About extending those Bush tax cuts
Lots of blah, blah, blah in Washington about whether or not to extend those Bush tax cuts, and to whom, and for how long.
The problem with arguing about such things, of course, is that no one really knows what the effect of each course would be. At least, I haven’t seen anything that convinces me that anyone knows. I’m already on record as saying that economics is not my strong suit, but I’m beginning to wonder whether it’s anyone’s.
Here’s why: in economics, what seems obvious ain’t necessarily so. The economy is one of those extraordinarily complex systems that make predictions exceedingly hard to get right. Oh, somebody always seems to have been correct—ex post facto. The problem is knowing ahead of time whose prediction is the one to (literally) bank on.
Here’s the dilemma we face right now: we’ve got a number of huge economic problems, high among them being unemployment, an economy that needs stimulation in terms of confidence and spending and investing, and the need to restrain a huge and growing deficit. What might help the first two (spending, lower taxes rather than higher) might harm the third.
Furthermore, we’ve got uncertainty about the actual effect of tax hikes and/or tax cuts. It is intuitive to think that raising taxes raises revenues. But it’s not always correct—and even when it is, it’s not always correct to the extent expected and depended upon.
In other words, sometimes raising taxes doesn’t do what it’s meant to do, and can even have large and unintended consequences (such as people not working so hard in order to keep their incomes in a lower bracket, fleeing the state or the country, finding effective ways to shift money around so they avoid taxes, and so on).
If you look at discussions of the topic around the blogosphere, you’ll find that the arguments tend to split not only on political lines between conservatives and liberals, but between those who think it’s most important to stimulate the economy by keeping money in the pockets of the people (rich and poor and in-between), those who think it’s most important to reduce the deficit by raising taxes, those who think it most important to reduce the deficit by cutting government spending, and those who want to combine some of these approaches.
The real question is: who’s more correct? Which approach will help most? I’m for a combination of extending the Bush tax cuts and cutting spending. But hey, I’ve already said I’m no expert. The trouble is that neither are the experts.
I thought at one time I would major in economics. Probably would have if the Navy hadn’t invited me into flight training after my sophomore year. Lot more fun. So, I know little about economics, except as you say it is complex; and even the experts are often confused.
Still, some things are fairly obvious. I sent the following email to my Senators. I do not believe in miracles, and do not expect those two Dimocrats to listen. But, it made me feel better.
Dear Senator,
The most recent excuse I am hearing for raising taxes on certain Americans, while not raising them on others goes like this:
“The wealthy will just save their windfall, while the lower income individuals will spend it immediately, thus stimulating the economy.”
(The term windfall is a misnomer as we know. No one is actually going to get any more in any scenario. But, that is the fiction.)
Seriously. We both know how ludicrous this whole argument really is. Are we expected to believe that high income folks are going to actually stuff their money in the mattress? No, what they do not spend, they will continue to invest in American businesses, sometimes their own, thus enabling those businesses to grow, and/or new business to be financed. This is how our economy is stimulated. In fact if they know that tax rates are going to be stable, they will feel even more empowered to invest. This is not rocket science.
Lower income people will likely spend any available money all right. But, our purchases will mostly benefit the Chinese economy. Not only is this a fact that is a matter of public knowledge, I can verify it from personal experience. The Chinese don’t need, nor do they deserve, any additional economic stimulus from us.
So, please let’s get serious. Ignore the fairy tales from the White House spin machine, and from the likes of Harry Reid. Get on with the business of insuring that tax rates will remain stable for all Americans in the teeth of weak economy.
Sincerely,
Via Instapundit:
VERONIQUE DE RUGY: Reality Isn’t Negotiable: The Government Can’t Raise More than 19% in Taxes for Long.
http://mercatus.org/publication/reality-isnt-negotiable-government-cant-raise-more-19-taxes-long
1. Lower rates DO NOT lower revenue. Just the opposite happens in fact. This is a false dichotomy; it is also a false choice. Those on the left that say otherwise are either idiots or, more likely, liars. If you imagine that that ‘new revenue” will not result in more spending, then you are even more far gone than the left is.
