Monday, September 06, 2010

Definition of Insanity

Today, one American client-citizen is a little bit happy: Paul Krugman. The rest are flummoxed.

Because the previous stimulus worked so well, BHO today proposed more: $50 billion (that's $50 thousand million, or about $160 per American client-citizen) of additional "infrastructure" spending. More with the roads and bridges stuff.

Even BHO's foot soldiers admit that this spending won't help anything until 2011. Krugman, we figure, is rejoicing, even while he's hedging his bets with the pronouncement that to be effective the figure would need to be bigger by a couple of orders of magnitude, like $5 trillion.

Two recessions in the SWNIDish lifetime were ended with lasting cuts to marginal tax rates. With business confidence in the cellar, the best way for government to act would be to remove its own contribution to the uncertainty by pledging not to enact a carbon tax, extending the Bush personal income tax rates and capital gains rates indefinitely, and reducing the world-beating corporate tax rate to something. Then announce a plan to phase back federal spending to a baseline before 2008 and we'd have a formula for reducing deficit spending and stimulating business confidence.

None of this will happen with the present administration or Congressional leadership, of course. But we say it now to put the lie to the assertion that no one in opposition to the presently-in-power philosopher-kings has any suggestions.

41 comments:

JB in CA said...

Well, I'm not at all keen on cutting the tax rate on large corporations (which is what re-upping the Bush tax rates would, in effect, do) for at least two reasons: (1) The large corporations are already sitting on more cash than they seem to know what to do with, and (2) in the last several decades, large corporations did little to jump-start the economy out of a recession, even when they were given tax relief. They preferred to play it lean and mean—hiring back only a small portion of the workforce they laid off—while the small businesses and, especially, the entrepreneurs were responsible for creating the majority of jobs. So I say give those guys the tax breaks, and let them have at it.

But don't do it the way Obama's proposing. Tax incentives for small businesses to hire new employees sounds good, but few businesses are likely to go into dept hiring people for a future tax break that will cover only a small fraction of the costs. Give them a tax break now on their profits, and they'll use the money they retain to create new business that will require new employees to handle it.

In the meantime, let the large corporations use all that money they're sitting on to pay their executives obscenely outrageous bonuses. It shouldn't take long for the market to correct that excess, given the new competition the large corporations will face from the small businesses.

Jon A. Alfred E. Michael J. Wile E. SWNID said...

Factoid, JB: the "Bush" tax cuts were to individual rates, not corporate rates. American corporate tax rates are second highest in the world, right behind anemic Japan's.

We argue that punishing people for bad social behavior with tax rates is effectively cutting off one's nose to spite one's face.

Note well that "big corporations" don't just hide their money in mattresses. It gets put into the global economy someplace, either to buy another business, invest in an existing business, or loan to someone. So if globally companies aren't hiring, it's not just from a lack of capital, but for other reasons related to uncertainty. Some of that is independent of tax policy, but what is related to the fear of higher taxes can be ameliorated with a change in direction.

Note also that reducing tax rates generally has the effect of raising tax revenues (to a point, but with a corporate rate at 35%, it's hard to argue the opposite in this case), so the wisdom of maintaining high rates continues to elude us.

Finally, we question whether so-called targeted tax breaks for specific activities of so-called small businesses is worthwhile. Anything temporary won't inspire confidence; anything targeted tends to distort decisions from economic fundamentals to tax-code compliance.

We think you have listened too closely to the populist rhetoric of the ersatz Robin Hoods.

Tom in KY said...

I'm not sure that business confidence is "in the cellar" as the sage of the SWNID suggests. According to the St. Louis Fed, corporate profits were $1.37 trillion in 2nd Q of 2010; firms have $2 trillion in cash reserves; business spending jumped 20% in 2nd Q, up 13% over 2009.

The tax burden on individuals is the lowest it has been since the 1950s. Median families pay 4.6% in taxes, 50% of the country pays nothing in taxes and 9 million (top 3% earning over 250K) pay 50% of federal tab. “But I make $400,000 a year and can’t buy the yacht that Kobe Bryant has.” Well, there is that argument…

One of those recessions you mentioned, Bush 41 raised taxes, Clinton raised taxes and it was followed by years of exponential growth. The same cannot be said of the "let's cut more taxes" era of Bush 43. The notion that the economy reacts negatively to an increase in taxes is just not true.

Putting Republicans back in charge to steady the ship is laughable, if it wasn't so sad. Just a few examples:

Let's go back to Clinton. When the Republicans had him on the ropes, did the repeal his tax increases? Nope. Jump ahead to the 2000s. "Liberal are out of control - if you'll put us in charge, we will cut spending and we’ll gut the evilest of institutions, the Department of Education". Nope - increased by 101% - along with every other domestic program (should I mention the expansion of entitlements as well, or would the SWIND just faint?)

One of the reasons that half the country pays zilch in taxes is the earned income tax credit (EITC), created by Republicans in the 1970s and expanded by successive Republican administrations - Clinton did add childless claimants. I'm not saying it wasn't a good move, but it IS a spending program (something Republicans can't stand to admit with their current strategy), costing $50 billion a year.

I think that we can agree that there needs to be tax simplification, but add that to your list of things that will never happen either. I read an article the other day that was very simple, but very true, “If both parties say that deficits are bad, then why do we still have them? If the tax code is unfair, it’s because that’s the way they want it to be”.

And all of God’s people say, “Amen”.

Tom traumatized by LaRosa's said...

I'm not sure that business confidence is "in the cellar" as the sage of the SWNID suggests. According to the St. Louis Fed, corporate profits were $1.37 trillion in 2nd Q of 2010; firms have $2 trillion in cash reserves; business spending jumped 20% in 2nd Q, up 13% over 2009.

The tax burden on individuals is the lowest it has been since the 1950s. Median families pay 4.6% in taxes, 50% of the country pays nothing in taxes and 9 million (top 3% earning over 250K) pay 50% of federal tab. “But I make $400,000 a year and can’t buy the yacht that Kobe Bryant has.” Well, there is that argument…

One of those recessions you mentioned, Bush 41 raised taxes, Clinton raised taxes and it was followed by years of exponential growth. The same cannot be said of the "let's cut more taxes" era of Bush 43. The notion that the economy reacts negatively to an increase in taxes is just not true.

Putting Republicans back in charge to steady the ship is laughable, if it wasn't so sad. Just a few examples:

Let's go back to Clinton. When the Republicans had him on the ropes, did the repeal his tax increases? Nope. Jump ahead to the 2000s. "Liberal are out of control - if you'll put us in charge, we will cut spending and we’ll gut the evilest of institutions, the Department of Education". Nope - increased by 101% - along with every other domestic program (should I mention the expansion of entitlements as well, or would the SWIND just faint?)

