Monday, August 02, 2010

Life in the Fast Lane

I was talking to some of my friends last Week about letting the Bush Tax Cuts expire. I stated then, right or wrong, that they could expect about a 5% increase in Personal Income tax, and about a 7-8% increase in Capital Gains tax. A lot of people claim this added taxation would be bad for business, but I seriously doubt it. The reason I doubt it stands as these Individuals have opportunity to attain higher maximization of their Income with due diligence–they work a little harder–and the fact that Government debt pulls as much or more of Investment capital from the Market as they would contribute to that capital. Menzie Chinn may provide a more balanced look at the entire Question, but ultimately doubts that removal of the Tax Cuts will have much impact.

I would like to approach the problem in a different manner. The people to be taxed once more did very well in the past decade. One can find many estimates on how well they did in actual fact what with the inflation rate being what it was, but I assume they achieved a growth rate in their Income and Capital Gains of about 8% per year before scaling for Inflation. I may be vastly wrong because I do not follow long-term inflation, but cannot imagine that the Inflation rate was over 40% for the Period; this meaning that these Income levels did about twice as well as the inflation rate, so that their Incomes are about half again as large as in 2000 after inflation.

It is clear that they are first paying more today than they were in 2000 even with the Tax Cuts. It is also clear that if the Tax Cuts expire on schedule, there would be an incredible lengthy period before they would have to pay an equal taxation to what they would have paid, if the Tax Cuts were never implemented in the first place. An astute economist could insist that the tax impact of Bush Tax Cuts expiration could not be accounted as added taxation until the new taxation had replaced the foregone tax revenues over the Tax Cut period. The wondrous element here may be that this will be what the markets will also account, and there will be no tax impact until the previous Income Gains fall back into normal alignment with lower Income sectors. If this is the Case, then the Tax Cut expiration would be a benefit, with no impact on the economy, lower Interest rates as Government debt is not assumed, and it would propel these Income levels to maximize their Income potential. lgl

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