The left set up this spending for the very purpose of raising taxes. The only way they can make a living is through picking the taxpayers pockets.
2. Given other people’s money to anyone stimulates nothing but immorality. It does not stimulate the economy. This too is a lie.
3. None of these choice preclude spending cuts. This too is a false choice. I rather doubt, however, that, other than defense spending, anyone is actually talking about cutting anything. More likely they are talking about slowing the rate of growth. What needs to be done is to dismantle the New Deal agencies, departments and all their accretions. This is the only way to “cut spending” in the true sense of the term.
The Left has reversed decades of progress. The only way to get it back is to toss them out and along with them toss out every bit of the collectivist policies that go with them.
It’s all about envy. Egalitarianism is a manifestation of envy. It’s vice masquerading as a virtue. De Jouvenal wrote a treatise on redistribution a half century ago and showed it is ethically indefensible.
Since history shows that revenue from tax income is historicaly stable at ~19% (see Veronique de Rugy citation above) then that’s all the govt will get.
If the govt gets its 19% from higher tax rates it constrains the economy (as neoneocon notes, people may not work as hard to keep their income in a lower bracket) so it takes 19% of a smaller pie. If the govt expands the economy then it receives 19% of a larger pie, thus increasing revenues.
Progressives such as the Obama administration have it exactly backwards; they believe that the economic pie is finite but the govts ability to tax is infinite. They focus more on class warefare (taxing the “rich”) and redistributing the pie, which in turn, creates a moribound economy and a self-fulfilling prophecy (“See, we told you the economic pie is finite”).
In fact, it is the economic pie that is infinite. Did Bill Gates become wealthy by financially raping the economy or individuals? No, he provided something that the public was willing to spend money for and thus became the wealthiest man in the world. Free markets do this, but they take power out of centralized hands. This is the real focus of the progressives, centralized control of the public for the public’s own good. Spare me!
What really rich people do when there are no profitable investment opportunity? They buy inflation-shielded govenment bonds, and most of their personal fortune is frosen in these bonds. (Especially in bad times, when uncertainty of markets and regulation regime makes any investment risky.) The only way government can turn this mount of money into job-creating investment is to ease regulation and tax burden which prevents productive use of private money.
Since most people are not economic experts and even the “experts” have been unable to predict how the economy will react to this stimulation and that regulation, etc…, it is my belief that we are all better off with as little govt involvement in the economy as possible and let things develop naturally. The free market has a better chance to get things right than any particular “expert,” politician or bureaucrat. And, it would have the added benefit of getting the politicians more like background noise in our lives rather than “the this-one-goes-to-eleven” speakers blaring in our faces that they are now.
Neo:
You’re buddy Thomas Sowell just covered this topic and made a very good argument about whether raising taxes on the rich really raises revenues:
http://www.nationalreview.com/articles/254086/can-republicans-talk-thomas-sowell
One things clear though, wealthy businessmen in the private sector will continue sit on that 3 Tril the media siad they were greedily hoarding until they know whether they can aford to hire and expand.
The solution to money probelms surely lies somewhere beyond all this class warfare bs. Seems to me we could save a bundle by the elimination of government.
The rich also have the flexibility to decide where to dock their yachts. This is simply a class warfare tactic. Nancy Pelosi could send a check to the IRS for any extra money that bothers her conscience, and MO could encourage Wagyu beef eaters to switch to hot dogs and send their savings to a local food bank.
If the spending cuts would start with getting rid of unnecessary regulators and spending cuts, the business community would be grateful. And if our bobble-head president would stop reversing his positions, investors might gain confidence. People will adapt to measures needed to get the economy back on course if they sense a coherence and rationality behind them.
“If the spending cuts would start with getting rid of unnecessary regulators and spending cuts, the business community would be grateful.”
Here, here! Adding IRS regulators doesn’t count in my book as jobs growth.