One of the reasons that half the country pays zilch in taxes is the earned income tax credit (EITC), created by Republicans in the 1970s and expanded by successive Republican administrations - Clinton did add childless claimants. I'm not saying it wasn't a good move, but it IS a spending program (something Republicans can't stand to admit with their current strategy), costing $50 billion a year.

I think that we can agree that there needs to be tax simplification, but add that to your list of things that will never happen either. I read an article the other day that was very simple, but very true, “If both parties say that deficits are bad, then why do we still have them? If the tax code is unfair, it’s because that’s the way they want it to be”.

And all of God’s people say, “Amen”.

Tom, Traumatized by LaRosa's said...

I'm not sure that business confidence is "in the cellar" as the sage of the SWNID suggests. According to the St. Louis Fed, corporate profits were $1.37 trillion in 2nd Q of 2010; firms have $2 trillion in cash reserves; business spending jumped 20% in 2nd Q, up 13% over 2009.

The tax burden on individuals is the lowest it has been since the 1950s. Median families pay 4.6% in taxes, 50% of the country pays nothing in taxes and 9 million (top 3% earning over 250K) pay 50% of federal tab. “But I make $400,000 a year and can’t buy the yacht that Kobe Bryant has.” Well, there is that argument…

One of those recessions you mentioned, Bush 41 raised taxes, Clinton raised taxes and it was followed by years of exponential growth. The same cannot be said of the "let's cut more taxes" era of Bush 43. The notion that the economy reacts negatively to an increase in taxes is just not true.

Putting Republicans back in charge to steady the ship is laughable, if it wasn't so sad. Just a few examples:

Let's go back to Clinton. When the Republicans had him on the ropes, did the repeal his tax increases? Nope. Jump ahead to the 2000s. "Liberal are out of control - if you'll put us in charge, we will cut spending and we’ll gut the evilest of institutions, the Department of Education". Nope - increased by 101% - along with every other domestic program (should I mention the expansion of entitlements as well, or would the SWIND just faint?)

One of the reasons that half the country pays zilch in taxes is the earned income tax credit (EITC), created by Republicans in the 1970s and expanded by successive Republican administrations - Clinton did add childless claimants. I'm not saying it wasn't a good move, but it IS a spending program (something Republicans can't stand to admit with their current strategy), costing $50 billion a year.

I think that we can agree that there needs to be tax simplification, but add that to your list of things that will never happen either. I read an article the other day that was very simple, but very true, “If both parties say that deficits are bad, then why do we still have them? If the tax code is unfair, it’s because that’s the way they want it to be”.

And all of God’s people say, “Amen”.

Tom, Traumatized by LaRosa's said...

I'm not sure that business confidence is "in the cellar" as the sage of the SWNID suggests. According to the St. Louis Fed, corporate profits were $1.37 trillion in 2nd Q of 2010; firms have $2 trillion in cash reserves; business spending jumped 20% in 2nd Q, up 13% over 2009.

The tax burden on individuals is the lowest it has been since the 1950s. Median families pay 4.6% in taxes, 50% of the country pays nothing in taxes and 9 million (top 3% earning over 250K) pay 50% of federal tab. “But I make $400,000 a year and can’t buy the yacht that Kobe Bryant has.” Well, there is that argument…

One of those recessions you mentioned, Bush 41 raised taxes, Clinton raised taxes and it was followed by years of exponential growth. The same cannot be said of the "let's cut more taxes" era of Bush 43. The notion that the economy reacts negatively to an increase in taxes is just not true.

Putting Republicans back in charge to steady the ship is laughable, if it wasn't so sad. Just a few examples:

Let's go back to Clinton. When the Republicans had him on the ropes, did the repeal his tax increases? Nope. Jump ahead to the 2000s. "Liberal are out of control - if you'll put us in charge, we will cut spending and we’ll gut the evilest of institutions, the Department of Education". Nope - increased by 101% - along with every other domestic program (should I mention the expansion of entitlements as well, or would the SWIND just faint?)

One of the reasons that half the country pays zilch in taxes is the earned income tax credit (EITC), created by Republicans in the 1970s and expanded by successive Republican administrations - Clinton did add childless claimants. I'm not saying it wasn't a good move, but it IS a spending program (something Republicans can't stand to admit with their current strategy), costing $50 billion a year.

I think that we can agree that there needs to be tax simplification, but add that to your list of things that will never happen either. I read an article the other day that was very simple, but very true, “If both parties say that deficits are bad, then why do we still have them? If the tax code is unfair, it’s because that’s the way they want it to be”.

And all of God’s people say, “Amen”.

Tom said...

Sorry about the multiple posts. I kept getting an error message, so I kept trying.

Apologies!

JB in CA said...

Tom: No problem. I thought you were trying to show us what "Tom traumatized by LaRosa's" said, so we could see that "Tom in KY" was right.

JB in CA said...

SWNID: Factoid, JB: the "Bush" tax cuts were to individual rates, not corporate rates.

I stand corrected. I didn't realize that "the Bush tax cuts" does not really mean "the Bush tax cuts." For instance, I thought the Bush tax cuts mentioned below had something to do with the Bush tax cuts, as opposed to, say, something other than the Bush tax cuts. I suppose I should have known better, but then again, I'm not really up on all that sophisticated economic terminology.

Associated Press
updated 10/22/2004 4:44:47 PM ET

WASHINGTON — With no fanfare, President Bush Friday signed the most sweeping rewrite of corporate tax law in nearly two decades, showering $136 billion in new tax breaks on businesses, farmers and other groups.


By the way, how well have those (non-?)Bush tax cuts been doing to stimulate the economy?

Note well that "big corporations" don't just hide their money in mattresses. It gets put into the global economy someplace, either to buy another business, invest in an existing business, or loan to someone ...

... or buy treasury bonds earning 3% interest at taxpayer expense, so Washington can afford to fund additional tax breaks to those corporations, so they can buy treasury bonds earning 3% interest at taxpayer expense, so Washington can afford to fund additional tax breaks to those corporations, so ... .

We think you have listened too closely to the populist rhetoric of the ersatz Robin Hoods.

Meet Robin Hood (and his merry madmen):

http://www.cnbc.com/id/15840232?video=1578662831&play=1

I'll let you decide which one of these guys impresses me most and whether he counts as an ersatz Robin Hood.

Oh, and by the way, you suggest that I've been unduly influenced by those who take from the rich and give to the poor. I wonder. Is it better to be unduly influenced by those who take from the poor and give to the rich?

Tom, Traumatized by LaRosa's said...

JB in CA said...

"Tom: No problem. I thought you were trying to show us what "Tom traumatized by LaRosa's" said, so we could see that "Tom in KY" was right."

It's an inside joke for the SWIND... :)

Q said...

My wife is a business partner in a healthcare office. Due to "Obamacare" she and her business partners are simply sitting and waiting trying to figure out what their next move is. Fortunately the business is well managed and can weather the storm of a recession and uncertainty in healthcare regulation. However, deep cuts have been made.

