Saturday, February 28, 2009

The Liberal Dilemma: If Increased Taxes Reduce Behavior, What About Businesses?

The website explains how some taxes are used for the purpose of modifying the behavior of the populace. One of the most glaring examples of this is found in the cigarette taxes. The IRS explains that increasing taxes on cigarettes causes a decrease in the smoking rate. And if any IRS auditors are reading this, I think the IRS is absolutely correct: Increasing the price per pack will decrease the smoking rate. Here are some figures from USA Today:

  • Connecticut increased it's tax on cigarettes from 51 cents per pack to $1.51 per pack in 2002 and the smoking rate decreased 37%
  • New Jersey increased its cigarette tax by 81 cents per pack in 2002 and the smoking rate dropped by 35%
  • California increased its cigarette tax in 1999 and smoking decreased by 18% since the increase.

So it's clear there is some correlation between increasing the taxes levied on a behavior or the means of the behavior and the rate at which the behavior is performed.

Liberals love this principle because it allows the government to have control over something without passing a law to control it. It is conceivable that the tax on a cigarette could be so high that it effectively bans cigarette smoking altogether.

And this is where liberalism's ideas begin to fail.

The United States already boasts one of the the highest marginal corporate tax rates in the world at 35%.

Barack Obama has stated that he would like to lower the corporate tax rate, and would be able to if he were to close the tax "loopholes"(a derogatory word for "deductions") in order to increase revenue to the Federal Government. Put simply, he would like to raise the overall corporate tax rate by taking away corporate deductions and lowering the actual rate on paper. Reuters reports:

[President Obama] said that the tax rate "on the books" was high in the United States.

But Obama added, "In practice, depending on who it is -- what kind of accountant you can hire -- they're not so high. That's an area we can work on," Obama added.

He'll be able to say he cut corporate tax rates in an attempt to appease the more conservative-minded people, but the actual numbers will reflect a tax rate increase overall. Raising taxes on wealthy corporations seems like a good way to increase revenue, but wait...

The IRS's stated purpose for increasing the tax rate per pack of cigarettes is to reduce the smoking rate. So what happens if you effectively raise corporate tax rates? Wouldn't that reduce the rate at which businesses are started or expand?

This is the liberal dilemma: if increased taxes reduce a behavior, then class-envy-based corporate tax policy is a recipe for an economic downturn by their own admission.

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