On taxes, who should get the cut?

[Art]

A conversation between BG and I in the State of the Union thread got me to thinking. He expressed some sentiment I've heard from many Democratic Congressmen and Senators. When there's a tax cut, the money should go to the "working" folk who need it. On the other side, the Republicans say, and believe, when there's a tax cut, the money should go to the "working" folk who pay taxes.

Where do you fall on this issue?

Basically, it's true that 96 percent of federal income tax is paid by the top 50 percent of American wage earners. This means the bottom 50 percent pays 4 percent of federal income tax. Do you believe, if there's a tax cut, that the top 50 percent should get 96 percent of the break and the bottom 50 should get 4?

Or, do you believe when their is a tax cut, the bottom 50 should simply have money distributed to them from the top 50 percent? I find it difficult to believe that many of you are for a redistribution of wealth in this fashion. I have a very hard time listening to this stance and believing that people actually understand what they say they are for.

BG and I had a very polite conversation in which he said from what he'd seen, he'd get less than anyone from a tax cut. The reason is because he doesn't pay much, if any, at the end of the year, in federal income taxes because he falls in the bottom 50 percent of American wage earners and isn't shouldering the load. Doesn't it seem "right" if not right/conservative that a person who falls in the one percent of people shouldering 33 percent of the federal income tax burden should be given at least 33 percent back in any portion of a tax cut?

The response back may be, "But they have more money so they can afford to pay more." Or, "The percentages they pay for essentials like food and housing don't eat into their checks like they do for the bottom 50." Or any other thing I completely agree with. I KNOW all of those points. But, the question I'm asking is not whether we should have a flat income tax. I'm asking that when there IS a tax cut, shouldn't the people who shoulder the federal tax burden get the money back in similar percent to their burden?

[Atlanta Skins Fan]

Art, you're right of course. And the only reason that Democrats are spouting this nonsense is because they think they can get elected by enlisting the jealous and the stupid in their class warfare game.

Even so, I'm tired of debates over the graduated income tax. It's missing the point. The income tax, by definition, punishes work and productivity -- and in its implementation in our byzantine tax code, rewards special interests and accounting games. That's still true even if the Republican platform is adopted without change.

The country would be far better served by a simple, flat, national sales tax on products and services -- with some exemption for basic housing and staples purchased by the poor.

[Riggo-toni]

When it comes to fiscal policy (if it can even be called a policy anymore), I am first and foremost a proponent of tax reforms or cuts that have benefit to the overall economy. As hard as this may be for some to believe, I am more concerned w/ the overall economic outlook than with so-called economic "justice" or even having an extra hundered dollars in my pocket at the end of the year. Handouts going to the lower 50% might have a minor stimulative effect on consumption, but every economic slowdown over the last 20 years has been caused by lags in investment. Like it or not, it is the middle and upper classes who invest the most money, so any kinds of tax policy to revive the economy will inevitably be skewed towards the half of Americans who are stockholders. A solid bull market will do far more to create jobs and thus benefit nearly all American workers than any government action to redistribute wealth - an action which by definition takes capital away from the most efficient generators of wealth.

The same arguments were lobbied around everytime it came to cutting the capital gains tax. When it finally happened, the Stockmarket took off like a rocket, American hi tech firms raced ahead of other nations, and tax revenues actually increased dramatically, resulting in a surplus. Compare this with George H. Bush's 1990 "fair" tax hike, which analysts agree actually lost money and saw the upper classes contributing less to the overall tax burden.

The real solution requires more daring than anyone in office has the cajones to undertake. We should be implementing tax reform, not tax cuts. Index the capital gains tax to inflation, and eliminate it for equity held longer than 5 years. Phase out the home mortgage tax deduction - an absurd tax break that actually pays out more to the wealthy. Take the '86 reforms even further. Bring us down to 2 low rates (or better yet, just a flat tax) and eliminate more of the deductions. You'll see the economy recover faster, and you'll see the rich ante up even more.