Other practices are not so lucky. Already in our small KY town the only OB practice was sold to, and then closed by, the local University. Expectant mothers are forced into the bigger cities. Access to obstetrics is now restricted in our small town due in part to "Obamacare". Other medical practices have also been forced to sell too but have remained open.

Our small local hospital has been struggling too due in part to many of these changes. It all adds up to a big mess thanks to the POTUS and his ilk.

mcarswell said...

"(1) The large corporations are already sitting on more cash than they seem to know what to do with"

The follow up, however, is if that's true, then why are they? I'm not sure that corporations exactly want to sit on their piles of cash indefinitely. Board members, analysts, and markets will eventually view idle assets as misused assets. And we'll see the less-taxed global competition grow stronger. But for now, if treasuries are the most appealing use of funds, can we blame them for acting rationally?

Jon A. Alfred E. Michael J. Wile E. SWNID said...

Now that BHO has proposed tax cuts, such as they are, we think a lot of this multiple posting has been shown up.

While it is possible to raise tax rates in the middle of expansion and not squelch the expansion, we doubt that it's possible to end recession by raising taxes. Bush 41's tax increase presaged a shallow recession that led to his electoral defeat.

While it is possible to stimulate an end to recession with a tax cut, it isn't possible to suspend the business cycle indefinitely. So enuf of this silliness about a tax cut six years ago somehow producing the present distress.

JB, on who robs who, false choice, which we assume you recognize. Enuf of all this zero-sum-game unreasonableness. Grow the economy and it doesn't matter that my neighbor's income grows faster than mine.

Further, JB, conventionally we refer to "tax cuts" meaning reductions in rates, not favorable treatment for this or that situation. Bush did get some temporary corporate tax breaks of the latter kind passed, much like those now proposed by BHO. What we advocate, in the spirit of Friedman, is a reduction in the rate, letting businesses keep more of the profits that they earn from any productive business activity, not just those favored presently by the political classes. The fact remains that a 35% corporate tax rate has been in place for ages and is higher than anyone's save Japan's.

Tom, we find your partisanship unbecoming. While it is true that both parties are hypocrites, it is likewise is that Rs will reduce taxes more often than Ds. Not sure how you expected Rs to "repeal" Clinton's increases in light of his veto power, we note that Clinton's Republican successor did cut taxes. His father, who raised them, subsequently presided over a recession. But thanks for not disputing that the tax cuts of the 1980s and 2000s did indeed revive the economy.

Professor Carswell notes the precise symptom of lack of business confidence that we mourn: the unwillingness of businesses to invest their capital, fearful of what might happen next. Socking money away in wholesale quantities is no indicator of confidence.

Let's all keep our eyes on the ball.

JB in CA said...

But for now, if treasuries are the most appealing use of funds, can we blame them for acting rationally? —mcarswell

No we can't, but we can (1) question whether they really are "acting rationally", and (2) blame the government for acting irrationally.

Consider #1: Is it really rational for a corporation to engage in a policy that is likely to boost short-term profits at the expense of its own long-term interests?

Remember, the sale of treasury notes puts the country further into debt, which, of course, has an increased negative effect on the economy, unless the corporations that buy those notes use the interest they make off of that investment to expand productivity. But that's precisely what they're not doing in the scenario I outlined above. Instead, they're (largely) buying more treasury notes.

Of course, the problem is that no individual corporation can mend the long-term economic conditions on its own by redirecting its cash reserves elsewhere. That's why each corporation tends to engage in such long-term, self-defeating behavior. On the other hand, if the government quit enabling such counter-productive practices, those same corporations would be forced into using their "idle assets" (by the "[b]oard members, analysts, and markets" you mentioned) in more creative and productive ways for the economy at large. And that would be in everyone's best interests.

Now consider #2: Why anyone would think it's a good idea for the government to give another tax break to corporations that have been taking money they continue to save from the last tax break to buy treasury notes and further deplete tax revenues, rather than expanding their businesses and replacing the workforce they so quickly dispensed with, is beyond my comprehension. If the government is to enact another corporate tax break, it should limit it to small businesses and entrepreneurs, since, historically, they are the ones more likely to use the extra capital to expand their operations and hire new workers.

And we'll see the less-taxed global competition grow stronger. —mcarswell

Actually, "the less-taxed global competition" is not really less-taxed—at least, that is, if we are to believe the Government Accountability Office (GAO) and the World Bank. According to a 2008 report by the GAO, the effective domestic tax rate (i.e., the actual tax rate after deductions) on American multinational corporations is 25.2%, not 35%, as we keep hearing. (Source: http://www.gao.gov/products/GAO-08-950. I should note that the data for this study was from 2004, but it's unlikely much has changed since then. I couldn't find any comparable study on more recent data.) According to a study undertaken by the World Bank, as of 2009, the U.S. has a lower total tax rate (i.e., effective tax rate on all tax related expenses) than eleven out of the top fifteen largest economies, specifically those of Japan, China, Germany, France, Brazil, Canada, India, Russia, Australia, and Mexico. (Source: www.doingbusiness.org/documents/paying_taxes_2009.pdf.)

Could it be that "the highest (or second-highest) corporate tax rate in the world" is really just so much spin perpetrated by the thousands upon thousands of big-business lobbyists on behalf of those very businesses that stand to gain from a reduction in corporate tax rates?

JB in CA said...

So enuf of this silliness about a tax cut six years ago somehow producing the present distress.

Looks like I need to work a bit on my delivery. I thought it was kind of funny.

JB, on who robs who, false choice, which we assume you recognize.

Think of it as a false choice in response to a begging of the question.

Grow the economy and it doesn't matter that my neighbor's income grows faster than mine.

Of course, the question was how best to grow the economy, not how best to slow down my neighbor's race to the top.

Further, JB, conventionally we refer to "tax cuts" meaning reductions in rates, not favorable treatment for this or that situation.

I'll pass that on to these folks:

http://www.msnbc.msn.com/id/6307293/

http://www.taxpolicycenter.org/briefing-book/background/bush-tax-cuts/2004.cfm

Bush did get some temporary corporate tax breaks of the latter kind passed ... ."

"some" = $136 billion.
"temporary" = 10 years.

The fact remains that a 35% corporate tax rate has been in place for ages and is higher than anyone's save Japan's.

See the second to the last paragraph of my comment to mcarswell above. (One correction to it. I should have said "lower total tax rate ... than ten out of the top fifteen" instead of "lower total tax rate ... than eleven out of the top fifteen", since the U.S.'s TTR is the lowest of the eleven.)

mcarswell said...

