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

[Dr. Keith]

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.

You can't tax a business to death with changes to the top personal income tax rate. Simply not possible. If you disagree I'd like to see an example/hypothetical. this sounds like the return of Joe the Plumber.

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.

How many business that have a CFO are affected by the personal tax rate?

If we tell them that the new taxes will still be far lower than the rates were during the Reagan era do you think they will still be scared?

 

[lomiller]

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.

The people employed by the increased widget production would have bought neither widgets nor gadgets because they had no job at all can now buy both and the people who only wanted a set number of widgets, can now buy them for less and spend the extra on gadgets.

Your mistake is in assuming that economic activity is a zero sum game, it’s not. When either the money supply or the speed of money increase it makes it possible for both widget makers and gadget makers to sell more of their products. The only practical limitation is that sooner or later you run out of people willing to work for current wages so you have to pay more and raise your prices accordingly. Unless you think the US is running out of people looking for work, your basic premise is wrong.

 

[drkitten]

Your mistake is in assuming that economic activity is a zero sum game, it’s not.

Yeah. And that's an econ 101 mistake. As in, if you passed econ 101, you don't make that mistake. If I have peanut butter but no jelly, and you have jelly but no peanut butter, we're both better off if we can make a trade, and we're better off still if the governmetn subsidizes a baker so we can make it a three-way. The value of goods is not fixed, not intrinsic, and depends on each individual person's needs.

Money (including tax money) is a good in this sense. It's more valuable lent out to a company than it is in my pocket, which is why the bank will pay me for my money which it then lends out. And the whole point of the market -- including the money market -- is to try to find a way to move goods to the place where they're the most valuable.

The econ 102 mistake that Bob is making is assuming that the market is the only or even the best way to move goods around. It's well known that there are some circumstances where the market works really well and others where it doesn't; the supply of "public goods," for example, is well-known as a case where the free market fails utterly. So the idea of moving money by taxing enterprises and using it to purchase public goods is a better/cheaper/more effective way of increasing the supply public goods than allowing participants in the free market to (not) invest in them. Hence using public stimulus to invest in infrastructure makes a lot of sense.

Basically -- and I've said this before -- opposition to the stimulus is the Young Earth Creationism of economics. The only way to make the case for this is to tell transparent lies that blatantly contradict the real world. In the case of post #19, some of the lies include : "spending is a zero-sum game," "the stimulus is an example of the broken window fallacy," and "Cash for Clunkers destroyed wealth." Other threads have already dealt extensively with these -- suffice it for now to say that there is not an ounce of truth in any of these, and the only way that Bob (or anyone else) could make those statements is by deliberate and willful falsehood.

 

[drkitten]

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?

Nope. Nor do we care about leprechauns.

A small sole proprietorship that is earning $250,000 per year net of all expenses is not going to fail due to higher taxes. And if it's not earning a quarter of a million dollars in net profits, then it's not going to be taxed higher under the proposal to restore income tax rates for earners above that.

 

[drkitten]

I thought the object of investment DID matter?

Not as far as the stimulus is concerned.

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?

But the stimulus isn't long term.

The whole point of the stimulus is to get money moving that otherwise wouldn't be moving.

The best thing we could do for the entire economy is for everyone to go out and spend 20% of their savings tomorrow. On anything, it doesn't matter what. All of a sudden, everyone would see their sales jump, stores would see their inventories drop dramatically, suppliers would get orders to restock those inventories and have to increase production, people would have jobs working for those suppliers, and the economy would be running again.

But I'm not going to go out and deplete my savings tomorrow if I don't know that I'll have a job in a month; I may need that money to live on. But that means that I'm not buying stuff, that stores are sitting on unsold inventory, that suppliers are seeing reduced orders and cutting back, and people are being laid off.

It's the "paradox of thrift." A high level of consumer spending in this situation is a classic example of a public good that the market won't deliver because each individual actor wants to maximize their own utility, not the utility of the economy as a whole.

So, if I can give the twenty million Americans without jobs something to do -- even digging holes, or canning bicycles in syrup -- then they'll be willing to spend their savings accounts. That's the idea behind the stimulus. And once they're spending, companies will start wanting to hire them to do other things than dig holes and I won't need to pay to have as many holes dug.

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.

You will see the stimulus benefit from simply putting people to work and getting them spending. But as long as you need to put them to work, you might as well get them to work on something useful. The stimulus would still work if people were canning bicycles, but they might just as well build a high-speed rail link that will reduce the costs of doing business instead.

 

[Marcus]

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

As a sole proprietor, I pay income tax on taxable income, but social security(self-employment) tax on net profit.

I won't be buying any new equipment or making other investments in the business unless they are actually needed, it would be foolish to do so just for the tax consequences.

ETA: I assume you are only talking about federal taxes, on the state level there are taxes to be paid on things like inventory and equipment (argh).

 

[ServiceSoon]

Consumers are doing exactly what they need to do, pay down debt so that we can start all over with our boom and bust economy again. Gov programs that add to our debt which encourage spending are only decreasing the peak of the next cycle and/or prolonging the recovery.

