Stimulus doesn't work, but tax breaks for the rich do?

[Puppycow]

I keep seeing republican pundits on TV saying that stimulus doesn't work, but also that you can't raise taxes on the rich in a recession.

Well, it's just not true. Is this really so hard to figure out? I understand why republicans are making the argument, I just don't understand why anyone believes them.

 

[MikeMangum]

I keep seeing republican pundits on TV saying that stimulus doesn't work, but also that you can't raise taxes on the rich in a recession.

Well, it's just not true. Is this really so hard to figure out? I understand why republicans are making the argument, I just don't understand why anyone believes them.

You offer a link as if it is supporting evidence, instead it is just opinion.

The reason that raising taxes on 'the rich' is a bad idea is that increasing marginal tax rates reduces economic growth. Additionally, most job creation comes from small businesses, many of which are sole proprietorships where the business income is paid as personal income tax.

As a sole proprietor you must report all business income or losses on your personal income tax return; the business itself is not taxed separately.

...

You'll be taxed on all profits of the business -- that's total income minus expenses -- regardless of how much money you actually withdraw from the business. In other words, even if you leave money in the company's bank account at the end of the year (for instance, to cover future expenses or expand the business), you must pay taxes on that money.

 

[Weak Kitten]

Doesn't it all depend on where you are on the Laffer Curve? There's a point of optimum balance between income from taxes and economic growth, or so I've gathered.
I'm not an economist but I've gotten the impression that no one quite knows where that optimum point is yet. I'm all for shifting the numbers around till we find it! No way to test a hypothesis without doing a bit of experimentation.

 

[pgwenthold]

Additionally, most job creation comes from small businesses, many of which are sole proprietorships where the business income is paid as personal income tax.

...and who aren't rich.

 

[pgwenthold]

Doesn't it all depend on where you are on the Laffer Curve? There's a point of optimum balance between income from taxes and economic growth, or so I've gathered.
I'm not an economist but I've gotten the impression that no one quite knows where that optimum point is yet. I'm all for shifting the numbers around till we find it!

What numbers?

The biggest problem I have seen with the Laffer curve is that there is no single "tax rate" to put on the x-axis.

Suppose we cut federal income tax at low incomes, increase it at high incomes, cut capital gains, but the local municipality increases the sales tax by 1/3 of a percent. Where did you move on the Laffer curve? You can't just look at total taxes because they affect different people differently, and therefore will have different responses depending on the details.

The problem is that the Laffer "curve" isn't really a curve. It's a surface. A very highly dimensional surface. Unfortunately, finding the max on a 120 dimensional surface by making small, random changes from your current location is very, very challenging. You may be able to wiggle yourself in to a local maximum, but you have no idea where this is or where it compares to the absolute max of the system. You may find your way to a molehill, while completely missing the mountain that is a little bit off in the distance.

 

[NoZed Avenger]

I am not convinced the actual tax rate (at this point in time) matter as much as certainty.

Presently, no one is sure how the Health Care requirements are going to actually shake out, there is talk of lowering, raising, or leaving the present tax rates alone - simultaneously, there *might* be more stimulus spending, there *might* be further rate changes for mortgages and investments, there *might* be cap and trade, there *might* be sigificant increases in capital gains rates . . . .

Personally - and this is opinion only - I am not surprised a lot of businesses are looking at what they don't know about very near future and deciding thi is not the time to rush out and hire a bunch of new people.

 

[ksbluesfan]

The current state of the economy is not entirely a reflection of the tax tables. There probably is some truth that tax cuts for the rich help stimulate the economy, but only to a certain point. It is probably also true that stimulus spending helps the economy too, but it has to be applied carefully to avoid inflation and it has to be big enough to have an impact.

At this point in time, I would like to see more stimulus spending, with the emphasis on infastructure and research and development. Once the economy is growing steadily and the unemployment rates are below 5%, taxes should be raised to pay for spending.

 

[TragicMonkey]

If tax cuts for the rich are supposed to stimulate the economy by encouraging them to hire people, why not eliminate the "possibles" and "probables" in there by making it a definite? Give them a tax break conditional on them hiring somebody for something at a rate that is some percentage of the tax break. A real incentive, a real reward, a real benefit, a real advantage. Sounds better than all the guessing that if Beyonce had a million more dollars she'd hire twenty more hair stylists with it.

 

[ksbluesfan]

Darn it. I wish I would have read the linked article first. Now I feel foolish. Hopefully better economists than me are making the decisions.

