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Trillions of dollars at stake?

By Julia Dutill
web posted September 21, 2020

“There is an enormous gulf in tax policy between the two presidential candidates – with trillions of dollars at stake over the next decade,” the Wall Street Journal recently announced. President Trump promises to continue his 2017 tax law, which lowered taxes but increased budget deficits. Mr. Biden wants to tax corporations and wealthy people more heavily to pay for social programs, such as “free” public college and healthcare. I believe there are a couple problems with Mr. Biden’s approach, as I’ll state below.

First of all, taxing the wealthy will not in any way incentivize them to invest in their business, and therefore grow the economy. The reason a business owner invests in his business is because he believes the potential reward of doing so outweighs the risk of spending his own capital. High taxes reduce the potential reward of making the investment ad may cause business owners not to invest further in their business. And when business owners decide not to invest in their business, unemployment rates go up, and the economy shrinks.

Also, if Mr. Biden goes ahead with trying to create “free” social programs, as I mentioned above, those “free” programs will be paid for with tax dollars that come out of your own pocket. There is no such thing as a completely free good. “Free” programs can only be funded with higher taxes.

It seems like the opportunity cost of low taxes is that the government gets less money in the short term. The government does get more money faster with high taxes, but low taxes will bring in much more money over the long run. The following example illustrates this.

Suppose a wholesaler, selling burgers, suddenly has a tax increase. Now he has to pay 20% of his income, which is currently $50,000. He now has less money to spend on building factories and developing new technology, and has less money to put in the economy itself. Maybe next year he can only make $25,000, but he still has to pay 20% of that. Obviously, 20% of $50,000 is more than 20% of $25,000, so the government ends up with less money next year. And a retailer, buying the wholesaler’s burgers, is having to pay higher taxes also, so he has less money to buy burgers and expand his stores. His customers may not be able to be supplied with all the burgers they would like. This will happen in a much larger scale all across the United States if Mr. Biden increases tax rates, and consequently, the economy will start shrinking fast.

Now let’s look on the reverse side. Using our previous analogy, suppose a burger wholesaler gets a tax decrease. The tax rate is now 15%. Now, our wholesaler has more money to invest and grow his net income, and perhaps he can double it in about a year. He has more money to spend in building factories and developing new technology. Also, if he doubles his net income to $100,000, next year, he will actually be paying more to the government. 20% of $50,000 is a lot less than 15% of $100,000. And when people spend more money, that money gets put into the economy itself, causing it to grow.

There is indeed a significant difference in the tax policies of the two presidential candidates. Will the “trillions of dollars at stake” be used to fund government programs that the people as a whole may not agree with? Or will they be used to benefit every individual, business, and the economy as a whole? ESR

Julia Dutill is a homeschooled sophomore in high school, and this is her first submission to Enter Stage Right! © Julia Dutill, 2020.

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