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

Agreed. Net operating losses can be used in 2 different ways. 1. They can be used on the last taxe cycle to receive a rebate. 2. They can be used to reduce the future tax cycle tax obligation.

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

No, but they aren't going to stay in business, expand, or provide pay increases, etc if it's not profitable.

You can't tax a business to death with changes to the top personal income tax rate. Simply not possible. If you disagree I'd like to see an example/hypothetical. this sounds like the return of Joe the Plumber.

If consumer spending accounts for 66% of the GDP, and a healthy chunk of that comes from the Rich; can you see my hypothetical now?

How many business that have a CFO are affected by the personal tax rate?

It's not about the CFOs' personal life decisions, it's about what recommendations the CFO will make to investors/owners about future revenue projections. It's about the markets reaction to a proposed tax increase. We're living in a psychological thriller right now. Nobody knows what will happen if taxes are increased. It's less problematic to avoid this move right now. I don't drink and drive, and we shouldn't raise taxes at this moment.

If we tell them that the new taxes will still be far lower than the rates were during the Reagan era do you think they will still be scared?

Haha. If only economics, ideologies was an exact science. I honestly believe that if everybody agreed on how to fix this we would've already been on the road to recovery. Human psyche is a real....

 

[Bob Blaylock]

Your mistake is in assuming that economic activity is a zero sum game, it’s not.

Government programs are a zero-sum game. Government doesn't spend any money, anywhere, without taking at least that much money from the taxpayers.

Private enterprise creates wealth. Money is spent on activities that turn raw materials and labor into goods and services that are worth more than the cost of producing them.

Government does not create wealth. Government only consumes and redistributes it. Wealth consumed by the government is wealth that isn't being used to create more wealth, as it would be if left in the hands of those from whom government took it.

Your mistake is in assuming that government will put any wealth to better (or even nearly as good use) as those from whom government took that wealth.

The current administration has taken billions of dollars from taxpayers, and outrageously squandered and wasted it. In so doing, it had done great damage to the economy, while pretending that it was doing it to help the economy. This is money that would have done much, much, much more good, if those to whom it rightfully belonged were allowed to keep it and spend it for their own purposes.

 

[Bob Blaylock]

Basically -- and I've said this before -- opposition to the stimulus is the Young Earth Creationism of economics. The only way to make the case for this is to tell transparent lies that blatantly contradict the real world. In the case of post #19, some of the lies include : "spending is a zero-sum game," "the stimulus is an example of the broken window fallacy," and "Cash for Clunkers destroyed wealth." Other threads have already dealt extensively with these -- suffice it for now to say that there is not an ounce of truth in any of these, and the only way that Bob (or anyone else) could make those statements is by deliberate and willful falsehood.

Amazing!

You're telling us that the “Cash for Clunkers” scam did not destroy wealth, and then accusing me of “deliberate and willful falsehood”?

Destroying wealth is exactly what the “Cash for Clunkers” scam did. That was its purpose, its intent, and its effect. Every car that was destroyed under this fraudulent, outrageous scam, left the economy poorer by the value of that car in addition to the value of the labor and resources used to destroy it.

Only through “deliberate and willful falsehood” could you or anyone else possibly claim that it did otherwise.

 

[MikeMangum]

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.

The Laffer curve doesn't have anything to say in regards to economic growth; the Laffer curve deals with tax rates relative to tax revenues, not economic growth. Of course, expanding the tax base (growing the economy) also increases tax revenue.

 

[lomiller]

Government programs are a zero-sum game. Government doesn't spend any money, anywhere, without taking at least that much money from the taxpayers.

In which case the money moves in the economy, which is exactly what you want in a recession. The movement of money is absolutely not a zero sum game, in fact it’s self re-enforcing the more money moves the stronger the incentive for more of it to moves.

Money is spent on activities that turn raw materials and labor into goods and services that are worth more than the cost of producing them.

Your belief that government doesn’t produce goods/services is completely wrong. It’s far more focused on services obviously but there are cases where it produces goods as well.

I can grantee you the cost of producing new money is always less then the cost of producing new goods/service regardless of whether it’s government of the private sector producing those goods/services. In fact if there is ever a shortage on in the economy it’s blatant mismanagement.

left the economy poorer by the value of that car in addition to the value of the labor and resources used to destroy it.

If you destroy 1 car and hire 1 otherwise unemployed person to build a new one it seems to me you have a more valuable car then you would have had otherwise, which is clearly a net increase in total wealth.

 

[TraneWreck]

Government programs are a zero-sum game. Government doesn't spend any money, anywhere, without taking at least that much money from the taxpayers.

And private business doesn't spend any money, anywhere, without taking it from someone else's pocket.

This is so silly. If a government uses tax money to build a new road that opens up an area for commercial development, they've created economic opportunity.

If the government spends money on an Navy that guards shipping lanes allowing countries to freely trade, they've generated wealth.

Please read from sources other than Glenn Beck's university.

 

[drkitten]

I won't be buying any new equipment or making other investments in the business unless they are actually needed, it would be foolish to do so just for the tax consequences.

