Tax-break paradox

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The paradox of "tax breaks" is that they sound like they would cause tax decreases, and are highly sought after, but they really cause taxes to increase, which is sought after by nobody. Here's how it works.

Republicans are known for promising tax breaks to the rich and the middle class conservatives, who finance their election campaigns. They also advocate maintaining a balanced budget and reducing the deficit. The immediate effects of a tax cut are a decrease in the real income of the government and an increase in the real income of those whose tax rate has been lowered. In order for the government to recoup the effects of the tax cut, they depend on the private sector to invest or spend more money so that the government can collect the taxes from businesses. Businesses, however, tend to be run by the wealthy and the middle classes, who then demand more tax cuts, or else they will threaten to lay off people (which will reduce the individual income taxes collected by the government). So, when elected, Republicans initiate new tax reductions to please their sponsors, but also increase the taxes charged to everyone to balance the budget, requiring more tax cuts just to stay even. Then businesses lay off workers, the economy goes bad, and to compensate, the Republicans increase the defense budget, which increases the deficit. Unfortunately, since most of the defense budget goes to support soldiers and contractors overseas (but mostly contractors), this does not help the local economy. Everybody becomes unhappy about the economy and elects Democrats.

Democrats are known for promising more employment and services to rich liberals, the middle class and the poor, who finance their election campaigns. They remove tax breaks instituted by Republicans, and add different tax breaks instead, while increasing taxes on the rich. This causes the rich to become unhappy and put their money into businesses, which hire minimum wage employees and avoid unions like the plague by threatening to move overseas or remaining small. Unfortunately, minimum wage employees do not have enough money to stimulate the economy and build up local businesses, so small businesses tend to fail and large businesses tend to move overseas regardless of what happens with the tax situation. Then the government hires more government workers to stimulate the economy, which increases the deficit. To support the union wages of government workers and reduce the deficit, the government increases taxes, causing everyone to complain and elect Republicans.

edit Types of Tax Breaks

edit Business Tax Breaks

There are two types of business tax breaks: Tax breaks for small businesses, and tax breaks for corporations. Sorry, medium sized businesses are generally out of luck here. Tax breaks for small businesses are intended to keep small businesses from closing, encourage new businesses to open, and encourage expansion of small businesses. Unfortunately, opening any small business tends to be a gamble at best, since most small businesses close within their first 5 years since they tend to be run by inexperienced owners. So no matter what the government does to help small businesses, it still isn't enough, because they are still small. Tax breaks for corporations are generally known as industry tax breaks.

edit Industry Tax Breaks

These are tax breaks designed to "stimulate" specific industries. Unfortunately, too much "stimulation" tends to cause blindness and other side effects. In the automotive and oil/gas industries, the unions and the corporate executives tend to fight over the income generated by these types of tax breaks. If the unions get the income, the price of the product goes up to cover wages. If the executives get the income, the price of the product goes up to adjust for "inflation". So the tax break that was given to keep the price of the product down fails. In the banking industries, tax breaks are intended to keep banking fees low and prevent banks and other savings institutions from failing. Unfortunately, the income from tax breaks tends to be mismanaged along with the other assets of failing institutions, so they help neither the banks nor their consumers.

edit Investment Tax Breaks

These tax breaks usually benefit rich individuals the most, since they have more money TO invest, and may even have so many investments that they live off just the interest from their investments. Usually, these tax breaks are given in hopes that business owners will invest more money in the local economy, but more often the money just goes overseas. Investment tax breaks may also benefit some senior citizens, but these are of course, in the minority.

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