The science of economics is like the science of digestion. If you keep it simple it makes sense. Look at what goes in and if its good stuff, you won’t get constipated or liquid. But once you delve inside, it’s a load of crap.
Neo,
Consider me the expert then 🙂
Scenario 1 (The government has been doing this one):
-The government spends and spends regardless of the revenue.
-The tax rates remain the same.
In scenario 1 – the economy has not expanded much and unemployment has remained high the past 2 years.
Scenario 2 (The government wants to do this):
-The government continues spending and spending regardless of the revenue that may or may not come in – they are not connected because they are irresponsible
-tax rates go up for certain people – which may or may not bring in more revenue or even make revenue go down.
In scenario 2 – the tax rates going up is surely not helpful to the economy. The argument about spending more is irrelevant since they aren’t connected. If the only change is the tax rates then we are absolutely positive that it has a negative impact because the spending isn’t part of the equation.
Given Scenario 1 and 2 are both not really good, what we need (yes Nyom) is the prescription that Sarah Palin talked about:
1) Capital gains tax rate reductions
2) Corporate tax rate reductions
3) Not keeping tax rates the same but maybe actually lowering them (not a rebate check either – that’s just a one year gimme)
4) Slashing regulations – btw – even though regulatory agencies received MORE and more each year they failed to protect us from the housing bubble and subsequent mess of Fannie Mae, Freddie Mac, etc.
5th and actually foremost – Announce and end to Obamacare and cap and tax – Companies are trying to plan for these added costs. They will once and for all know that they don’t have to plan for these costs.
Because NONE of these are the plans we are talking about – I know that the Democrats (they are still in control) do NOT care about the unemployed – they care about control.
Nick Gillespie over at Reason quote an observation that I saw somewhere else (probably linked off InstaPundit): that since 1950, government revenue has maxed at 19% of GDP. It’s been pushed over it for short periods, but has always dropped down. If this is a hard limit (and the Laffer curve and the basics of deciding when to play a game with a house take suggest it is) then increasing tax rates will necessarily reduce the size of the economy AND the government revenues.
As simple as that.
If you want to start with Economics, your two foundation texts are Thomas Sowell’s Basic Economics and P.J.O’Rourke’s Eat The Rich. O’Rourke’s corollary to the Tenth Commandment is worth the price of the book.
If, for example, your marginal tax bracket is 50%, then you have to do $100k worth of work to get $50,000.
Suppose the last quarter of your year is where you start earning into the 50% bracket: Maybe you’d knock off about Hallowe’en. That’s probably not practical, so you take more vacations during the year. Using the hypo, having $50k is better than not having it, but doing $100k worth of work to get it might be annoying. For example, if you’re a doctor, you get the liability exposure of $100k worth of medical work. You put in the hours. You worry. For fifty cents on the dollar.
Okay, so the next marginal rate is, say, 35%. You do $100k worth of work to keep $65k. Presuming you’ve socked away enough to be cheerful before you hit the maximum marginal bracket, you might just start taking it easy.
Does anybody know how to make a doctor work when he doesn’t want to? A salesman make cold calls in November if he’s done okay so far? A merchant keep his Saturday hours? Or his evening hours?
Yeah. We know. That’s the problem.
Income, Consumption, and Spending
Jerry L. Jordan at Investors.com explains the simple facts about production and consumption among rational people. What people do when they anticipate good and bad times. The link above goes to a summary and a link to the full article.
Useful economics is based on human goals and planning. You can point to the motivations and actions of the people, and it makes sense.
Manipulative economics presents summaries from on high, based on assumptions and mathematics that are too complicated for the non-expert to understand. Motto: “The peasants should trust us”.
Highly complex mathematical economics does not start out to be manipulative. But, politicians cherry pick the results they like, and push the summaries as if they are true, but impossible for ordinary people to understand. Such economics is based on assumptions which cannot be verified and predict results which cannot be measured. They always seem to call for higher taxes and more government programs and spending. What a coincidence.