JB - you raise good tax rate questions that I'm not qualified to answer. Also I wasn't able to read the doingbusiness.org article you provided (due to the truncated link), but I found this one which offers somewhat of a counterargument to the points you made. Of interest here is that Cato maintains the 35% rate is the "effective" rate even while it mentions (concedes?) that a temporary tax break in 2009 on capital purchases reduces the rate to 27%. Not sure if this was a one-time tax break or if it is longer, or whether the GAO factored in something similar that was very temporary either. I'm not even sure if the GAO leans politically, whether by choice or by constraints put on it by elected officials. Anyway:

http://online.wsj.com/article/SB10001424052748704635204575242241281902852.html

I want to go back to this point and comment:

"(2) in the last several decades, large corporations did little to jump-start the economy out of a recession, even when they were given tax relief. They preferred to play it lean and mean—hiring back only a small portion of the workforce they laid off—while the small businesses and, especially, the entrepreneurs were responsible for creating the majority of jobs."

Big business dramatically affects the success of small business, making the distinctions on job creation somewhat problematic. I worked for a franchise office equipment dealer (130 employees) that operated in 4 states, and our company grew in #s precisely because of our ability to land major contracts (150-300 leased machines) with big businesses.

I work now in the fixed asset/capital purchasing dept for a company that operates about 6,000 retail locations. A major part of our non-IT capital budget is spent at small companies that do construction and fabrication. The cost per square foot to construct a store (forget the occupancy expense to lease the space) is extraordinarily high, and it's not a one-time thing... we remodel frequently (75% of the cost of new construction), and we convert stores from one brand to another (full remodel). That's just the capital. Repairs and maintenance expense is massive for all the stores and its provided entirely by small businesses. So I think people too easily dismiss the effect of big business on the health of the economy and job creation. Big businesses do not default on leases and loans, and the combination of their purchasing power and ability to pay provides small businesses with enough confidence to hire the extra people to service and protect the relationship.

mcarswell said...

JB - you raise good tax rate questions that I'm not qualified to answer. Also I wasn't able to read the doingbusiness.org article you provided (due to the truncated link), but I found this one which offers somewhat of a counterargument to the points you made. Of interest here is that Cato maintains the 35% rate is the "effective" rate even while it mentions (concedes?) that a temporary tax break in 2009 on capital purchases reduces the rate to 27%. Not sure if this was a one-time tax break or if it is longer, or whether the GAO factored in something similar that was very temporary either. I'm not even sure if the GAO leans politically, whether by choice or by constraints put on it by elected officials. Anyway:

http://online.wsj.com/article/SB10001424052748704635204575242241281902852.html

I want to go back to this point and comment:

"(2) in the last several decades, large corporations did little to jump-start the economy out of a recession, even when they were given tax relief. They preferred to play it lean and mean—hiring back only a small portion of the workforce they laid off—while the small businesses and, especially, the entrepreneurs were responsible for creating the majority of jobs."

Big business dramatically affects the success of small business, making the distinctions on job creation somewhat problematic. I worked for a franchise office equipment dealer (130 employees) that operated in 4 states, and our company grew in #s precisely because of our ability to land major contracts (150-300 leased machines) with big businesses.

I work now in the fixed asset/capital purchasing dept for a company that operates about 6,000 retail locations. A major part of our non-IT capital budget is spent at small companies that do construction and fabrication. The cost per square foot to construct a store (forget the occupancy expense to lease the space) is extraordinarily high, and it's not a one-time thing... we remodel frequently (75% of the cost of new construction), and we convert stores from one brand to another (full remodel). That's just the capital. Repairs and maintenance expense is massive for all the stores and its provided entirely by small businesses. So I think people too easily dismiss the effect of big business on the health of the economy and job creation. Big businesses do not default on leases and loans, and the combination of their purchasing power and ability to pay provides small businesses with enough confidence to hire the extra people to service and protect the relationship.

mcarswell said...

Back to sitting on piles of cash... when I said it’s “rational,” I was making a comment on the tough decision companies face in this state of uncertainty: whether those cash reserves will be needed in the future for a long-term downturn or not. (The uncertainty being due to possible corporate tax hikes, consumer spending hurt by an energy tax, rising healthcare costs, a possible VAT ("all options are on the table"), a double dip, a European fiscal implosion, a Chinese bubble, an unforeseen surprise from Congress in its lame duck session, etc.) For the pessimists, it’s rational to stay liquid for now even if in hindsight it appears self-defeating. Joseph had 7 yrs worth of grain piled up because he had a vision, but of course no one today knows what the next 7 yrs will look like. And I would characterize Treasuries more as a way to park cash rather than a way to “boost” profits. I’m no expert on Treasuries, or anything really, but it’s my understanding that the yield is low because they are extremely low risk, but its better than nothing. Besides, if no one buys them our government eventually defaults, unless it cuts spending or raises taxes. I don’t understand your point about how big business is actively depleting tax revenues by buying Treasuries (or is this akin to the inverse of Obama's claims to "jobs saved" by doing or not doing certain things?), and if so, why big business is culpable for buying something the government has to sell to stay afloat.

mcarswell said...

JB - you raise good tax rate questions that I'm not qualified to answer. Also I wasn't able to read the doingbusiness.org article you provided (due to the truncated link), but I found this one which offers somewhat of a counterargument to the points you made. Of interest here is that Cato maintains the 35% rate is the "effective" rate even while it mentions (concedes?) that a temporary tax break in 2009 on capital purchases reduces the rate to 27%. Not sure if this was a one-time tax break or if it is longer, or whether the GAO factored in something similar that was very temporary either. I'm not even sure if the GAO leans politically, whether by choice or by constraints put on it by elected officials. Anyway:

http://online.wsj.com/article/SB10001424052748704635204575242241281902852.html

I want to go back to this point and comment:

"(2) in the last several decades, large corporations did little to jump-start the economy out of a recession, even when they were given tax relief. They preferred to play it lean and mean—hiring back only a small portion of the workforce they laid off—while the small businesses and, especially, the entrepreneurs were responsible for creating the majority of jobs."

Big business dramatically affects the success of small business, making the distinctions on job creation somewhat problematic. I worked for a franchise office equipment dealer (130 employees) that operated in 4 states, and our company grew in #s precisely because of our ability to land major contracts (150-300 leased machines) with big businesses.

I work now in the fixed asset/capital purchasing dept for a company that operates about 6,000 retail locations. A major part of our non-IT capital budget is spent at small companies that do construction and fabrication. The cost per square foot to construct a store (forget the occupancy expense to lease the space) is extraordinarily high, and it's not a one-time thing... we remodel frequently (75% of the cost of new construction), and we convert stores from one brand to another (full remodel). That's just the capital. Repairs and maintenance expense is massive for all the stores and its provided entirely by small businesses. So I think people too easily dismiss the effect of big business on the health of the economy and job creation. Big businesses do not default on leases and loans, and the combination of their purchasing power and ability to pay provides small businesses with enough confidence to hire the extra people to service and protect the relationship.

mcarswell said...