 

[pgwenthold]

If tax cuts for the rich are supposed to stimulate the economy by encouraging them to hire people, why not eliminate the "possibles" and "probables" in there by making it a definite? Give them a tax break conditional on them hiring somebody for something at a rate that is some percentage of the tax break. A real incentive, a real reward, a real benefit, a real advantage. Sounds better than all the guessing that if Beyonce had a million more dollars she'd hire twenty more hair stylists with it.

Stop saying things that make sense.

Of course, this is predicated on false pretense, that tax cuts for the rich are supposed to promote hiring.

Why would they do that? The only reason that companies will hire people is if they need someone to operate their business, either in production or service. Regardless of the tax breaks, no one is going to pay an employee to sit around and not do anything. If no one is buying cars, it doesn't make any difference how many tax cuts you give them, car manufacturers aren't going to hire people.

This is not a chicken and egg situation. Workers get hired when needed. End of story. No one hires workers so that they can have money to go buy groceries, which will allow the grocery store to hire more people, which will allow them to have more money which they might spend at your business. That is foolish on the face of it.

Even one of the local rightwingers has pointed out that business cash reserves are currently at exceedingly high levels (something like $7 trillion). Why are they so hight? Because there is nothing to spend them on. There's no production costs, and human resource costs are minimal. So they sit on their cash. They won't invest it until there is hope for a return. That means customers.

I'm not saying this is your mistake, you are just exposing the lie that they are making. Actually, it's not so much of a lie as an obviously stupid idea. Yet, some people still fall for it...

 

[drkitten]

The reason that raising taxes on 'the rich' is a bad idea is that increasing marginal tax rates reduces economic growth. Additionally, most job creation comes from small businesses, many of which are sole proprietorships where the business income is paid as personal income tax.

Bad example. The sole proprietorship actually ends up being an argument in favor of higher marginal tax rates.

Remember that businesses, including sole proprietorships, pay taxes net of expenses, including employee salary as well as equipment purchases and whatnot. Raising the marginal tax rate makes it less profitable for already profitable companies (including sole proprietorships) to hold cash positions because they need to pay more money on that; they're better off investing the money into the business, for example, by buying more equipment or hiring more people.

Buying equipment increases consumer demand and stimulates the economy. Hiring more people creates jobs and stimulates the economy. Holding a cash position, on the other hand, simply creates more money in the bank to just sit there (that's one of the current problems with the economy; money in the bank is indeed "just sitting there" because banks themselves are sitting on cash positions or buying Treasuries instead of lending it out -- which would also stimulate the economy, but it's not happening.)

So, basically, raising the marginal tax rates would force successful small business to create jobs and increase demand, which would in turn help marginal small businesses become more successful (because of the increased demand).

That's an argument for increased marginal tax rates.

 

[ServiceSoon]

I am not convinced the actual tax rate (at this point in time) matter as much as certainty.

Presently, no one is sure how the Health Care requirements are going to actually shake out, there is talk of lowering, raising, or leaving the present tax rates alone - simultaneously, there *might* be more stimulus spending, there *might* be further rate changes for mortgages and investments, there *might* be cap and trade, there *might* be sigificant increases in capital gains rates . . . .

Personally - and this is opinion only - I am not surprised a lot of businesses are looking at what they don't know about very near future and deciding thi is not the time to rush out and hire a bunch of new people.

I agree with this. There is so much uncertainty right now that very few people (rich, poor or anywhere in between) are taking any risk. Whether this risk is a rich person adding any employees, expanding their business or the middle class person buying a new car, eating out, etc.

 

[drkitten]

I agree with this. There is so much uncertainty right now that very few people (rich, poor or anywhere in between) are taking any risk. Whether this risk is a rich person adding any employees, expanding their business or the middle class person buying a new car, eating out, etc.

Which again becomes an argument for a directed stimulus that puts money to specific purposes instead of a general undirected one like a sustained tax cut.

Cut taxes right now and poor people will put it into a cookie jar. Middle class people will put it into the IRA. Rich people will buy another round of T-bills.

Give a tax cut for buying styrofoam peanuts, and people who weren't sure whether or not they needed packing material will buy lots of peanuts and the manufacturers will increase production, which means they need more employees and raw materials.

Or bicycles. Or pineapple chunks in syrup. It doesn't much matter what people spend a new round of stimulus on as long as the stimulus gets spent.