– –
Robber: (rings doorbell) Hello. Let’s you and me rob your rich neighbor.
Fred: That’s wrong.
Robber: He has more money than he knows what to do with.
Fred: I suppose.
Robber: If we take his money and spend it, we will boost the economy. I think all he does is to throw it into the air and laugh.
Fred: That is sounding better.
Robber: We will hire my cousin to help the poor with part of the cash.
Fred: I want to help the poor. But, will we be punished?
Robber: Don’t worry. I’m going around the neighborhood. We’re going to vote on it.
“The economy is one of those extraordinarily complex systems that make predictions exceedingly hard to get right.”
Change ‘exceedingly hard’ to ‘impossible.’
There are no economic experts. The best book you can possibly read is Taleb’s _Black Swan_.
If you don’t believe that, here’s a way to test the proposition. Pick the economist who has made two significant correct predictions in a row. I’d start with the economist that predicted the internet bubble AND the 2008 crash.
It’s worth noting, too, that the major economists who failed to predict the last crash are the same ones who have all the right answers now.
Bet on the Black Swan.
Two points: The simple fact is that the people with money,”the rich”, are the source of capital creation. Capital creation is the mother’s milk of job creation. The President’s best hope for re-election is a growing economy with a declining rate of unemployment. That is the first reason he should be for extending the current tax rates. The second point is that historically whenever we have had a reduction in tax rates (yes, even democrats such as Kennedy believed in this} the economy expanded at a greater rate than it had before and tax receipts grew at a greater rate than before. In fact since the end of the second world war, the revenues of the government have been at a constant rate of 18.5% of GNP,plus or minus 1% regardless of the tax rates. Logically then, policies that boost GNP (lower tax rates) mean greater tax receipts. Don’t we all, liberals and conservatives want more people employed and a better debt picture than currently projected? I guess if you are more concerned about equal misery than greater prosperity, you adopt the present liberal position.
I dropped out of my first and only economics class, Economics 101, I believe, right after the first class, in which the lecturer introduced the fundamental building block that he said all of the economic theories he was going to teach us was based on; “economic man.” As he explained to us, “economic man” was a very rational man, whose every decision was fundamentally based on economic considerations.
Did “economic man” have to choose between a red sweater at the store or a blue one, one that was solid colored or argyle, turtle neck or another style, good fabric and workmanship or bad? Well, he chose on the basis of which one was cheapest or the best buy, regardless of design, style, color, or workmanship.
Perhaps I had an idiot for a lecturer, perhaps he explained things badly, but after 50 minutes of this, I realized that any theory that was predicated on the idea of “economic man” was absolute idiocy, was shit, and, after leaving that classroom, I never looked back.
Most everyone who has commented so far has good ideas and are aware that Obamanomics does not, cannot work.
The government does not create private sector jobs, bit it depends for its income on the private sector doing well. So, the government should concentrate on creating the conditions for the private sector to do well.
What are those conditions? Stable money, understandable and fair regulation, stable and low tax rates, an openess to free international trade, and a government that lives within its means.
Now here is what I’d do, if I was Obama:
Extend the Bush tax rates for all. You want more jobs? It’s a no brainer. But Obama/Reid/Pelosi fight it to the end.
You want more jobs? Start producing more energy (Oil, gas, coal, nuclear, and hydro) right now. Open up ANWR, the offshore areas, and incentivize nuclear power the way solar and wind are being incentivized.
You want more jobs? Cut corporate taxes to 10%. Corporations don’t pay taxes, their customers do.
Want more jobs? Quit talking trash about our businesses and start easing the burden of regulation. Especially all the garbage EPA regs.
Freeze Federal spending at 2008 levels and get started on the fix for Social Security, Medicare, and eliminating or reducing agencies , bureaucracies, and even Departments. Energy and Education are two Departments that have never achieved anything they were intended to achieve. Get rid of ’em! Get spending on a track to reduce the deficit to a surplus in ten years.