JB - you raise good tax rate questions that I'm not qualified to answer. Also I wasn't able to read the doingbusiness.org article you provided (due to the truncated link), but I found this one which offers somewhat of a counterargument to the points you made. Of interest here is that Cato maintains the 35% rate is the "effective" rate even while it mentions (concedes?) that a temporary tax break in 2009 on capital purchases reduces the rate to 27%. Not sure if this was a one-time tax break or if it is longer, or whether the GAO factored in something similar that was very temporary either. I'm not even sure if the GAO leans politically, whether by choice or by constraints put on it by elected officials. Anyway:

http://online.wsj.com/article/SB10001424052748704635204575242241281902852.html

mcarswell said...

I want to go back to this point and comment:

"(2) in the last several decades, large corporations did little to jump-start the economy out of a recession, even when they were given tax relief. They preferred to play it lean and mean—hiring back only a small portion of the workforce they laid off—while the small businesses and, especially, the entrepreneurs were responsible for creating the majority of jobs."

Big business dramatically affects the success of small business, making the distinctions on job creation somewhat problematic. I worked for a franchise office equipment dealer (130 employees) that operated in 4 states, and our company grew in #s precisely because of our ability to land major contracts (150-300 leased machines) with big businesses.

I work now in the fixed asset/capital purchasing dept for a company that operates about 6,000 retail locations. A major part of our non-IT capital budget is spent at small companies that do construction and fabrication. The cost per square foot to construct a store (forget the occupancy expense to lease the space) is extraordinarily high, and it's not a one-time thing... we remodel frequently (75% of the cost of new construction), and we convert stores from one brand to another (full remodel). That's just the capital. Repairs and maintenance expense is massive for all the stores and its provided entirely by small businesses. So I think people too easily dismiss the effect of big business on the health of the economy and job creation. Big businesses do not default on leases and loans, and the combination of their purchasing power and ability to pay provides small businesses with enough confidence to hire the extra people to service and protect the relationship.

Jon A. Alfred E. Michael J. Wile E. SWNID said...

JB, you name the problem precisely when you differentiate the effective corporate tax rate, which is as you say, in contrast to the nominal rate, which is as you say. Our Republic's corporate tax system works with a world-beating nominal rate adjusted with various tax breaks ("loopholes" when a politician needs a scapegoat) to reward politically favored economic behavior. The effect is to substitute politically favored economic activity for economically favored economic activity, to substitute the judgment of politicians for the judgment of businessmen.

Hence the proposed tax breaks for R&D now proposed, which sound so forward-looking but in fact have a tiny impact on economic activity and may tend to subsidize efforts that lack intrinsic merit.

We think that the time has come to boost business confidence (the confidence to invest those piles of cash presently held for the next disaster) by dropping the nominal rate, chucking some of the targeted incentives, and letting business do business instead of beg for favors.

Do you remember the 70s? We know you do. Back then, individual "tax shelters" were all the rage, thanks to sky-high nominal income tax rates. Yet tax receipts as a percentage of GDP averaged about what they do now. That happened as people naturally took steps to avoid taxes by doing what the government favored, whether it made economic sense otherwise or not.

In the end, why do we trust government to punish business into doing something smart? Why does the government know better what to do with people's money than do the people to whom the money belongs?

JB in CA said...

Big business dramatically affects the success of small business, making the distinctions on job creation somewhat problematic.

mcarswell, I think this is a really good point. (I would add that the same goes for small business vis-a-vis the government and, for that matter, big business vis-a-vis the government.) In a sense, all I'm really questioning is whether an across-the-board tax cut is the best way to strike an ideal balance among the three groups (given our current situation) so as to jump-start the economy. Maybe I'm wrong, and it is. But there are three factors that lead me to believe otherwise: (1) Big business looks to be much healthier right now than does small business (including entrepreneurial start-ups), (2) the further we go into debt, the longer it will take to climb back out, and (3) Small business has historically been the engine that jump-starts the economy out of recession. If we cut taxes (i.e., lower the tax rates) for small business and keep them the same for big business, we will at once help rectify the imbalance noted in 1, moderate the amount of additional debt noted in 2, and go with the odds noted in 3. On the other hand, it seems to me that an across-the-board tax cut would multiply our problems by exacerbating the imbalance noted in 1, increase our time to recovery noted in 2, and hedge our bets against the historical favorite noted in 3.

JB in CA said...

continued ...

I don’t understand your point about how big business is actively depleting tax revenues by buying Treasuries ...

The government cuts taxes. It then needs money to make up for the lost revenue. To get that money, it sells treasury notes to corporations (among others). The government then pays interest on the treasury notes to those corporations with its already-diminished tax revenue. (Well, theoretically, anyway. Sometimes it just prints new money, but that's another issue.) As a result, the government finds itself even further in debt than it was immediately after the tax cut.

In theory, of course, the corporations will take the money they saved from the tax cut and increase their productivity, which will generate more than enough new tax revenue to compensate for the revenue lost from the tax cut and the debt incurred by the government on interest paid on the treasury notes. And in many cases, that is exactly what happens.

My problem, however, is this: The non-financial Fortune 550 corporations are presently sitting on something in the neighborhood of $1.8 trillion. Given that they're not currently using that money to expand productivity, it seems to me unlikely that they would use any new money they would save from a tax cut to do so. (This, I think, is one of the substantive issues that SWNID and I disagree on.) Instead, I suspect that if they did anything with it, they'd buy more treasury bonds. And if they did that, for the reasons given above, we would fall deeper in debt.

... why big business is culpable for buying something the government has to sell to stay afloat.

I'm not saying big business is to blame; I'm saying our current fiscal policy is to blame. We're not structuring the tax system properly to avoid such nonsense. At the same time, I don't like much of what I hear on either side of the debate (as if there were only two sides!) as to how we should fix things.

JB in CA said...

continued ...

... but I found this [alternative article to the GAO report] which offers somewhat of a counterargument to the points you made.

Thanks for the link. I find this statement in it curious: "... the U.S. effective corporate rate is 35.0 percent, which is much higher than the 80-nation average of just 18.2 percent." You're right, it looks to be inconsistent with the study done by the GAO (which, by the way, is supposed to be a non-partisan group commissioned and overseen by Congress). And even though the GAO study is based on data from 2004, it's hard to imagine that the tax burden on corporations has increased that much since then. Maybe the two groups are using different sets of criteria to calculate the effective tax rate. If so, you might question which set is the most reliable: the one used by the (purportedly) non-partisan Congressional commission or the one used by the (overtly) libertarian Cato Institute. Note, for example, that the Cato study is restricted to the effective tax rate on new capital investments only, unlike the GAO study, which was on the overall effective tax rate on corporations. Since the Cato study apparently left long-term capital gains taxes out of the equation, that would skew their result upward, since capital gains taxes are currently at 15%. One additional bit of information consistent with this interpretation is that the World Bank study (I also mentioned above) concluded that the U.S. corporate effective tax rate in 2009 was 23.5%, 1.5% less than the GAO had it in 2004.

