It’s the Demand, Stupid: Millionaire Surtax Edition

Listening to NPR’s Morning Edition yesterday, I was greatly interested in this piece on the Republican rejection of a surtax on millionaires to pay for an extension of the payroll tax cut for another year. In typical NPR fashion they try to find a millionaire to ask if such a surtax would dissuade them from hiring or investing:

So, NPR requested help from numerous Republican congressional offices, including House and Senate leadership. They were unable to produce a single millionaire job creator for us to interview.

So we went to the business groups that have been lobbying against the surtax. Again, three days after putting in a request, none of them was able to find someone for us to talk to. A group called the Tax Relief Coalition said the problem was finding someone willing to talk about their personal taxes on national radio.

Kevin Drum wonders:

Which is worse? That neither Republicans nor business groups could find even a single person to back up their “job creators” nonsense? Or that the crack reporting staff at NPR couldn’t figure out any way to contact millionaires except to ask Republicans and business groups?

I think Drum is a little unfair in his criticism of NPR, as one of that organization’s methodologies involves talking to a representative sample on any given subject. The GOP has been quite insistent on this assumed economic behavior, so it only seems fair to request help from them in interviewing that sample. I would assume they had every intention of talking to millionaires who did, and did not, agree with the Republicans about the effects of such a surtax.

Eventually NPR solicits opinions from self-identified millionaires on their Facebook page. One response (my emphasis in bold):

“If my taxes go up, I have slightly less disposable income, yes,” said Burger, co-owner of CSS International Holdings, a global infrastructure contractor. “But that has nothing to do with what my business does. What my business does is based on the contracts that it wins and the demand for its services.”

They received similar comments from others, but I bolded the above parts for a reason. That is because its never made sense to me that a small business owner would weigh his personal effective income tax rate as more important than whether or not his business would be more profitable by hiring another worker.

As it turns out, this may be entirely besides the point. The Assistant Secretary of the Treasury points out that we’re really talking about a small number of people:

Specifically, a recent discussion paper by Treasury’s Office of Tax Analysis shows that only 1 percent of all small business owners have adjusted gross income over $1 million and would be affected by this surcharge. Not only will the remaining 99 percent of small business owners be protected from paying this surcharge, they will receive a net benefitfrom the employer-side payroll tax cuts.

The percentage of affected taxpayers who earn a significant share of their income from small businesses is also much smaller than the opponents of the Senate Democratic plan claim.  Critics of the plan often use a definition of “small business” that includes many investment managers, lawyers and extremely wealthy people who are not by any common sense definition small business owners. In fact, more than half of the top 400 earners – whose average annual income was $271 million – would qualify as small business owners under their definition.

Suzy Khimm piles on:

Just 2 percent of all business owners who file taxes through individual returns—including sole proprietorships, limited liability corporations, S corporations, and partnerships—have taxable income that’s more than $1 million, according to an August 2011 Treasury report. And just about 1 percent of those Treasury categorizes as “small businesses owners” would be affected by the Democrats’ proposed millionaire’s tax —about 273,000 in total. That number drops even further—to 51,000—if you define “small business owners” as those earning at least 25 percent of income through their firm.

It’s kind of hard in this particular instance to refute the charge that your political party is seeking to protect, primarily, the interests of a narrow slice of the wealthy (who may not even be aware of what tax rate they pay). It certainly doesn’t help if you start the whole process by only begrudgingly agreeing not to raise taxes on a much larger slice of far less wealthy Americans in a stagnant economy with 8.6% unemployment.

There seems to be this idea, by some on the right, that taxation happens in a vacuum of static nothingness. And maybe it does in an economy suffering from a liquidity trap, but probably not for the reason they might think. If Mr. Burger’s taxes were to go down then he would have more disposable income, but if his customer demand is weak or nonexistent then he doesn’t have an incentive to hire. If his taxes go up then he has less disposable income, but if his customer demand is still weak or nonexistent then he still doesn’t have an incentive to hire. The static issue in Mr. Burger’s situation, and therefore his most pressing problem, is weak or nonexistent customer demand. It is not whether his personal income tax liability goes up or down.

This whole discussion strikes me as akin to everyone arguing the proper usage of Acetaminophen while you’re suffering from leukemia. Of course using the proper dosage of Acetaminophen can provide marginal, yet important, beneficial effects for some everyday issues. Maybe this is even a hobby subject of yours and you’ve spent your life listening to people argue that more than the recommended dosage is better, others arguing less, while experts stick to a ‘Goldilocks’ spot where everyone gets the most benefits for the least amount of risk. Perhaps, for the sake of this analogy, you’re even finding some minor benefits of taking such a drug while undergoing chemotherapy. Regardless of what you personally thought was a proper dosage, though, such an argument would largely be irrelevant while you were suffering from leukemia.

So imagine if someone told you the real cause behind your leukemia symptoms was an unhealthily high dosage of Acetaminophen. You’d call them stupid, right?

*Update: I just stumbled on this piece by David Ryan over at the League of Ordinary Gentleman. Having already finished my two-cents above, I’ll just tell you to go read it for a good idea behind the mindset of a hypothetical small-biz millionaire.

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