[gbear]

I think one point that you miss in your analysis is what the effects of the tax cut are. Forget for a moment who NEEDS the money. I think a case can be made for it that way, but you obviously aren't into that. Fine.

What gets me is the arguement that the tax cut favoring the rich is better for our economy than a tax cut favoring the middle class and poor. I think a pretty good arguement can be made that a tax cut favoring the poor still benefits the rich, and in some cases may benefit some of the rich more than a tax cut on their own taxes.

Lets start with two extremes:

A) all of the tax break goes to the rich because as you say they're paying. What do they do with it? In Econ classes in college, we studied spending rates and saving rates. What we learned made sense. If your income is huge and you get more money, then you tend to save more of it. Afterall, if you wanted to buy it, you already had. Thus, a tax break to the rich results in higher savings rates. That's not in and of itself a bad thing. This helps the economy too. However, when saving outstrips consumption, the return is less. I just think the alternative is better.

Option B is that the entire tax break goes to the poor. As I stated before, as people get more money, a higher percentage of their money is saved. THe converse is also true. If you don't have much money, and you get a little more, you tend to spend most of it. Now as good as saving is for the economy, ask yourself what's been driving our economy as the rest of the world went into recession? The answer is consumer spending. WEll, right now, consumer confidence is lagging, and if it continues one could expect consumer spending to start lagging as well. In fact, the Washington Post just published growth figures and they're minimal.

A tax cut to the poor in all likelyhood results in increased spending. Woohoo! Now if you're rich which is better? Having an economy slow down and risk losing your job or not making profits in your business but paying a lower tax rate or paying a little more but having customers and a healthy business enviroment. It's a tradeoff, but I'm not convinced that the Rich are that much worse off for paying a little more. I suspect, that it's not a straight line and that there is a break even point above which taxation hurts their spending power. However, I think the converse is true too. Upto a certain point taxation is still a good thing.

Ultimately, I think it depends on the goals of the tax cut. Maybe you think the taxes are unfair for the rich and that's the motivation to change htem. If so, shut up about it being an economic stimulus package. It's not. If it were, you'd put in the hands of those who would spend it. That's another arguement for lowering hte taxes paid by the poor. It does more to help the consumption side of the economy and that's the main driving force behind the economy.

[gbear]

Riggotoni-

One quick question, why do you think more people investing leads to higher rates of return?

I'd argue that more people buying goods and services should raise the rates of return. If lots of people invest, but nobody buys, then what are the investments paying out? Wouldn't that just drive down business earnings per share causing an over valuation of stock and people losing money? To some extent isn't this what happened with our stock market over the past 5-10 years where analysts kept saying the stock was overvalued? In fact, I'd argue that we didn't have strong enough consumption vs investment and htat lead to the economic downturn. This can clearly be seen in the internet industry where there was lots of investment, but very little consumption. As a result, many companies never got a profit, their stock was overvalued, and investors lost their shirts.

Consumption and people buying drives up the earning per share causing the money already invested to be worth more. Atleast that's how I learned it.

[Guest SkinsHokie Fan]

The truth about recessions since 1960 is that the majority is due to a slow down in Broad Private Investment. What is that you ask? Plants, factories, and durables (like refrigerators) Once BPI goes down you see the economy go down with it.

Over the last 5 recessions a drop in BPI has adversely effected the economy more so then a consumption by consumers. Basically consumption by consumers (nondurables and services) is 59% of the economy and BPI 21 percent of the economy. However BPI's share in the last 5 recessions is 93 percent. That shows how critical investment is to the economy and recessions.

So how do you get investment going again? Simple. You cut high end taxes. You get rid of nonsense like dividend taxes. And you can see that one of the fastest growing European economies is Ireland mainly because of the low corporate tax rate. Is it fair for the "rich" to have more of their taxes cut? Mabey not. Does giving 150 dollars extra per year to a person who pays no taxes get us out of a reccesion? Nope. BPI is what does it.

