Do the math

I am neither an economist nor a tax expert, but I can write on the back of an envelope. What follows contains a simple (really) calculation about small businesses and marginal tax rates. But before we get to the arithmetic, I recommend this piece on factcheck.org to get a feel for some of the worst of the foolishness about this issue.

The McCain campaign has been trying to convince us that Obama's tax plan will be bad for small business, making it hard for business owners to add employees. I repeat: I am neither an economist nor a tax expert. Reasonable people can disagree about the consequences of various policies. But...

Suppose a small business makes a profit (profit, not gross revenue) of $500,000. Roughly, what will the difference be under McCain's plan and under Obama's. Obama would tax the highest part of this business's profits at a higher rate that McCain. Translated: on the second quarter million of that half a million profit, Obama would collect more taxes. How much more? Near as I can tell, if we use a 5% figure, we're safe; the actual plan seems to be for something less.

If Obama had his way, this very profitable small business (a half a million in PROFIT is pretty darn good) would pay an extra $12,500 in taxes beyond what McCain's plan would -- 5% of that quarter of a million beyond the point where Obama's higher rate kicks in. But suppose it's 6% -- suppose it's $15,000. That's a chunk of change for you or me, but it's certainly not enough to hire an extra employee.

Of course, the business could hire someone part time. But now go back to the rationale for Obama's plan. Middle and lower income folks are more likely to spend extra money -- more likely to put it back into the economy. They'll buy more goods and services if they have more left over after taxes. Some of that money would go directly to the small businesses who've been asked to pay a higher marginal rate. And so, the story would go, what those businesses get in return for the higher tax rate is higher profits. They might even end up better off.

Of course, some of the money that lower-earning taxpayers spend will go to big businesses. But if demand for their goods and services goes up, then they'll spend more to hire the services of the small businesses that provide, e.g., cleaning or printing services for them. This, in turn, will be good for the bottom lines of those small businesses.

The picture, in other words, is partly a matter of trickle-up rather than trickle-down. Getting more money into the pockets of middle-income people may well stimulate the economy as a whole, and the rising tide will lift even the big boats.

Is this economic story true? I repeat once again: I am neither a tax expert nor an economist; I don't know. What I do know is that the McCain campaign's line depends not just on hiding the ball (see the little calculation above to remind yourself what's really at issue for our $500,000 net profit business) but also depends on its own particular set of economic assumptions. And those assumptions are no more obviously right than Obama's.