Yep, you heard it here: Ronald Reagan got it wrong. His economic policies, which were a head-and-shoulders improvement over the doldrums of the Carter administration, brought our economy back. Unfortunately, Reagan made some critical mistakes as well.
Reagan believed that if we cut taxes on the wealthy, it would serve to spur economic growth and create jobs. This is sound theory, but it must be applied correctly.
The Reagan tax cuts set up an economic atmosphere where it was more advantageous for the wealthy to sit tight and increase their wealth rather than expanding their businesses. This didn't allow the "trickle down" effect to perform as it should in a healthy economy. We went from Carter's dead horse to Reagan's sick horse. One is towers above the other, but do we really want either?
Why would this be true? As long as the individual tax rate is lower than the corporate rate, the wealthy will live on investments and pay at the individual rate. This is especially true with small businesses, where there are many s-corp proprieters who claim all their business profits on their individual income taxes at the lower individual rate. Seriously... if it was your money, what would you do?
This excerpt from "S and C Corporations Create Different Tax Consequences" might help you answer that question:
After the corporate income tax is paid on the business income, any distributions made to stockholders are taxed again at the stockholders' tax rates as dividends. Income paid to shareholders as wages are also taxed on the shareholder's personal income tax return.
Because of these two levels of tax, a regular corporation may be a less desirable form of business than the other business entities that pass-through the income and deductions directly to the owners. (For federal tax purposes, pass-through entities are sole proprietorships, partnerships, limited liability companies, and S corporations.
If the corporate rate could be lowered below the individual rate to create a bigger tax benefit for businesses to expand, this trend would begin turning around. If you think about it, it makes sense. Why would a business want to expand if it costs them more money in taxes than just sitting home and building wealth? What's the incentive?
I believe that the corporate tax rate must be lowered substantially, and the individual rate raised, again substantially, on individuals with higher incomes. But it should not be done to punish anybody or to make anything fair; the world of economics doesn't care. "Fair" is not an economic term.
We need to make it more advantageous for the wealthy to share their wealth voluntarily by pushing their investment back into active businesses and away from personal wealth-building. The idea is not to make them pay more, but instead encourage them to put their money into their businesses where it will pay the biggest benefit to all concerned.
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