(If you wish to see the chart where I got this data from send me a message and I will be happy to email you one)

[Art]

Gbear,

I'm not certain what you are saying makes sense or answers the question.

"What gets me is the arguement that the tax cut favoring the rich is better for our economy than a tax cut favoring the middle class and poor. I think a pretty good arguement can be made that a tax cut favoring the poor still benefits the rich, and in some cases may benefit some of the rich more than a tax cut on their own taxes."

I'm not sure what this means, precisely. First off, if you use the word "rich" define it. Are you talking about Bill Gates, or me? Secondly, and again, the question isn't whether you "favor" the rich -- whatever your definition -- or favor the middle class and poor -- whatever your definition of those. It's that the top 50 percent pay 96 percent of the federal tax burden. And, you favor the people paying, not the people that don't. That's what I'm asking. Obviously the "middle class" falls into the top 50 percent. But, I'm asking if they can be given back more than they pay in, or simply a percentage of the burden they presently shoulder.

"A) all of the tax break goes to the rich because as you say they're paying. What do they do with it? In Econ classes in college, we studied spending rates and saving rates. What we learned made sense. If your income is huge and you get more money, then you tend to save more of it. Afterall, if you wanted to buy it, you already had. Thus, a tax break to the rich results in higher savings rates. That's not in and of itself a bad thing. This helps the economy too. However, when saving outstrips consumption, the return is less. I just think the alternative is better."

I'm not sure this is a good example. First, what they teach you in college generally is meaningless in reality . Second, look at Cheney. He paid a $36 million tax bill when he became vice president. Now, say you cut his taxes so he only paid $32 million. What you're saying is that in college, because he's rich he already has the stuff he wants, and any extra money is saved. I think that's essentially wrong, but granting the validity of it, let me ask you what does it mean to save? Does it mean you fold bills and stuff them in your mattress? Does it mean you put every penny in a bank making .325 percent a month? Does it mean you put it into a money market or CD? Does it mean you buy mutual funds, or bonds? Does it mean you invest it in the stock market?

In every single case other than stuffing it in one's mattress, a rich person's savings of $4 million does more to stimulate the economy than giving $100 to a poor person to buy a DVD player. The investment is the savings. That's the point. It allows the bank to make more loans. It allows stock to be leveraged and companies to expand. Simply put, your economics professor may have been right. Rich people do save. And it's precisely that saving that stimulates the economy. Not to mention the $50,000 cars and the $200,000 boats, and the $400 dinners out and the other discretionary cash.

"B) Option B is that the entire tax break goes to the poor. As I stated before, as people get more money, a higher percentage of their money is saved. THe converse is also true. If you don't have much money, and you get a little more, you tend to spend most of it. Now as good as saving is for the economy, ask yourself what's been driving our economy as the rest of the world went into recession? The answer is consumer spending. WEll, right now, consumer confidence is lagging, and if it continues one could expect consumer spending to start lagging as well. In fact, the Washington Post just published growth figures and they're minimal."

Actually, the answer is NOT consumer spending Gbear. This is an utter fallacy. Consumer spending has been very, very good. Consumer spending is the LAST thing to fall when a recession hits. Corporate spending is down. That's what leads to recession. In fact, consumer spending stayed strong relatively speaking. So strong that it kept the recession at bay despite a corporate downturn in spending. But, read up on the latest economic downturn. You'll find consumer spending has been strong and manfucaturing and corporate spending has been down, which is why we're slower now than we were in the 90s when investment powered stock market gains which allowed for expansion and mergers and filling corporate shops with new gear, etc. Once that bubble burst, the economy slowed because corporations and manufacturing declined.

But, again, Gbear, the question remains. If 96 percent of the federal tax burden is shouldered by 50 percent of the people, shouldn't those 50 percent get 96 percent of any cuts made in their burden? It's simple. The stimulus is a proven thing. Every time we've cut taxes it's increased spending. So, it is, strictly speaking a proven stimulus package.

