From another thread:
People, and parties like to talk about small business tax, as if it makes the difference between a company staying in business or closing up shop. THey seem to forget that the businesses being taxed are ones that are making money. So, after all the expenses are paid out, and after all the employees are paid, and after all the owners and their families withdraw a nice generous salary, then whatever is left is income. This isn't money going to shareholders - this is money going to the owners of these companies, often in addition to the money they have already earned through the salary they award themselves. On top of that, if they want to reinvest money, there are tons of loopholes and tax credits to enable them to do so. So, let's not pretend that taxes are hurting the growth of small business.
But, the decision to engage in a risky economic enterprise is determined [color=red]before[/color] the end result is known.
Let me illustrate (I wish I knew how to insert a table on a babble post!!):
Let's say that an economic enterprise that you were considering engaging in had the following probabilities:
25% chance that you would lose $250,000
25% chance that you would lose $250,000
25% chance that you would earn $100,000
25% chance that you would earn $250,000
If you are making more than one dollar per year today, then you would avoid engaging in the risky economic activity because the "expectation value" of those probabilities would be zero (.25 x (250,000) PLUS .25 x (100,000) PLUS .25 x 100,000 PLUS .25 x 250,000 = ZERO). In other words, the probabilities associated with engaging in the risking activity (getting $0) would be greater than what you are making today (your current $1).
Now, assume that the probabilities of the losses were the same but the probabilities of the gains were higher:
25% chance that you would lose $250,000
25% chance that you would lose $250,000
25% chance that you would earn $150,000
25% chance that you would earn $350,000
Here, the "expectation probability" is that you would [color=red]earn $37,500[/color] (.25 x (250,000) PLUS .25 x (100,000) PLUS .25 x 150,000 PLUS .25 x 350,000 = $37,500). Here, the probable rewards exceed the probable risks, so engaging in the economic activity would be attractive.
But, let's say that you taxed the $150,000 at a 30% tax rate (leaving a net profit of $105,000) and you taxed the $350,000 at a 40% tax rate (leaving a net profit of $210,000):
25% chance that you would lose $250,000
25% chance that you would lose $250,000
25% chance that you would earn $105,000
25% chance that you would earn $210,000
Here, the "expectation probability" is that you would [color=red]lose $8,750[/color] (.25 x (250,000) PLUS .25 x (100,000) PLUS .25 x 105,000 PLUS .25 x 210,000 = negative $8,750). Here, the probable risks exceed the probable rewards, so engaging in the economic activity would not be attractive -- and a rational person would avoid engaging in that economic activity simply because of the taxes (even though, economically, nothing else has changed between the second and third scenario -- creation of other jobs, etc.).
_______________________________________
[b]Eleutherophobics of the World...Unite!!![/b]