Do not raise taxes. It is a historical fact that Congress always manages to spend $1.17 of every new tax dollar. It’s like giving booze to an alcoholic.The government does not have an income problem so much as it has a spending problem. When the economy recovers, their income will recover.
There is $18 trillion sitting on the sidelines. If people felt confident that the government was working to create the conditions for the privarte sector to do well, it would come back into the economy and a new growth phase would begin.
We do not exist in a vacuum and others “with bad intent” are sitting on park benches waiting, nudging, and certainly not going to let things progress unmolested…
On another note, the senate violated the constitution and no one really cares. the food bill necessitated raising taxes and so is a function of the house and has to originate there. everyone that voted for it technically violated their oaths of office to protect the constitution…
they are assumed to know the rules, and so are culpable for rule breaking (even if they dont know the rules). their attempting to purposefully pass a law which should originate in the house is breaking the constitution piece by piece, just as many other things we now think of as normal and ok, do the same. at some point they can just point and say “follow what?” a document we dont follow and then rack off a litany of items that make the concept a nothing
In 2008, the top 1% of earners paid 38% of all income tax. IMHO, that is progressive enough. I don’t have the precise figure in front of me, but around 45% of earners do not pay income tax.
Keep the current tax rate and CUT SPENDING.
http://www.ntu.org/tax-basics/who-pays-income-taxes.html
13 Republicans, including Scott Brown, voted for the food bill.
Every single one of them, including Brown, needs a primary challenger in 2012. If we make it that far.
Or whichever ones are up for re-election in 2012. I don’t know how many are.
Karl Denninger says that “Quantitative Easing” is tantamount to the largest tax increase in American history, and absolutely dwarfs the “Bush tax cuts”.
It’ NOT about economics. Neither is it about which side is “more correct”. (That is a very odd thought indeed: Both sides are correct, but one is more so?).
Eet es muy simple: One cannot borrow one’s way out of debt. Please do not inject “investment” into the process. Governments do not earn and do not invest; they tax by fiat and spend what they “earn.”
Once that rather obvious premise is accepted, it becomes painfully clear which side is “more correct.” The rest is politics.
Look for a big sell off Dec 15 in stocks as a huge number will want to take capital gains at this years rate not next years. the more they twiddle, the more likely this event…
We either need to come up with a way to make the poor pay more tax, or else prevent them from voting.
The middle class is the backbone of society, not the poor. The poor are largely a drain on society. It is vitally important that the productive middle class stop subsidizing the parasitic underclass.
Let them sweep floors or scrub toilets for 50 cents a day. I really don’t care anymore. My Give-A-Sh*t Meter is busted.
People with IQs of 80 and violent tendencies should have no say whatsoever in how our society is run.
The Founding Fathers believed that only property owners should be able to vote. Robert A. Heinlein suggested that only military veterans should be able to vote.
Another possible approach is to use IQ tests, with a cutoff at some point. Or we could base it on whether the person is a net payer or net consumer of taxes.
But however it’s done, a way needs to be found to prevent the left side of the bell curve from voting. We are rapidly approaching the point where the majority of citizens live off the taxes of the minority. If we reach that point it’s all over.
No society can long survive with a universal franchise. Sorry, but that’s just the way it is.
Art,
Why the 15th? Why not the 1st (before the market goes down) or the 10th?
Why not the 31st?
We are rapidly approaching the point where the majority of citizens live off the taxes of the minority. If we reach that point it’s all over.
Officially we are now a socialistic/fascist hybrid nation
[given that fascism is socialist, guess what?]
http://www2.hernandotoday.com/content/2010/dec/02/021954/officially-we-are-now-a-socialisticfascist-hybrid-/
Baklava:
I can’t predict the exact date, but it will happen sometime in December if something isn’t done. I heard Mark Levin talking about it on the radio tonight.