 

[ServiceSoon]

Bad example. The sole proprietorship actually ends up being an argument in favor of higher marginal tax rates.

Remember that businesses, including sole proprietorships, pay taxes net of expenses, including employee salary as well as equipment purchases and whatnot. Raising the marginal tax rate makes it less profitable for already profitable companies (including sole proprietorships) to hold cash positions because they need to pay more money on that; they're better off investing the money into the business, for example, by buying more equipment or hiring more people.

Buying equipment increases consumer demand and stimulates the economy. Hiring more people creates jobs and stimulates the economy. Holding a cash position, on the other hand, simply creates more money in the bank to just sit there (that's one of the current problems with the economy; money in the bank is indeed "just sitting there" because banks themselves are sitting on cash positions or buying Treasuries instead of lending it out -- which would also stimulate the economy, but it's not happening.)

So, basically, raising the marginal tax rates would force successful small business to create jobs and increase demand, which would in turn help marginal small businesses become more successful (because of the increased demand).

That's an argument for increased marginal tax rates.

You talk a lot about "successful" small businesses, should I assume that we don't care about businesses that will fail due to higher taxes?

Putting more stress on the backbone of the economy. Your scenario just sounds mean.

Your example sounds great, until you realize that every CFO is going to react differently to higher taxes. People are unpredictable. Speaking of people...the news headline from such an event (re: tax increase) would cause panic in the market.

 

[TragicMonkey]

Or bicycles. Or pineapple chunks in syrup. It doesn't much matter what people spend a new round of stimulus on as long as the stimulus gets spent.

I now have a craving for bicycle chunks in syrup.

 

[ksbluesfan]

You talk a lot about "successful" small businesses, should I assume that we don't care about businesses that will fail due to higher taxes?

Putting more stress on the backbone of the economy. Your scenario just sounds mean.

Your example sounds great, until you realize that every CFO is going to react differently to higher taxes. People are unpredictable. Speaking of people...the news headline from such an event (re: tax increase) would cause panic in the market.

Do companies pay taxes if they have a net operating loss?

 

[joobz]

You talk a lot about "successful" small businesses, should I assume that we don't care about businesses that will fail due to higher taxes?

Putting more stress on the backbone of the economy. Your scenario just sounds mean.

Your example sounds great, until you realize that every CFO is going to react differently to higher taxes. People are unpredictable. Speaking of people...the news headline from such an event (re: tax increase) would cause panic in the market.

I'm fairly sure businesses pay taxes only on their annual profits.

 

[joobz]

It doesn't much matter what people spend a new round of stimulus on as long as the stimulus gets spent.

I thought the object of investment DID matter? For instance, just spending money on ditch digging would result in a whole bunch of holes, which could create its own set of problems economically. Best examples I can think of is world fair areas or Olympic parks. How many of these parks actually benefit the countries long term?

However, investment into things that have both the stimulating advantage AND a real use (e.g., infrastructure, new useful technology, education...) is when you will see a great benefit.

 

[Bob Blaylock]

I keep seeing republican pundits on TV saying that stimulus doesn't work, but also that you can't raise taxes on the rich in a recession.

The problem with “stimulus” programs is that they consist of government spending money that it took from someone who probably would have otherwise spent it more usefully somewhere else. It's a zero-sum game. Government can't give money to anyone without taking it first from someone else.

Government could, for example, decide to give a “stimulus” to the widget industry, either directly giving money to that industry, or giving consumers some sort of bonus or tax break for buying new widgets. The Widget industry would then show some significant growth, and new jobs being created, and such, but at the same time, the money that consumers would be spending on widgets, they won't be spending on gadgets that they otherwise might have bought, so the gadget industry would be harmed as much as the widget industry is helped.

It's rather like Bastiat's Broken Window Fallacy, without the explicit destruction. I might as well remind you, while I'm at it, that we currently have an administration that has implemented at least one “stimulus” plan that was, in fact, exactly based on the Broken Window Fallacy, in which wealth was deliberately destroyed on the theory that doing so would help the economy by creating jobs to replace that destroyed wealth.

 

[joobz]

The problem with “stimulus” programs is that they consist of government spending money that it took from someone who probably would have otherwise spent it more usefully somewhere else. It's a zero-sum game. Government can't give money to anyone without taking it first from someone else.

The problem with this view is that there wasn't spending to begin with. Hence the recession. So, the idea that money would have been put to "Better use" is simply flawed.