Speaking of the World Bank study, I would also point out that there are about 200 nations in the world, and the Cato study includes only 80 of them, whereas the World Bank study includes 180. I suppose, depending on which of the roughly 120 you leave out, you could come up with strikingly different results than the ones given by Cato that place the effective U.S. tax rate on new investments at almost twice the average. That would make it one of the worst of the 80 nations represented. In the World Bank report, on the other hand, the U.S. came in 92nd best out of 180 in its total tax rate (i.e., the effective tax rate plus all other tax-related expenses, such as the cost of labor to fill out the tax forms. They didn't give a ranking for the effective tax rate alone). In other words, it was almost exactly in the middle, not even close to one of the worst.

P.S. Sorry about the World Bank study link. I can't find another way to get to it. Did you try all of it or just the first part through the word "documents"? I have to use all of it to get anything, and then what I get is a PDF file that has to be opened.

Bryan D said...

I feel like the only kid stuck at the table while all the adults go on about money, rolling my eyes and waiting for desert ;^D

JB in CA said...

Do you remember the 70s? We know you do.

Oh, so now you're outing me. I guess misery loves company.

In the end, why do we trust government to punish business into doing something smart?

I don't think of this as an issue of trust (or of punishment) but one of necessity. There's no one else to turn to in certain situations. That was the point I was trying to make earlier when I said "the problem is that no individual corporation can mend the long-term economic conditions on its own by redirecting its cash reserves elsewhere. That's why each corporation tends to engage in such long-term, self-defeating behavior. On the other hand, if the government quit enabling such counter-productive practices, those same corporations would be forced into using their "idle assets" (by the "[b]oard members, analysts, and markets" you mentioned) in more creative and productive ways for the economy at large. And that would be in everyone's best interests."

That scenario outlines a kind of prisoner's dilemma. If the government doesn't step in to fix the mess, each of the parties (i.e., the "prisoners") involved will make decisions that appear to be in their own best interests but, instead, undercut their interests. The same is true in other cases, such as those associated with the anti-trust laws, where government intervention was necessary to keep business from destroying themselves by creating monopolies that inevitably destroy free enterprise.

I would argue, however, that government intervention is also required for other reasons, as well. One classic example is the creation of child labor laws. Left to their own devices, businesses worked 10 year old children 16 hours a day. It "made sense"; they were cheaper than adults. It wasn't until government stepped in that they saw the light. And given the nature of the market, it's understandable. The only incentive not to do so was moral. Unfortunately, in our contemporary, multinational free market, morality is at best an indirect incentive. Businesses are amoral. Even when they do things for "the right reason", the real reason is that they believe doing so will be to their economic advantage. (I'll pause to note that there are some very notable exceptions to this rule, but they're few and far between in our contemporary corporate culture.)

Now, of course, much can be said about whether our current situation can be handled better with the government exercising a "hands-off" tax policy or a "targeted" one. I obviously think the latter is needed. But even if I'm wrong, it's not because business always works best when left alone.

mcarswell said...

“In theory, of course, the corporations will take the money they saved from the tax cut and increase their productivity, which will generate more than enough new tax revenue to compensate for the revenue lost from the tax cut and the debt incurred by the government on interest paid on the treasury notes. And in many cases, that is exactly what happens.

My problem, however, is this: The non-financial Fortune 550 corporations are presently sitting on something in the neighborhood of $1.8 trillion. Given that they're not currently using that money to expand productivity, it seems to me unlikely that they would use any new money they would save from a tax cut to do so.”

Should these companies simply hire employees before the demand for their services even exists? And these points raise another matter which is probably best left for the economists to decide, which is: who really bears the burden of tax hikes (or the reverse, in tax cuts). In other words, are the + / - changes to corporate taxe rates swallowed solely by the corporations, or its employees (lower wages), or ultimately transferred to consumers in the form of higher prices? If it’s the latter two, then a corporate tax cut is as good a stimulus as anything else we’ve done. I think the short answer is it depends on the company and the product, but a case can be made that even the corporations sitting on cash will lower their prices when their competitors (without cash) start passing on the tax savings in its pricing.

What’s interesting too is how 1st world countries can hope to continue to compete with the India’s, China’s, and other emerging markets of the world if maintain our tax regime. Supposing our tax rates were all the same, our labor costs are multiples more, making us less competitive.

At some point in this thread we have to remember too that for all the free market chaos we might suffer from, are our overseers in Congress so much wiser and selfless in doing what’s best for the national economy, never giving priority to the political advantages to be gained by whatever is being accomplished in these 2,000 page bills? The true chaos is in the cycle of campaigning, spending, oversight, and flight from accountability when the fallout occurs.

http://en.wikipedia.org/wiki/Tax_incidence

mcarswell said...

“In theory, of course, the corporations will take the money they saved from the tax cut and increase their productivity, which will generate more than enough new tax revenue to compensate for the revenue lost from the tax cut and the debt incurred by the government on interest paid on the treasury notes. And in many cases, that is exactly what happens.

My problem, however, is this: The non-financial Fortune 550 corporations are presently sitting on something in the neighborhood of $1.8 trillion. Given that they're not currently using that money to expand productivity, it seems to me unlikely that they would use any new money they would save from a tax cut to do so.”

Should these companies simply hire employees before the demand for their services even exists? And these points raise another matter which is probably best left for the economists to decide, which is: who really bears the burden of tax hikes (or the reverse, in tax cuts). In other words, are the + / - changes to corporate taxe rates swallowed solely by the corporations, or its employees (lower wages), or ultimately transferred to consumers in the form of higher prices? If it’s the latter two, then a corporate tax cut is as good a stimulus as anything else we’ve done. I think the short answer is it depends on the company and the product, but a case can be made that even the corporations sitting on cash will lower their prices when their competitors (without cash) start passing on the tax savings in its pricing.

mcarswell said...

What’s interesting too is how 1st world countries can hope to continue to compete with the India’s, China’s, and other emerging markets of the world if maintain our tax regime. Supposing our tax rates were all the same, our labor costs are multiples more, making us less competitive.

At some point in this thread we have to remember too that for all the free market chaos we might suffer from, are our overseers in Congress so much wiser and selfless in doing what’s best for the national economy, never giving priority to the political advantages to be gained by whatever is being accomplished in these 2,000 page bills? The true chaos is in the cycle of campaigning, spending, oversight, and flight from accountability when the fallout occurs.

http://en.wikipedia.org/wiki/Tax_incidence

Jon A. Alfred E. Michael J. Wile E. SWNID said...

