Sunday, October 31, 2010

Final Word on So-Called Stimulus?

What does it take to summarize everything SWNID has been arguing about economics since the ascent of BHO to executive power?

It takes a paper by a Harvard University economist.

Jeffrey Miron, in fully documented PDF format, argues with plain speech, common sense and empirical data that the best stimulus is entirely different from what BHO enacted. The Obama stimulus functions poorly because it empowers politicians to make economic decisions, inevitably for political rather than economic reasons, and acts far too slowly to address the lack of demand during a recession. Further, Obama's so-called green-energy initiatives are impotent because they again operate on a political rather than an economic basis and because they simply re-employ employed workers in government-funded employment. Then there's the way that stimulus spending tends to become permanent, tends to reward cronies, and all that.

What does Miron suggest as superior? Well, get ready for it.

He wants corporate taxes not just reduced but eliminated. Corporate taxes retard investment and employment, thereby retarding productivity.

He wants entitlement taxes disconnected from entitlement spending. That is, no more payroll taxes, which retard employment and perpetuate that myth that we've paid for the benefits of these programs through our lifetimes.

He wants "green" programs replaced with energy taxes, offset with lower taxes in other areas to offset their drag on the overall economy.

Note well that the Obamanoids can't ever do this stuff. They live by the myth that corporations are evil, that government is the Great Patron and Protector of the Working Person. They do favors in exchange for votes from people who don't realize that the favors are no favor.

Rs aren't going to do enough of this stuff, either. But that hardly excuses a vote for the status quo, or a wasted vote for a third-party that supposedly is pure, or refusal to vote because it make no difference at all.


JB in CA said...

Actually, I think we should eliminate all taxes and have the government hold bake sales to raise revenue.

Okay, I don't really think that. But what's with eliminating both corporate and payroll taxes? Right now, those two together account for 48% of the federal government's revenue. (Corporate tax = 12%; payroll tax = 36%.) Individual income tax, which accounts for 45% of federal revenue, would have to double to make-up for the loss, even assuming new revenue from energy taxes.

No doubt Miron thinks that corporations would raise wages to compensate for the massive increases in the individual income tax their employees would have to pay, and I suppose that's probably true. But I also suppose those same corporations would keep a significant portion of what they save for themselves (as profits) and their shareholders (as dividends), while taking it upon themselves to "stimulate the economy" by distributing a lion's share of the remainder to those high-end wage earners that invest their money to create new jobs, leaving lower-income wage earners—especially those in middle management—with less than what they need to offset their share of the increase in the individual income tax. (And by the way, if the wealthy are investing their increase in disposable income to create new jobs, and the middle-class are spending a larger portion of theirs on increased taxes, who's going to buy all those goods produced by the people hired to fill the new jobs? The poor? The Chinese? The government?)

None of that is to say we should therefore support Obama's policies. Obviously, they haven't worked-out (yet?!) as advertised (though there is some evidence to suggest that the "stimulus package", despite its many warts, kept the bottom from completely falling out of the economy). The problem is coming up with a viable alternative. And I don't think Miron has found it, though I admit he does have some interesting suggestions.

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

It's quite clear what he's proposing, in our view. We'll take it in reverse order.

(1) eliminate payroll taxes, substituting either energy taxes or personal income taxes as a substitute. The former have the advantage of driving energy efficiency more efficiently than "green energy" programs, ultimately boosting the economy; the latter have the advantage of being more transparent and less regressive.

(2) eliminate corporate taxes, substituting the resultant higher personal income taxes, which yield enhanced revenue with higher economic growth. If profits are reinvested, the result is higher economic output, which is good for all. If profits are distributed as dividends, they're taxed as income. If profits are distributed as higher wages and salaries for some or all, then they're taxed as individual income. If individuals are invested in corporate ownership through retirement plans, they benefit directly. If they aren't, they benefit indirectly through higher productivity and employment.

One can apply various formulae to the transition, using various economic models, all debatable, to preserve adequate government revenue as determined by a straightforward political process. It's gratuitous to assume that the middle gets soaked in such a scheme.

We think your final paragraph betrays a misunderstanding of how corporations actually work. Profits must be either reinvested, kept as cash reserves, or distributed as dividends. If retained in the first two instances, they are either invested directly for growth or loaned through the finance system for others to invest and grow. In the latter case, they become taxable income with the rest also invested or spent on consumption that also fuels the economy.

So, then, the real question is whether we want the bulk of the investment decisions being made for economic or political reasons. Note that theme in Miron as well.

In essence, we challenge your characterization that corporations can "keep a significant portion of what they save for themselves." The money doesn't go into a corporate mattress. And while corporations aren't especially wise or moral, they face competitive pressures that drive decision-making about salaries and investment that in the main rule out the kind of rampant profligacy that your broad scenario suggests. Corporations that act as you describe go out of business.