Tax Cuts for the Diner Owner

Alan has an interesting, albeit flawed analysis on the idea of tax cuts for the rich. Alan writes:

Let’s look at these two ideas in action. Consider a restaurant, or a gas station, or a small law firm, or similar small business. Say the business is going along pretty well, making money, the owner is prospering and can afford an expensive car, a boat, European vacations, college for the kids, and has some investments socked away. Upper middle class, I guess.

Apply trickle-down tax policy. The owner will have more money, say as much as $10,000 a year. GOPers say the owner will take this money and invest it in the business and create jobs; expand the restaurant, add more pumps to the gas station or perhaps open up another, hire an associate lawyer, or otherwise create more capacity for more customers that will require more jobs. That’s the theory.

The reality is that the owner will probably just buy more investments or nicer consumer goods. This will, somewhere down the road, lead to more jobs, probably. An upsurge in BWM sales will help create jobs, in Germany. Buying more stock in a company will allow it to borrow capital more cheaply, lowering costs, and returning more dividends to the wealthy investors.

The owner probably won’t expand the business with the $10k. $10k isn’t enough by itself for that, even $10k over several years. If the restaurant isn’t always full, the owner won’t make a bigger space so it’s full even less. If the lawyer isn’t turning down clients because of insufficient time to work new cases, an associate isn’t needed.

First of all, lets consider what he said about consumer goods. The fact that’s little know is that many foreign auto companies make their cars in America, while many American cars are made in foreign countries. For example, there’s a BMW plant in Spartansburg, South Carolina. If he buys the BMW for a $1,000 over invoice, the average price over invoice, $1,000 stays in the local community with $750 going to the dealership and $250 going to salesman.

Now, going to the scenario, lets acknowledge something. The lifestyle described requires an extremely high income. Essentially, we’re looking at a millionaire. To be earning the type of money, Alan’s describing without being up to his eyeballs in debt, the guy’s probably earning half a million. (Depending on what type of college he’s expecting the kids to go to and how much money invested is “some.”) So this is an extremely modest tax cut of maybe 2%.

This isn’t going to stimulate the economy a whole lot, but the money will do better than if it was left in the hands of the government.

Okay, so we’ve got $10,000 extra what might be done with it? Buying improved consumer goods was touched on and we’ve explained the economic benefit to that. We’ve taken his $10,000 tax cut and it trickled down to the Car Dealer, the Salesman, and the factory workers in Spartansburg, South Carolina.

The idea of investing the money was dismissed as only helping wealthy investors. The big point Alan has missed is the 401(k). I was down at Taco Bell a few days ago and I saw they’re offering a 401(k) to their employees. What does thing called a 401(K) allow workers to do?

It allows us to do tax-deferred savings for retirement. So myself or Mr. Taco Bell can go ahead and put aside 2 or 3% of their income. I know one friend who’s Pizza Delivery boy son is putting aside 15% of his income in that 401(k).

Good 401(k)s buy Mutual Funds. Mutual funds are managed by a skilled investor who purchases stock according to a philosophy, be it, “looking for good small cap stocks” or “stable value funds” anything else. So, you buy $10,000 in HP Stock and my 401(k) mutual fund has a ton invested in HP, I benefit.

With the restaurant, Alan missed a key point. He assumes that the owner will not add capacity if the restaurant isn’t being full up. Has Alan tried to go out to eat on a Saturday Night in Boise? I drove down to Texas Roadhouse. Packed! And then I drove to TGI Friday’s. Also packed! Unless you’re living in a one restaurant town, there’s ways to expand your business to pick up other restaurant’s business.

The restaurant owner’s tax cut may even find its way into the hands of his employees if he’s not filling his capacity. (Though how you’re making a half a million dollars a year and not being full up is anyone’s guess.) In a restaurant, the difference between success and failure in most businesses is customer service.

Suppose, he keeps losing his best waitresses to the Outback Steakhouse. Outback has higher ticket prices and therefore higher tips for those who tip on a percentage of the ticket. These waitresses drive his business, so he could choose to increase their base pay $2.00 an hour.

He could also decide to give high performing waitresses in college a tuition reimbursement. He could offer some additional training to all of his employees to increase employee performance, which would then make them more valuable in the marketplace after that left.

Finally, he might take that $10,000 and decide to do some maintenance. He could have the house painted. He might put in a new set of custom cabinets in his kitchen. All of these “trickle down” to contractors, carpenters, painters, and whoever else in the community.

Alan then goes on to write about Trickle Up Economics:

Apply trickle-up tax policy and put more money in working people’s pockets. They’ll have money to eat out more, or go for a drive, get a will, whatever. They might save a part of the extra money, but they’ll certainly spend a part of it. Demand drives supply, not the other way around. Adding more hours or more space to the business will require more waiters, convenience store clerks, you get the picture.

Lumber mills in Cascade and Emmett closed and threw folks out of work. What would return jobs to those communities? Tax cuts to the corporations? Tax cuts to Paris Hilton? Those types aren’t going to invest in Emmett and Cascade. However, give more money to the townspeople to spend locally and it will boost the local small businesses.

First of all, Alan insults the businessman. He’s not a “working person.” He just has a half million a year handed to him. Come on. Second point, what’s a 2% tax cut going to mean to a “working person.” To me, it’ll mean maybe $200 which is going to come to me over the course of a year which will amount to $7.69 a paycheck. Now I’d like to say that I’d stick that money in savings, but I’d probably just go ahead and spend it without a thought. Am I going to go out to eat more with $7.69? Probably not. Maybe once or twice a year, but it really wouldn’t change my life.

When one’s looking at economic growth, one gives more money to the people who know how to use their money to create wealth. They’re good at it. Christ, told the parable of talents where a man left his business to several employees over a course of years and when he came back, he did an account. One person had produced nothing and his talent was taken away and given to someone who had doubled his money. Christ observed:

“For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.”-Matt. 25:29

Now, Christ was telling us not to give to the poor, but he wasn’t speaking on compassion. He was talking about business. Those who perform with their money are going to get more than those who don’t if you want build wealth and success in a business or in a nation’s economy.

Now, I certainly in favor tax increases on the poor, but the fact is there is a very good case that rather than being a bane for the working people, the best thing for our economy is not to punish people who are successful and know how to build wealth.

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