Monday, December 06, 2010

Reason for Previous Post?

By coincidence, SWNID heard a live radio broadcast of BHO's brief announcement that he and the leaders of the GOP Congressional delegation had reached an agreement on a "framework" for a compromise sparing Our Republic a tax increase in 2010.

Listening to the President announce this compromise, really the first of his presidency, with the opposition party now empowered by a midterm landslide, we wondered whether anyone will ever apply the adjectives "statesmanlike," "generous-spirited," "noble," "conciliatory," or "gracious" to any of his political rhetoric. Essentially, the speech amounted to a tirade in which he petulantly complained that he was only allowing a tax break for the wealthy because the Republicans, who are utterly wrong on the issue, would hold America hostage if he didn't.

Since the tax deal will be for two years, it will be the centerpiece of the 2012 campaign. The GOP and BHO now are both wagering that they can win an election on their respective tax policies.

That, finally, explains what makes Obama Obama. He really, really believes that he's right about needing to redistribute wealth through the tax system and government programs. It's what's best for poor saps like SWNID, mired in the middle class.

Tonight we know why Dubya is now officially more popular than Obama. And unless something big and different happens, we'll know why Republicans will control all elected branches of the federal government in 2013.


Tom_KY said...

I like to pay less in taxes as much as the next guy, but according to the USA Today (and several other pubs) earlier this year, federal, state and local taxes—including income, property, sales and other taxes—consumed 9.2% of all personal income in 2009, the lowest rate since 1950 [taken from the Bureau of Economic Analysis]. That rate is far below the historic average of 12% for the last half-century. The overall tax burden hit bottom in December 2009 at 8.8% of income before rising slightly in the first three months of 2010.

So, I ain't paying that much anyway…if this increase applied to me - and it doesn't - the effect is $2,400. If I could handle that increase, then so could the people at the higher rates, RELATIVE to their pay. Now, do they need the money to offset their excessive personal spending? That's a different issue.

President Obama is not proposing any new taxes, he is letting the current tax POLICY (not "cuts") naturally expire, as the Republicans composed it. The notion that raising the rate from 35% to 39.6% would plunge the country into the dark ages is literally laughable when you read this response to former CEA Gregory Mankiw's assertion that his incentive to would decrease significantly:

Obama is less popular than Bush, because, among other things, his Profiles in Spinelessness speech yesterday. As Joe Scarborough said on his MSNBC show, "…what's he going to do after this, re-invade Iraq?"

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

Tom, we know that you know that tax receipts as a percentage of GDP plunge in recessions. And since GDP plunges as well, the percentage of personal income take plunges.

Inasmuch as recent changes in the personal income tax structure have taken a bigger chunk of folk off the personal income tax rolls entirely, and inasmuch as the prolonged recession as reduced personal incomes, it's no real surprise that you can cite the statistic you name with a straight face. Applying it as you do is another matter.

Arguably the marcroeconomic problem is that productive segments of the economy bear such a disproportionate tax burden that taxes work as a disincentive to productivity. We think this is especially true of the corporate tax rate, but let's apply it to individuals. We know for a fact that the SWNID household pays more than 9.2% of personal income in taxes. So we are paying more than our share from a profoundly middle class income. That means someone is paying a lot less. It's not folks better off than the SWNIDs: they pay higher rates still. It's gotta be the nearly half of citizens who pay no federal income taxes at all.

Still, we question the precision of this statistic, whatever you cite as its source. To wit: payroll tax is 7.15%, and most states in the Union tax sales at around 5% or more. Assuming that someone is paying some other taxes and that people spend at least half their personal income on buying stuff, it look to us as if 9.2% is excluding some serious forms of taxation. Further, it is well documented that federal expenditures now amount to about a quarter of GDP. The deficit is large, larger as a percentage of GDP than it was at any time since WWII, but not that large. Have you left out the digit in the tens place?

In the larger frame, your assertion assumes that Uncle Sugar spends our money better than we do. We stipulate that much personal spending is idiotic. We affirm with no pleasure whatsoever that the gummit does worse. Source: Adam Smith and universal experience.

Still, if you can spare the money and believe that DC spends it better than you do personally, you can send it as a gift. The US Treasury website has the address, and my guess is that you'll get a thank-you note from Geithner and Obama both.

Finally, a history lesson. Dubya agreed to a 10-year limit on his tax cuts because he couldn't get cloture without it. If there were no donks, there would have been no statutory end to these tax cuts.

Keep believing that BHO is unpopular because he doesn't appeal to progs anymore. That's also why conservative Republicans will be running into each other on Pennsylvania Avenue come 2 January 2011. It all makes perfect sense.

Waiter, reality check, please!

Jim Shoes said...

I'll stipulate that taxes are historically low, though I doubt it. But the economy is historically bad. How will raising taxes improve it?

I'll stipulate that rich people can afford to pay more taxes. But why should they, and what good does it do me or other middle-class people or poor people to tax the rich?

It is fun, though, to watch the left cannibalize itself for being insufficiently consistent in the application of its misguided ideology.

JB in CA said...

Jim Shoes: I think the idea behind taxing the rich at this time is threefold: (1) the rich are more likely during uncertain economic times to buy T-bills with their tax savings (which would add further to the federal deficit) than they are to invest that money in anything that would help stimulate the economy, (2) taxing the rich would help offset the extended unemployment payouts to those that have recently lost their jobs, and (3) extending unemployment payouts to the recently unemployed would help stimulate the economy, because the unemployed are more likely to spend that extra money on things other than T-bills (like food and clothing).

