Tax Hikes Could Lead to Unemployment, Or Not...

I have spent quite a bit of time discussing the negative impact that French tax policies are having on businesses there; it would be negligent not to point out (explicitly rather than merely implicitly) the similarly negative impact that tax hikes could have in America. From The Wall St. Journal:

"A looming increase in the capital-gains tax rate next year is fueling sales of some privately-held businesses.

Many business owners—mostly founders who could gain a lot from a sale—are looking to close deals before next year, when the maximum tax on investment income is scheduled to rise from 15% currently to at least 23.8% on most capital gains, at least for higher-income households. Many sellers intend to convert their equity into retirement funds or just start anew.

"It just made more sense for me to take my chips off the table and go do something else," said Bert Wolf, 60 years old, who has an agreement to sell his compressed-gas business, Acetylene Oxygen Co. of Harlingen, Tex., before year-end."

 

While some might be keen to point out that reacting negatively to the above puts a serious dent in my Schumpeterian credentials, I would respond that folding due to taxation is not creative destruction in the Schumpeterian sense. There is nothing inherently wrong with Bert Wolf's compressed gas business; it has not been made redundant by a new, superior solution (yet). It is rather being made inefficient to run based on tax policy.

 

Let's take for granted that America requires revenue to balance out its deficit. Raising taxes is one theoretical way in which revenues could increase. However, if the businesses the government is looking to tax no longer exist when the hikes occur, and if jobs are lost because of the specter of the hikes, it doesn't seem as if what works in theory will have the same impact in practice.

 

Of course, I am making some assumptions here. The analysis above is on people like Wolf who are selling their businesses, not folding them. My dire warnings, therefore, implicitly include an assumption that there will be some layoffs and/or reductions in overhead as part of the value proposition of whomever is purchasing the business.

 

If, instead, Wolf's old business remains the same, and he moves on to start another, then the tax hikes might actually be net creative of employment. If that is the case, I will have to rethink everything I believe about taxes and the economy and will likely rewrite about a quarter of the posts I have published here. Developing...