JB, on the matter of tax rates, we believe that the simple fact is that the federal government taxes corporate profits at 35%, though many profits can be sheltered from such taxes through various, generous write-offs. So our point is to urge Uncle Sugar to quit trying to figure out exactly how to fine-tune business activity through the tax code and let the people with the greatest stake in the outcome of their investment make decisions as best they can.

Yes, businesspeople are often short-sighted. Politicians, by contrast are always, always focused on the long term. That's why they never demagogue economic issues or threaten to tax the few rich for the benefit of the many not rich, hoping to gain a few votes come November. Further, they have much better information--nearly complete information thanks to their excellent staffpersons and superior education and experience--on all things economic. They can even define the precise line between undeserving "rich" and noble "middle class," between corrupt "big business" and virtuous "small business." Thus, we ought to trust governmental decisions on finance and investment. Politicians are philosopher-kings. Businesspeople are inferior, not just fallible, as their record shows.

And so we ought, like FDR, to liberate the billions in cash presently held by Big Business with the threat of an undistributed profits tax. Just as we noted in a recent post.

Or we could do the best that government can, which is to leave a little more money in the hands of the million points of light who have the biggest stake in its investment, collectively the most information on how to use it, and by their distribution the best chance of sorting out, over time, successes and failures, leading ultimately to the best shot at general prosperity. Just as in the Coolidge, Kennedy, Reagan, and Dubya administrations, when tax cuts fueled renewed prosperity.

Do we oversimplify?

PS: The Word Verification for this comment is "gores." Doubtless a sign of divine approval.

Tom said...

Differing views of opinion are unbecoming? Thank you for failing to disagree with me as well.

We should sing an Up With People Song or something...

JB in CA said...

mcarswell: Thanks for your thoughtful responses. I do disagree with some of what you say, but I think it's more a matter of degree than of substance. Maybe not, but here are my thoughts, anyway. (Oh, and I obviously should have said "Fortune 500 companies". I have no idea where 550 came from.)

Should these companies simply hire employees before the demand for their services even exists?

No. I was simply pointing out that they haven't done much hiring yet, and it's hard to see how the money saved from a tax cut would motivate them to do so anytime in the (near) future. If you lower their taxes, that by itself will not create any more demand for their services. To think that they would take the money they saved from a tax cut and use it to create new demand overlooks the fact that they haven't done so yet with all that extra money they have on hand. I'm not saying we should raise their taxes, only that we shouldn't lower them. Instead, lower the taxes of those companies that have, in the past, used the extra money in creative and productive ways.

... a case can be made that even the corporations sitting on cash will lower their prices when their competitors (without cash) start passing on the tax savings in its pricing.

I agree, and that would have the effect of encouraging demand. I would point out, however, that big business can already afford to create a little competition by lowering prices, with all that extra cash on hand, and yet they're not doing so. (Note that a recent preliminary report on the S&P 500 companies showed a 6% increase in income and a whopping 40% increase in profits, largely through layoffs. Why would they change what they're doing in a down economy when they're already making money hand over fist?) Giving small businesses and entrepreneurs some tax relief would do a better job of stimulating competition.

If it’s the latter two, then a corporate tax cut is as good a stimulus as anything else we’ve done.

Well, maybe so, but one thing we haven't done is what I'm suggesting: Keep tax rates the same for large corporations and lower them for small businesses.

And these points raise another matter which is probably best left for the economists to decide ...

Agreed. Unfortunately, the economists can't seem to agree with each other on such matters.

Supposing our tax rates were all the same, our labor costs are multiples more, making us less competitive.

Well, that assumes they are equally efficient, have equal access to raw materials, are equally creative, and provide equal quality products and services—and that if they were equal in all those respects, they'd continue to be content with lower wages.


At some point in this thread we have to remember too that for all the free market chaos we might suffer from, are our overseers in Congress so much wiser and selfless in doing what’s best for the national economy, never giving priority to the political advantages to be gained by whatever is being accomplished in these 2,000 page bills? The true chaos is in the cycle of campaigning, spending, oversight, and flight from accountability when the fallout occurs.

I know. It's depressing to think about. And unless we do something to fix it, it's going to get even worse. I would note, however, that much of the mess is the result of competing interests, and many of those competing interests are fueled directly by the legions of lobbyists sent in from the business sector.

JB in CA said...

Bryan D: We keep going on about money because we have so little of it—all of us, that is, except for Ebenezer SWNID.

JB in CA said...

SWNID: Exactly! Except you forgot to mention that big business has cooties and only Obamacare can give us cootie shots.

Jon A. Alfred E. Michael J. Wile E. SWNID said...

OK, if we're after 30+ comments getting the issue into sharper relief, then let me say categorically why we are not in favor of targeted tax cuts for small business to reward economically favored behavior versus a general cut in the corporate tax rate to let businesses keep their dough.

First, we affirm that the stimulative effect is indirect rather than direct. But the point of this exercise would not be merely to let businesses have more money to invest, save, spend on wages, or distribute as dividends (all of which has an indirect stimulative effect) but to restore confidence that the government that has for two years threatened to take more of businesses' profits will in fact take less.

We prefer this to rewarding small businesses for specific behaviors because all such moves tend to distort economic decision-making (we act to get a tax break, not on the intrinsic merits of the action) and provide non-stimulative expenditures for many decisions that would've been made anyway.

And we think that the history supports our jaundiced view.

Word verification: cringing

JB in CA said...

We prefer this to rewarding small businesses for specific behaviors because all such moves tend to distort economic decision-making (we act to get a tax break, not on the intrinsic merits of the action) and provide non-stimulative expenditures for many decisions that would've been made anyway.

So are you against all targeted tax breaks to reward economically favored behavior or just those that favor small business over big business? For instance, would you be in favor of eliminating (across-the-board) all tax write-offs for the cost of capital investments, insurance, labor, interest on loans, advertising, and retirement plans (just to name a few)?

Jon A. Alfred E. Michael J. Wile E. SWNID said...

JB, we think you're confusing some accounting issues. Much--if not all--of what you name are ordinary business expenses. Our objection is to the tax code's favoring of certain kinds of expenses with more beneficial tax treatment than others--e.g. offering credits for business activities favored by the government (e.g., Obama's proposal to offer tax incentives for R&D). Both business and individual tax codes are replete with such favors. Doubtless the most famous and widely favored is in the individual tax code: the tax break for mortgage interest.

Of course, you do allude to the intractable problem of dividing the large from the small. And for what purpose? We've seen credible critiques of the notion that "small businesses" are really the net creators of new jobs (they create a lot, and they lose a lot too, as many disappear).

Reducing the nominal corporate tax rate and paring down the special treatment of various business behaviors would do much to restore business decision-making to intrinsic merits.

