Theater of the Absurd: Taxes and Investment

Henry Drummond: You know Hornbeck, I'm getting damn sick of you.
E.K. Hornbeck: Why?
Henry Drummond: You never pushed a noun against a verb except to blow something up.
--Inherit the Wind

As the 'fiscal cliff' approaches, I have seen a number of studies and op-eds (including this one by Democratic Party shill Warren Buffett) suggesting that higher tax rates do not impact investment. Such arguments do not pass ECON 101 basics.

Assume an individual makes $1 million in income. Further assume that the individual's total tax rate (fed, state, local, sales, etc) is 40% (could be closer to 50% in some states). The person is left with $600,000 after taxes. Suppose that the individual consumes $400,000, leaving $200,000 in savings.

Now taxes increase 25% to a total rate of 50%. On the same income, the new rate leaves the individual with $500,000 after taxes. If the person maintains a similar lifestyle (consumption of $400,000), then $100,000 remain for savings.

The economy has just lost $100K in savings that could have been invested in productivity improvement.

Any tax increase on income reduces the potential pool of savings that can be used for investment. How can it be otherwise?

Of course, there are no limits to what gets debated in the political Theater of the Absurd.