The real effect of income tax cuts.

How will a decrease in income tax affect your financial standing?


Let's say you, like a large majority of Americans, are not self-employed.

For the sake of round numbers, let's assume

-your salary at ABC corp. is a cool $100,000
-the federal tax rate is 50% (again, for the sake of round numbers, we're going to assume Federal tax is the only tax, but really, it could be ANY tax)
-After tax, you take home $50,000/year.

This feels terrible, because you all that money you're earning is going to the government. After all, it's your money!

So you call your state representative, he agrees, and authors a 50% tax cut bill which passes the house, senate, and white house, bringing the tax rate to 25%.

You now take home $75,000/year, a whopping 50% take home increase! The world is good; Rainbows and unicorns are everywhere.

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Meanwhile, your employer knew that yesterday, you agreed to work for a salary that brought home $50,000/year.

Now, next week, John Doe is hired with an identical job function to yours at ABC corp. Assuming all things equal, will John be given a $100,000/year salary? Not if your company is in the business of making a profit! His salary will be $66,666.67/year. After the 25% tax, he'll take home $50,000 assuming he's still in the same tax bracket, if he's not, they'll calculate a salary to yield the $50,000 take home. HR and management have just saved the company $33,333.33 for every employee they hire from now on!

Who really benefits here? The business owners, executive management, and "the investor class."

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In the modern world, people, not materials & equipment, are considered the greatest monetary burden. Companies would much rather have machines do the work that humans do. They don't show up late, take vacation, use facebook during the workday, they're way easier to maintain(i.e they don't get sick), and they don't ask for raises.

Soon enough, your identical co-worker is providing the same amount & quality of work, yet he's costing the company less. Will your company pressure you to work more? Should they? Why not? You're costing them more. Are you sure you won't be "pressured" to leave? You can save the company $$ if you do. As an example, Target corporation is known for getting employees out of the organization by giving them a workload so large that they will fail. That way, they can say it is "performance related." There are no laws to my knowledge against management changing your job function, or its scope.

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Stepping back to the big picture, the grocer, your landlord, and the gas station know that you're making more money. AND YOU CAN AFFORD TO PAY MORE. What business wouldn't charge more if they knew their employees could afford to pay more? (The kind that don't last very long)

The dollar inflates and the cost of goods go up that year.

Obviously, youll argue that 25% tax cut is unworldly, and that governments hike or deflate taxes incrementally over time to prevent the economic shock to the labor market and cost of goods to spike. touche. Lets go back and run the numbers if it was something more realistic like 5%. Is 5% savings something that would really impact your life? Probably, but not a huge effect. Is 5% of your salary important to your company? 5% times the payroll is a BIG number in many instances.

But then I have a question for you. WHAT IS THE POINT OF THE TAX CUT IN THE FIRST PLACE? Is it not to decrease burdon? How much should income tax be cut?

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Here's the rub. It doesn't matter what the income tax rate is. Your take home dollars will always reflect your worth to the company and the economy as a whole(whether your compensation is appropriate or not). Not your pre-tax salary. None of this applies if you are the type of person that can get away with naming your own salary. The company will obviously pay what it takes to get your talent. You are also quite rare.

This goes for everything. People see tax breaks as a shortcut to get ahead. But when everyone gets ahead at the same rate....guess what. Its a zero sum for everyone except the government, who won't be able to afford filling potholes and paying police & educators. The less money that is available to the government is essentially the same as less power.


This is essentially an ingredient in a recipe to create an oligarchy and dynastic families. Money is siphoned away from the government (i.e. the people) and given to a few.

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In the end, a tax cut is not going to make you more money. If you want to make more money, move around in your career, learn new skills, gain and edge on the competition, and step up the competition with your co-workers. Remember, It's a jungle out there....