The same goes for the individual tax system, but it's the business tax rate that offers promise, as a reduction would reduce the sense that business is under threat from government and so do something to provide confidence for investment. Not everything, but as much as government can presently.

JB in CA said...

Much--if not all--of what you name are ordinary business expenses ...

Actually, I think they're more than just ordinary business expenses. The government wants something in exchange for the tax write-offs it allows. It wants businesses to increase their productivity through capital investments, protect their assets with insurance, employ workers that might otherwise be on the dole, take out loans to generate new income, advertise to compete more efficiently in the marketplace, and contribute to the well being of their employees after retirement.

Such activities, from the perspective of the government, are desirable. That their costs have become normal operating expenses for businesses should not cloud the fact that the government is encouraging (and reinforcing) them through a system of incentives. The write-offs would make no sense otherwise. After all, why would the government give businesses tax incentives to do the sorts of things they'd do anyway without those incentives? It doesn't give individual citizens tax incentives to do the sorts of things they'd do anyway—such things as eating food, wearing clothes, and driving cars.

Doubtless the most famous and widely favored is in the individual tax code: the tax break for mortgage interest.

And it seems to me that there are very good republican (small "r") reasons for offering such an incentive. The mortgage interest deduction encourages citizens to take a greater stake in their respective communities—the theory being that homeowners are much more likely to be civic-minded than renters.

Reducing the nominal corporate tax rate and paring down the special treatment of various business behaviors would do much to restore business decision-making to intrinsic merits.

Intrinsic to what? Well, the obvious answer is "intrinsic to the bottom line". But there are also decisions to be made whose merits are intrinsic to the welfare of society as a whole. The government, of course, is concerned with that. Businesses aren't—or, rather, they are, but only insofar as such decisions affect the bottom line. That, of course, is not to say that the way the government is currently making such decisions really is in the best interests of society as a whole. Clearly, I think that many of those decisions are counterproductive to that end. What I want to insist on, however, is that the problem cannot be accurately represented simply as one of government intervention, as if it's never appropriate for the government to intervene in business practice for the sake of something other than the bottom line.

Jon A. Alfred E. Michael J. Wile E. SWNID said...

OK, maybe some clarity here. Terminological imprecision aside (e.g., labor patently is a simple business expense, unless the tax code provides some extra incentive, like a tax credit, for employing people, the kind of silliness presently under discussion in some quarters, silly because this very thing proved so counter-productive in the Carter Administration), you understand our point well if you take it that we advocate less tax-code incentivizing than is happening presently. We think that deeming the government as concerned for the common good is as naive as it is cynical to assert that businesses are concerned only with profit. We do not object in principle, however, to the government rewarding civic-minded behaviors. We are skeptical of such efforts, not opposed to them in principle--tory, not libertarian.

We do object strenuously to the government doing as much of that as it does presently while using demagogic, class-warfare rhetoric to demonize business and the rich. That's pure politics, the very kind of thing that makes us call for a redressing of the balance, as opposed to yet another "targeted tax break" to "jump-start the economy."

We chose the mortgage interest deduction precisely because so many are now asking whether it is truly justified on the Jeffersonian basis for which it has so long been rhetorically justified. Canada does fine without it. Home ownership can be a detriment to the workforce's mobility. A macroeconomic argument can be made that mortgages cost more because of the deduction and because of the subsidizing of mortgages through Fannie and Freddie.

But we could choose other, familiar tax-code incentives. E.g. Cash for Clunkers, now firmly demonstrated to have at once merely moved forward some car buying while at the same time reducing the inventory of used cars, thereby driving up the cost of used cars. E.g. tax credits for first-time home buyers, which had the same move-forward effect that led to a second dip in the housing market this summer. E.g. tax credits for home weatherization (an incentive the SWNID household has gladly taken up), which is having a similar move-forward effect on the home-improvement industry that will be felt next year. None of this has provided any real macroeconomic stimulus.

But permanent tax cuts (not, mind you, temporary rebates like Bush's or Obama's) have a pretty decent record of stimulus. Not perfect but decent. And what is patently high by global standards is the US business tax rate. So the obvious move to try is . . .

JB in CA said...

labor patently is a simple business expense, un- less the tax code provides some extra incentive, like a tax credit, for employing people ...

But that's just my point. The tax code already provides some extra incentive to hire workers. Right now, businesses get a tax write-off for employee salaries. If that deduction were taken away, businesses would start laying off employees to make up for the lost revenue. So the deduction for employee salaries acts as an incentive for businesses to employ more workers than they would have employed otherwise. For that reason, labor expenses are more than just simple (i.e., ordinary) business expenses. They are expenses that businesses would not have incurred to hire the additional employees had they not been given a tax break to do so.

We think that deeming the government as concerned for the common good is as naive as it is cynical to assert that businesses are concerned only with profit.

I think this is a fair criticism. What I was trying to do was characterize the basic purpose of each institution, not describe the actual practice of each. You're right to point out that the actual practice of governing often loses sight of the ultimate goal and that businesses are not concerned only with profit (which isn't exactly what I said, but I'll not quibble). What I should have said is that the primary purpose of government (in a democratic society) is to promote the overall welfare of the community, whereas the primary purpose of business (in a democratic society) is to provide goods and services at reasonable prices. By saying earlier that business is primarily concerned with profit, I inadvertently described its purpose in practical terms, which made business sound more devious than government, which I described in theoretical terms. To be honest, I believe they're equally devious in practice. But I also believe that, theoretically, each is socially beneficial. The point I was trying to make, however, is that government, not business, is the institution charged with looking out for the overall welfare of the community. Businesses, on the other hand, are focused on more immediate concerns.

We do not object in principle, however, to the government rewarding civic-minded behaviors. We are skeptical of such efforts, not opposed to them in principle--tory, not libertarian.

Agreed, though I would be less inclined to associate skepticism so closely with minimalism.

We do object strenuously to the government doing as much of that as it does presently while using demagogic, class-warfare rhetoric to demonize business and the rich.

Agreed absolutely.

A macroeconomic argument can be made that mortgages cost more because of the deduction and because of the subsidizing of mortgages through Fannie and Freddie.

Agreed on mortgage deductions, but I still think they're a good thing (for the reasons given). I don't know enough about Freddie and Fannie to have an opinion about their affect on mortgage costs.

But we could choose other, familiar tax-code incentives. E.g. Cash for Clunkers ... tax credits for first-time home buyers ... tax credits for home weatherization ... . None of this has provided any real macroeconomic stimulus.

Agreed.

But permanent tax cuts (not, mind you, temporary rebates like Bush's or Obama's) have a pretty decent record of stimulus. Not perfect but decent.

Agreed, except for the assumption that tax cuts could be made permanent. (Congress can always change its mind.)

And what is patently high by global standards is the US business tax rate. So the obvious move to try is . . .

... cutting taxes on small businesses and entrepreneurs.