Imagine a company deciding to change its sales compensation plan. Rather than providing incentives for salespeople who achieve difficult quotas, it instead implements a sliding commission rate that declines as sales increase. The most talented salespeople would be the most severely impacted and human nature being what it is, they would certainly reduce their efforts accordingly. Business would decline.
The U.S. government is currently debating whether or not allowing expiration of the Bush tax cuts for high-earning individuals will reduce their incentive to spend. This, though, should be a relatively minor concern. The real problem is the reduced incentive to produce. I remember a friend of my father’s who was a renowned surgeon during the period of 70% top marginal tax rates. He would only work 6 months of the year – saying he refused to work for 30% of his money.
The taxpayers targeted by the current administration are the ones most instrumental to our economic success. Many of them are small business owners and, particularly in a credit challenged economy, need their profits in order to facilitate growth. Taxing away earnings leaves the owners with both less incentive and less ability to continue to invest in their companies. Small business is the primary driver of employment; meaning that the higher tax rates will continue to thwart economic progress.