Rick Kelo examines how Tax Rates Change Behavior

Rick A Kelo

The most basic tenet of economics is that people respond to incentives.  This is a universal law that has never been disproved.  If, for example, I offer you $10 to chop off one of your fingers and you refuse we haven't proved you don't respond to incentives.  All we've shown is that $10 isn't incentive enough for you to chop off one of your fingers.  However, members of the Japanese crime syndicate the Yakuza routinely chop off one of their own fingers as an offering to their crime boss.  The only matter at question is whether the incentive is incentive enough.

Knowing that people respond to incentives Rick Kelo wonders why we don't more frequently bear that in mind when discussing increasing tax rates.  Kelo has more than 10 years of experience as a Chicago tax recruiter at the prestigious TaxScout, Inc.  However, before that he studied economics and finance and worked in both fields.  On the topic of tax rates creating an incentive to change behavior he notes:

"We have seen in American history, that when marginal tax rates increased substantially business owners elected to retain earnings in corporations in anticipation of a lower taxed regime in the future.  Policies like the abusively hyper-progressive federal income tax rate of mid-1900s America created the "fringe" benefit system that existed until well into the 1970s."
~ Rick Kelo

So, as Richard Kelo points out, the question is what becomes incentive enough? If we raise the individual tax bracket to 70% or 90%, then we can certainly expect business owners to have their company purchase most of their needs in pre-tax dollars through "fringe benefits" rather than take that money as a wage and lose 70+% of it.