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How the GOP Tax Cut Will Also Shrink Your Paycheck

By       Message Thom Hartmann       (Page 1 of 2 pages)     Permalink    (# of views)   2 comments

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When Republicans cut taxes, wages go down or stay flat for working people.

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The morbidly rich billionaires who own the Republican Party know that when working/middle-class people get a tax cut, it means that over time working-class wages will go down -- which is why they're more than happy to give us all a temporary tax cut.

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This is what wealthy people know that most Americans don't: Tax cuts for truly wealthy people increase their income and wealth; tax cuts for working people actually decrease their income and wealth over time.

This is because of what economist David Ricardo referred to as the "market for labor," as well as the different ways working class versus rich people use their "extra money." Here's how it works:

If you're part of the top .1% -- say you're earning a million dollars a year -- and you get a tax cut, you'll keep more of the money you're earning. The main reason is because people in those income categories 1) generally have a high degree of control over their own income; and 2) they more often than not already are working under a massive tax cut -- at least a lower tax rate -- called the capital gains tax or carried interest.

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But even setting aside Part II of that, truly super-high income earners, like the banksters on Wall Street or CEOs of large corporations, have a significant measure of control -- if not total control -- over their own income.

For working people, it's an entirely different story.

Let's say for the sake of argument that I'm a super-wealthy entrepreneur and I own the company you work for. While I can set my own paycheck (within the parameters of money available to the company), I also set your paycheck. But that's largely a "market function" -- that is, I pay as little as possible for the right talent to get the work done.

So if we live in a country where working people pay, to use round numbers for example, a 50% tax bracket, and I know that you need $50,000 a year after taxes to live, and pretty much anybody who's applying for your job will also demand at least a $50,000 take-home pay, I'll set the wage for that particular job at $100,000 a year. At a 50% tax rate, that gives you $50,000 after taxes.

As the company owner, let's say that I've set my own salary at $1 million a year, which means I'm taking home around $500,000 a year at a 50% tax rate (of course, taxes are progressive, but that's not relevant to this argument as Republicans just "cut taxes for all income brackets," so for simplicity sake let's assume the "flat tax" Republicans say they love so much).

Now, what happens if Democrats come into power and say that they want to build a national high-speed rail system, and need to raise taxes to 60% to do it. What happens to my pay and to yours?

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For me, my net take-home income goes down from $500,000 to $400,000 a year, but I can easily fix that by simply increasing my pay to $1.2 million. After all, this is a billion-dollar company, and a little bit here and there for me and my executives is no big deal.

But you -- and anybody else doing the particular job you're doing -- still need $50,000 take-home pay in order to live. So if your taxes go up, and I want to keep you as an employee, I'm going to have to raise your pay by enough to keep your take-home even.

This is why when taxes go up on working people -- as they did dramatically from 1913 to 1980 -- pay went up dramatically, too.

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Thom Hartmann is a Project Censored Award-winning New York Times best-selling author, and host of a nationally syndicated daily progressive talk program on the Air America Radio Network, live noon-3 PM ET. www.thomhartmann.com His most recent books are "The Last Hours of Ancient Sunlight," "Unequal Protection: The Rise of Corporate Dominance and the Theft of Human Rights," "We The People," "What Would Jefferson Do?," "Screwed: The Undeclared War (more...)
 

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