If you look at the SPY, DIA, and QQQQs they are being accumulated (more buyers than sellers). I believe that is so because many investors (Most investors now are pros – the odd lotters are sitting in cash or {shudder} bonds.) are betting the Bush tax rates will be extended. The shorts have been getting beat up the last few days, but I expect a sell off of a per cent or so tomorrow. The way the Dems are fighting to raise taxes, some investors will not want to leave their money in the market over the weekend. Congress adjourns for Christmas recess on December 18th. The closer we get to that date with no action on the tax, the bigger the chance of a sell off as people cash in their profits under the lower tax rate. At least that is the way I’m seeing it and playing it. Mr. Market will probably fool me though.
But why would capital gain rates go up next year with the House being controlled by Republicans.
My bet is that the market stays up because capital gain rates could go down next year…. or stay the same.
As I understand it, the market is mostly being pumped up by big institutional investors, with help from the Fed.
Most retail investors, if they know what’s good for them, headed for the hills long ago.
rickl, Baklava, here’s an article that explains a bit about the 15 Dec date, capital gains, and a crash theory.
http://politics.usnews.com/news/blogs/washington-whispers/2010/12/2/delaying-tax-vote-could-crash-stock-market.html
The economy is one of those extraordinarily complex systems that make predictions exceedingly hard to get right.
They should put the global warming “experts” on it. They have no problem with differential equations that couple unquantified phenomena.
And regarding experts in economics: there are no experts in economics. None. There are lots of people who hold themselves out as such, however.
The reason I currently favor higher taxes and government created/subsidized jobs is China. It seems to me that lower taxes on the top 1% incentivize higher consumption of Chinese made products and higher investments in Chinese companies. Neither of which help us one jot. I think in a world where currencies were more realistically correlated (if that make sense), the Bush tax cuts may well stimulate our economy. To me though it now it seems like every cent we get we can’t wait to send it abroad.
For the federal government, a sell off would give a temporary boost in revenue.
Face it folks the government is acting in it’s interest.
Simon,
That is the most awful logic I’ve seen in a few months.
Increasing tax rates on the top 1% lowers investment not consumption.
Baklava says:
Do what is right based on truth not hate.
http://www.heritage.org/Research/Reports/2010/12/The-Economic-Impact-of-a-25-Percent-Corporate-Income-Tax-Rate
Drudge headline says 15 too
That’s also “Bill of Rights Day, honors the United States Bill of Rights on the anniversary of its ratification.”
Baklava, I said I thought investment would also go to China. Because things can be made so much more cheaply there. I am in no way sure of my logic, it is just a fear I have about the economy at the moment.
Sorry I transposed fear to hate.
Baklava says:
Do what is right based on truth not fear.
Baklava, I wasn’t talking about corporate tax rates, just personal ones. Your link may well be right on that score. I have no idea.
Neo, you’ve just described the Economic Calculation Problem.
Whatever the government tries, they will be wrong. Because they cannot possibly know what everyone really wants in terms more specific than “jobs” and “growth”. People do not get paid in generalities. The only mechanism that assures each gets the best he can afford is to let everyone bid on everything.
Government policy just screws up the bidding, creating winners and losers by legal force instead of economic value.
Economics may not be your strong suit, but you sure sound like an expert from the Austrian school.
Occam’s Beard,
Did you know that if you laid all the economic experts on the earth end-to-end they still wouldn’t reach . . . a conclusion?
Simon,
Sorry, My link was not related to the topic at hand – it was separate.
As far as personal tax rates – S corporations pay via personal taxes.
And as far as raising tax rates on the top 1% – you lower investments
It’s the wrong thing to do during a recession if your goal is to raise employment.
Raising it for 2 years is weird. Make it something businesses can plan for – a permanent rate.
I assume that the American people understand that if the Democrats wanted to solve these problems instead of making, valueless gesture to please the extreme left wing of their party. They would sit down, rool up their ideas and start to find better compromise solution. People realize that if the tax on capital gains rises up the stock market will go down and then everyone will be negatively affected. Finally, Many economists forecast that could happen as soon as middle of December, if this tax situation is not resolved.