Of course. But lots of things that are needed aren't cost-effective, and tax policy can change that. While you would be foolish to do something just for the tax consequences, you'd be equally foolish to ignore tax consequences when you made a decision.

For example, suppose you have an aging and inefficient widget. A new one will cost you $50,000 but save you $5,000/year forever. Do you buy it?

Simple math says it will take ten years to pay for itself; most companies won't invest in new equipment with that long a payback period.

But when your accountant points out that buying the widget will save you $40,000 in taxes (because it reduces your taxable income) this means the net cost to you is only $10,000 and the payback period is only two years. This makes the equipment much more attractive to buy.

You can do the same calculations with whatever semi-realistic numbers you like to see how different prices, tax rates, and savings interact. The end result is that saving tax money will make (some) marginally unprofitable investments into marginally profitable ones.

You can do the same calculations for people, too. A new widget-operator will generate $35,000 in revenues per year but cost $40,000. So you don't hire him. But if the tax consequences reduce his cost to you by $7,000, then he's actually a net generator of revenue for the firm and you should hire him.

 

[drkitten]

Amazing!

You're telling us that the “Cash for Clunkers” scam did not destroy wealth, and then accusing me of “deliberate and willful falsehood”?

I am. And you've just supported my accusation by retelling the lie.

Every car that was destroyed under this fraudulent, outrageous scam, left the economy poorer by the value of that car in addition to the value of the labor and resources used to destroy it.

And left the economy richer by the value of the new car that replaced it

Only through “deliberate and willful falsehood” could you or anyone else ignore the second half of the equation.

 

[drkitten]

And private business doesn't spend any money, anywhere, without taking it from someone else's pocket.

This is so silly.

Of course it is. It's the YEC of economics. The only way to make this position make any sort of sense is to tell transparent lies.

Please read from sources other than Glenn Beck's university.

It's not a question of where he reads. It's a question of what lies he chooses to tell after he's done the reading. You can correct Kent Hovind on his "mistakes" in biology as many times as you like. He'll tell the same tired falsehoods to the next audience, because what's important to him is not the truth of this snake oil claims, but just that the snake oil get sold.

 

[joobz]

I am. And you've just supported my accusation by retelling the lie.



And left the economy richer by the value of the new car that replaced it

Only through “deliberate and willful falsehood” could you or anyone else ignore the second half of the equation.

Of course, I am sure Bob will be stating that the money that went to purchase the new car could have been used elsewhere. This of course, is only the case if people were using the money elsewhere to begin with.
And let's add to the equation the savings people have in gas (trade in cars had an average 16mpg, replacement cars had a 25mpg). This additional cash can be used elsewhere in the economy as well.

 

[drkitten]

Consumers are doing exactly what they need to do, pay down debt so that we can start all over with our boom and bust economy again. Gov programs that add to our debt which encourage spending are only decreasing the peak of the next cycle and/or prolonging the recovery.

Most of us would agree that "decreasing the peak of the next cycle" is generally a good thing. Since "the peak of the next cycle" is generally a bubble, and people get seriously hurt when bubbles burst --- that's exactly the problem we're dealing with now, in fact --- the basic idea behind Keynesian economics is that government fiscal policy can be used as a brake on the economy, reducing the "irrational exuberance" during bubbles and cushioning the troughs.

If consumer spending accounts for 66% of the GDP, and a healthy chunk of that comes from the Rich; can you see my hypothetical now?

And, again, this argues for an increase in income tax, because that will encourage spending, which is what the economy needs, instead of saving, which is what we're getting (due to the paradox of thrift).

Nobody knows what will happen if taxes are increased.

That's funny. A few posts ago Mike was telling me exactly what would happen if taxes were increased. A few sentences ago you personally were telling me that "they aren't going to stay in business, expand, or provide pay increases, etc if it's not profitable." But when I point out that increased marginal tax rates make it more profitable for sole proprietorships to expand and provide pay increases (and less profitable to sit on cash), all of a sudden it's oh-so-uncertain whether or not companies will take the more profitable route?

 

[drkitten]

Of course, I am sure Bob will be stating that the money that went to purchase the new car could have been used elsewhere.

Yes. That's because it's easy to tell lies.

This of course, is only the case if people were using the money elsewhere to begin with.

Which was demonstrably not the case, hence the need for the stimulus in the first place.

And let's add to the equation the savings people have in gas (trade in cars had an average 16mpg, replacement cars had a 25mpg). This additional cash can be used elsewhere in the economy as well.

Yes, but you're only saying that because you have this infantile and leftist infatuation with being correct and truthful.

 

[Bob Blaylock]

If you destroy 1 car and hire 1 otherwise unemployed person to build a new one it seems to me you have a more valuable car then you would have had otherwise, which is clearly a net increase in total wealth.

That's the Broken Window Fallacy, exactly.

 

[Bob Blaylock]

And private business doesn't spend any money, anywhere, without taking it from someone else's pocket.

Private business doesn't take money from other people's pockets, as government does. Private business only gets money by giving something of greater value in return for it, to someone who willingly exchanges his own money for that more valuable product.