[Art]

Gbear,

Listen to SHF. He's right. You're wrong. Read up on the causes of recessions in general and what leads the way out of slower economic periods. Consumer spending hasn't been an issue this time, or any time. Consumer spending isn't the leading indicator. It's a trailing one. It slows after everything else has slowed. It comes back after everything else comes back. That's a truth your econ professor may have missed .

[Riggo-toni]

It's a sad fact that we've had a whole genration of people indoctrinated into the neo-Keynesian nonsense of money-multipliers and consumption driven economies. What's causing the current slowdown? A dropping stockmarket has shrunk many peoples' total wealth, thus making them more reluctant to spend or to inves t further. The Keynesian view that consumer spending alone is the engine of the economy is pure bunk. The massive growth in the mid-90s was led not by spending, but by investment. Investment capital is the catalyst for increases in productivity, which is what increases true overall wealth. According to those Econ classes you took, they undoubtedly fed you the propoganda that higher gov't spending benefits the economy more than tax cuts, because people only spend a portion of the tax cuts, while the $$$ gov't spends goes straight into the economy. Ergo, higher taxes and higher spending produces a better economy. Absolute nonsense! In the 50s, gov't spending/GDP was 19%, and the economy grew at about 5% a year. In the 60s, it was 20%, and the economy grew at 4%. In the 70s and 80s, it increased to 21%, and economic growth shrank to 3%. During the first Bush's presidency, spending ballooned to 25%, and the economy crawled along at 1%. Thatcher cut spending in Britain from 45% down to 39%, and the British economy took off. Major let it balloon back to 45%, and the Tories got booted out. During the Clinton/Gingrich years, spending adjusted for inflation as a percentage of GDP per capita actually shrank for the first time since Eisenhower, and we hit record growth in productivity and the economy.

Money invested does not sit and fester, which is the assumption made in your Econ 101 class. It lowers the cost of capital to businesses, providing them with the means to invest in research and technologies that increase productivity and generate real wealth. Nor do government outlays have the ameliorative economic effect that Keynesians believe they do, because government doesn't create anything. You don't get something for nothing. Money the gov't spends must be recouped in either taxes or inflation, or both. In fact, speaking as someone who's worked at an international currency trading office, the phenomenon of overshooting in currency markets as a result of announced gov't policies more than offsets any potential benefits in expansionary fiscal policies. This is something Greenspan has been trying to hammer home since the early 90s. "Hot money" greater than the value of our entire GDP trades around the globe everyday. When gov'ts become fiscally irresponsible, these enormous sums leave to find more suitable currencies.

[Darth Tater]

Investing is PROVEN (for example, look at the 80s) to be the key to economic stimulus. If your going to talk about the academic aspects of economics, you need to pay attention to the work of University of Chicago and, the group to predict the depression -- 'The Austrian School' (produced guys like Hyeck -- whose name I never spell right).

The fact is, if you really want to stimulate the economy, give the money to the guys whose investment, will, at the margin, create jobs, help finance new industries and be an agent of change. For example, when Reagan cut certain taxes, all of a sudden a 'new' technolgy which actually had been developed 6-7 years earlier, was now a good investment and resulted in re-charging the lagging US-based car manufacture business creating and saving jobs of guys who'd then go to 7-11 and spend $. Build and market and they will buy. People don't like the term 'trickle-down' economics but as John Adams said 'facts are stubborn things'.

[Riggo-toni]

SHF,

I'd actually really like copies of those charts, if you don't mind:cheers:

[Darth Tater]

Discussion about macro-economics reminds me of a story. After I completed college, I took a job as an economic analyst for a policy wonk. I was given a situation to apply economic analysis but when my analysis did not support their desired conclusions, they asked me to do a re-write. When no valid economic analysis could support the position, the facts were changed to support the position the policy wonk wished to support.

