policy of low taxes. Let’s even take it to the extreme and say no taxes. So you make $400,000 this year and don’t pay any taxes. The conservatives argue that you will then use that extra $160,000 towards new investment and creating new jobs, but I am going to assume you’re a rational businessman. In this economy, any investment in expanding a business is risky-- more risky than investing in gold at least. Even if you aren’t risk adverse, you would require a sizable potential return on investment to take on that risk. Currently though, you’re return on investment is 4% (ROI = profit/investment = $400k/$10mil). To invest and expect more than a 4% return is illogical.
Now normally, you’d be able to take out a loan to leverage your investment money to get a better ROI. You would go to a bank and get a $640,000 loan, so you could invest $800,000 and expect to increase profits by $32,000 (for an ROI of $32k/$160k = 20%). But remember, we’re in the scenario where the conservatives get their way. And if that’s the case, the banks aren’t getting their bailout, so they aren’t lending money. Good luck finding one who would give you $640,000 for what is still a relatively risky investment. So no new investment, no new jobs, but at least you get to keep that extra $160,000. Until next year of course, when even less people have jobs and your sales drop further.
And remember, you aren’t paying any taxes in that scenario. So no one else is either. Imagine for a moment what that would do.