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Taxing Talent
by Andrew Roth
The Iron Fist of Capitalism
25
November 2002

The great thing about capitalism is that anyone can start their own business. It's the American Dream.

When conceptualizing this, the narrow view is that an entrepreneur starts a company in order to make a profit. End of story. The broad view is that the entrepreneur takes her hard-earned money, puts it at risk by starting a new company, provides new jobs, and offers the public a new product or service that everyone will benefit from (even those not directly involved).

Unfortunately, it's this latter view that is often overlooked. In fact, it's remarkable how a company's power to improve the quality of our lives goes so largely unnoticed by those in Washington.

Imagine all of the brilliant students who are graduating from college this year. There will be hundreds and thousands of newly-crowned doctors and engineers and computer programmers all ready to strut their stuff in the private sector. But what if no companies are waiting for them when they step off campus? What if the economic environment in this country is so unattractive that no employers are willing to use their limited resources to hire these talented young men and women?

If that's the case, how do you measure the waste, the squandered time that could have been used to find the cure for cancer or the new efficient fuel replacement for oil? For the most part, you can't. Opportunity costs can't be quantified when the benefits that could have been reaped are not just immediate but are compounded over several years. Also, if you tried to quantify it, do you measure it in lives lost or dollars thrown away?

Our leaders dismiss these costs and continue to charge punitive taxes when the solution is just the opposite. And all for the sake of what? Eliminating deficits? We know that deficits are created from massive spending, not massive borrowing. We also know that deficits can be eliminated not by raising taxes, but by reducing them. So then why are high taxes still the norm?

Consider this: I recently spoke with a small business owner in South Dakota. As an employer of 26 people, this company's owner figures that he pays more than 50% of his profits in taxes. Take into consideration that he has to pay federal corporate taxes of 35%, federal payroll taxes of 7.65%, and combined state and federal unemployment taxes of 1%. While South Dakota doesn't charge a state income tax, it doesn't relieve the owner from out-of-state sales (each respective state will charge him accordingly). And don't forget about property taxes.

Add all of these figures together and he still isn't done. Remember, the government requires proof of compliance. Tax returns, certified audits, and accounting reviews all cost money to prepare. Call compliance costs what you want, but in the end they are still "taxes" on doing business.

Many voters and politicians will read this, nod their heads, shrug their shoulders, and recognize the absurdity of it. Then, come next November, they will forget it and without shame request that local property taxes be raised in order to finance new school buildings for our kids. I mean, education should be a top priority, right?

The thing is, all of this comes down to refusing to accept sound economics. Perhaps it is a reflexive notion. Intuitively, it makes sense to raise taxes in order to pay for something like a new school building, right? Unfortunately, that's just not the way it works.

Raising taxes, or even merely keeping rates where they are, hurt the economy. We are the land of plenty. We can unleash huge amounts of wealth into our system simply by forcing our politicians to get out of the way.

As Walter Williams of George Mason University recently wrote, "In medicine, misdiagnosis leading to mistreatment and further injury can lead to malpractice suits. Unfortunately, in politics, misdiagnosis, mistreatment and further injury lead to re-election."

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