[fansince62]

1) banks don't sit on savings..they loan it out with a required margin in retained reserves

2) investment helps, but if there are no productivity gains resulting in cost savings or some other avenue to increased revenues......they die also........

Productivity gains was and remains the driver, even after the speculative boon is removed, during the 90s and on into this decade.....and of course....folks/businesses/gov't who want to buy the product/service!!!

[Riggo-toni]

Someone mentioned the "Austrian School" of Economic thought. Man, I always knew we Redskin fans were the most knowledgeable in the World!!! :cool: :read: :read: :read:

[gbear]

Fan Since 62,

I agree completely. I think all of those above who mention investment as the cure all are ignoring that the investment has to accomplish something.

Art, you said investing 4 mil vs giving a poor guy a $100 for a DVD player. A better comparrisson is what happens to the economy if 40,000 dvd players are bought vs giving the guy 4 mil to invest. I submit that 40,000 extra dvd players sold is likely to move inventory causing reorders causing an increase on the return of the investment in DVD maker companies ultimately helping the job market and the owners of the company.

As for consumer spending being good, that's been true. I think you're taking it for granted though. With consumer confidence headed south, you might want to think about bolstering it.

You want to talk about what causes recessions? I'd submit that overinvestment is also a cause. In our most recent, internet industries were way over invested in. The bubble burst and people working for companies that had lots of investment capital but never turned a profit are now out of work. Investment is nice, but as Fan since 62 said, it's only good if it leads to increases in productivity or increases in revenue. Without that it's a waste.

What's more, I propose that giving people money and letting that money chase the goods and services they desire is a better way of having investment chase money making improvements in productivity or new gadjets/services. Investment in stuff nobody buys means waste. I'd argue that in Art's example above the 4million given ot a random person is less liekly to chase productivity gains than the 40,000 DVD player purchase. If nothing else, the DVD maker is likely to benefit from lowered costs to make each DVD player due to a lessening of startup costs as a percentage of the cost for each DVD player.

Skins Hokie Fan,

I think you've left one critical part out of your equation. Why does the level of broad private investment go down? I think one obvious answer to that is that the investment starts to give lower returns. How many people have pulled money out of the stock market because they weren't making much money on the money they already had in there? I submit that consumer spending makes BPI profitable which makes it more desirable and that in turn makes more people do it. I'm not sold on the idea that investing in random factories is going to save the economy. It's got to be profitable investment, and it's only profitable if people are buying the end product.

I know, the whole arguement of the smarter business investor can make all of his money productive. I'm not sold. So many of us (myself included) buy mutual funds. We know some of that money is going to chase unproductive ideas. Heck we pick our mutual funds based on percentages chasing winning ideas but nobody expects all of them to be winners. Even if you could be guarunteed all winners, it would probably take so much money to find the winners that the administrative costs of the super mutual fund would be exhorbitant.

[Darth Tater]

Once again, 'facts are stubborn things.' No matter what you wish to be true, the greatest bang-for-the-buck your going to get from an economic stimulus package, is by creating better investment opportunitys. Consumer confidence and that type of thing are LAG indicators. That is when they are high, start preparing for an economic downturn. Investment ALWAYS leads consumption.

I won't bore people with the mathematical formulas but...

Investment yields increased productivity yields increased GDP yields increased tax revenue. Increased spending just competes away investment dollar, and while you may have a near term boost, soon demand/supply adjust. You just shift demand along the original demand curve to the right (people are willing and able to spend more for an item). No better off accept prices are higher.

Investment tends to shift the supply curve to the left. Lower real prices yields greater demand -- the curve actually shifts as more people can now demand the item.

This result is also supported by factual evidence as has been pointed out. What would you then conclude, is the best strategy to 'stimulate' the economy?

[codeorama]

For once, I actually agree with ASF.

I am a huge supporter of a national sales tax and the elimination of the IRS.

The way we do taxes now is so confusing and difficult, it's absurd.

