-You own a company and the tax rate goes up on taxable income over $250K.
-Your projected taxable income in 2012 is $300K.
-IF you had sufficient demand that you would really like to expand your capacity by hiring additional personnel and/or getting new equipment, etc. (all deductible expenses, subject to certain amortization rules on equipment), you could bring your taxable income under the $250K threshold, avoiding the higher rate on that income. I believe this is the stimulative effect (or effective subsidy) SK and Brian are referring to, as the tax saved on that $50K is essentially a subsidy for growing one’s business.
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edit: It’s like when we hear peole claim that they will stop working so many hours, etc. in order to bring their taxable income under the $250K threshold; but instead of shrinking their business/gross income, they grow it.[/quote]
Not precisely the point I was making, but not far off. I don’t think it makes a lot of sense to bring income down to precisely where the bracket changes. (Same for the stupid claim that people will work less to avoid the higher bracket.) Nor do I think very many businesses operate with that kind of precision. I’m far from convinced that the current proposed small increases to the top marginal rate will be stimulative, but I’m more convinced that they won’t be inhibitive either. Not only is here any historical evidence to support it, there’s no logic.
It’s the higher historical top tax rates (>50% marginal rate) that can be shown to have been stimulative, where tax savings actually provide a 50% or more subsidy for investment.