I once saw a guy speak about a national sales tax and I was very impressed. If you don't buy anything, you don't get taxed. Sure, prices would be higher, but you pay for what you want, not what the govt wants.

I also love the idea of eliminating car insurance and including the insurance in the price of gas... the more you drive, the more you pay, makes sense, you need more coverage if you are driving more.

But neither of these ideas will ever come to be because of the lawyers.... The IRS is too big to be disbanded, eventhough it is such a sham.

[Kilmer17]

1 by 1, we need to convince this nation that a national sales tax is the way to go.

billions alone from illegal enterprises that currently pay no taxes.

[Darth Tater]

Well Kilmer17, you can try it on me I think that the national sales tax is the worst tax methods. Mostly because it would get screwed in implementation. Nice in theory but as long as we got a government that makes groups like fish mongerers protected classes...

[Kilmer17]

Well, I cant defend the ability of our govt to eff something up.

But assuming it can be implemented in it's theoretical state, it would be wildly successful.

BTW, it couldnt be any worse than our current tax system in terms of implementation and bureaucratic red tape.

[gbear]

OPM,

Your example is partly true, but you miss something really big!

"...you may have a near term boost, soon demand/supply adjust. You just shift demand along the original demand curve to the right (people are willing and able to spend more for an item). No better off accept prices are higher."

You say the original curve just shifts right? If the costs go up, then profits go up. The costs to produce the goods usually go down not up as you produce more. Take Art's DVD player example. If more people want them, it's true the price goes up short term. However because they are prfoitable, more companies start making them. You may have noticed this to be the case over the past few years. Those more companies making them...well that's investment chasing profits created by increased spending. You might also notice what happened with the increased number of producers. The price has come way down. I don't think your analysis goes far enough.

The problem with investment for the sake of investment is that it doesn't always chase profits. We saw that through the 90's with the internet stocks.

You say consumer spending is a lag. That may be true, but I'd argue so is investment. Investment lags behind confidence. Confidence that investment will bring one returns is important. I'd point out that confidence indicators right now are low, and for that matter consumption growth has been low if you take a look at this past Christmas shopping season. Consumption is needed for that confidence. I'd argue that's why recovery from recession often picks up speed rather than a constant growth recovery. It's all a cycle that builds apon itself. It's just that increasing consumption does increase investment. I'm not sold that the reverse of that is necessarily true.

As an aside, I think that blanket investment for the sake of investment without searching for profits depends on random inovation to be profitable. That requires two lucky thngs to go right, first innovation and second useful/profitable innovation. Sometimes that's not the case. The internet boom is a good example. There was lots of nonprofitable innovation going on. How many times did you see something on the web and go "gee that a great idea." then watch as it failed to ever turn a profit. I prefer the sure thing. Afterall, inovation can still come with the investments after the increased consumption.

[fansince62]

gbear...you need to draw one distinction.....investment in a stock is not the same thing as investment in real, productive assets. the dot com bubble had everything to do with outlandish discouted present value expectations for future income streams and nothing to do with real business products and services......

[codeorama]

Originally posted by Kilmer17

1 by 1, we need to convince this nation that a national sales tax is the way to go.

billions alone from illegal enterprises that currently pay no taxes.

Exactly right, I totally forgot about that as well...

Just think of all the drug dealers that pay no taxes, or all the other people that make their money under the table....

They would now pay taxes.... and in the case of the drug dealers, they would pay alot of taxes.... all those cars and boats...

A national sales tax is the most common sense idea... It's a shame that no one in the government has any common sense.... regardless of their party affiliation.

[gbear]

Fan Since 62,

Yeah but the dividend tax repeal is designed to encourage stock investment. Even with your point, I suspect consumption is more likely to lead to investment in real productive assets than a stock benefit. Real business products and services follow the demand. If that's increased, people will invest to be able to meet that demand and make a profit from it.

[NavyDave]

I rather keep my tax cuts and invest than let some else use my money for a DVD recorder and membership to blockbuster and Bally's