Jim Shoes said...

JB, all true if Keynes is right this time and weak aggregate demand is the problem. All wrong if Hayek is right this time and malinvestment is the problem. There's enough dissent from Keynes these days to argue for something other than endlessly trying to stimulate spending to end the recession. I believe SWNID has suggested "over-stimulated" as an apt metaphor.

And if Shlaes is right that the Great Depression was prolonged and double-dipped largely because of cut-the-rich-down-to-size policies that slammed the business climate into the deep freeze, then taxing the rich to solve the recession is eerily like going to war over the assassination of an Austrian archduke.

Dr. Love said...

Jim—Hayek is demonstrably right at this point, is he not?

Read all statements along the lines of "Capitalism has failed/is dead" as "Keynesianism has failed/is dead."

JB in CA said...

Jim Shoes: I guess I don't understand your point. It seems to me that the only way out of a recession is to stimulate spending. If people don't buy things, all the saving and investing and budget-cutting in the world isn't going to create jobs. In particular, if we cut taxes for the wealthy, they aren't going to invest in anything, unless people buy it. And people aren't going to buy it, if they don't have jobs—unless, of course, they have other income to draw on, such as unemployment benefits. Malinvestment may have gotten us into this mess, but it's hard to see how good investment alone could get us out of it—without major collateral damage, that is.

And just a side note: If cutting the rich down to size helps the people in need, I'm all for it. The rich can handle themselves. If not, I'm against it. But Shlaes' referring to any policy as a "cut-the-rich-down-to-size policy" isn't likely to dissuade me from it any more than Nietzsche's referring to Judeo-Christian morality as a "slave morality of resentment against one's master" is likely to dissuade me from it. Nor should it dissuade you. Sticks and stones and all that, you know.

Christine said...

A couple points:

Payroll tax is not 7.5%. It is 15%. The fact that an employee never sees the "employer contribution" does not mean that the employee did not earn that money. That is to say the employee's true earnings are what it costs to employ him.

It irks me that people refuse to see this. Of course, since my husband in self employed, I more than see it. He pays about 30% of everything he makes in state and federal income taxes. (this does not count excise and property tax)

Regarding investing vs. consumer spending. The way out of a recession is not to give a token sum of money to people who already pay little or no tax (unless they work and pay the burdensome payroll tax of course). The way out of a recession is to produce more.

The rich did not get that way by investing in T-bills. They got that way investing in something that actually contributes to the GDP. (most of them anyway)

And consumer spending on products made in China and Bangladesh, while great for the workers there, will do nothing to help the US economy.

JB in CA said...

Regarding investing vs. consumer spending. The way out of a recession is not to give a token sum of money to people who already pay little or no tax (unless they work and pay the burdensome payroll tax of course).

Do you really believe that unemployment benefits represent a "token" sum of money? I imagine those that are unemployed don't. And yes, the unemployed aren't working, but most of them desperately want to work. And if, until they find work, they're fortunate enough to get unemployment benefits, those benefits are taxed at the same rate as taxable income is.

The way out of a recession is to produce more.

Who's going to buy all that stuff that's produced if no one is spending? The unemployed? Well, maybe, if they're given unemployment benefits.

The rich did not get that way by investing in T-bills.

Actually, that's exactly how many are getting rich(er) right now. They either invest in or work at the large investment banks. Those banks take out loans from the Fed at near 0% interest (at taxpayer expense) and then, rather than loaning that money out to others in the private sector to help stimulate productive investing, they turn around and "invest" it in T-bills at a 3% return (also at taxpayer expense). They then take the profits from that (near) 3% gain and distribute it to their stockholders and employees. GDP goes up; stocks go up; bonuses go up; the federal debt goes up. Talk about a redistribution of wealth!

christine said...


I wasn't speaking simply of unemployment, which is pretty paltry, but also the idea that the middle class should not get a tax increase, but the rich (who already pay most of the taxes in the US) should pay more.

I know a little about unemployment payments since we were receiving them for a few months. No one who is on unemployment is going to buy anything beyond the bare necessities, because it doesn't even pay for that. So the unemployed won't (or shouldn't) be doing all this consumer spending everyone seems to want.

You can talk about banking and investment reform and you might have a point, but soaking the rich will not make a difference in that regard.

However, chances are the rich person will "afford" that tax increase by doing without something like dinner out every week or by putting off buying that new car and that in turn will put someone else in the unemployment line.

JB in CA said...


I think you're right that wealthy people would spend less on goods and services if they got taxed more (though it's hard to imagine that Bill, Warren, and Oprah would have to cut back on much). At the same time, it's hard to imagine that the top 2% of the work force (> $200k for individuals; > $250k for households) could spend enough to keep the whole economy going, especially when there's a huge unemployment problem. What we need is a great deal of disposable income in the hands of a large number of people, without a corresponding increase in the national debt. One way to accomplish that is to raise taxes on the wealthy, while extending benefits to the unemployed and lowering taxes on the middle classes. (I forgot to mention this last point earlier. You were right to note that extending unemployment benefits alone would not stimulate enough spending.)

The proposal to raise taxes on the wealthy so as to offset an extension in unemployment benefits and a middle class tax cut, as far as I can tell, is not at all intent on "soaking the rich" (despite the leftist rhetoric). Instead, its goal is to increase taxes only on income that exceeds the thresholds I mentioned in the last paragraph. So an individual that makes $201k per year would be taxed higher only on the last $1k, not on the first $200k. It's true, of course, that taxing income in excess of that threshold would have a negative impact on the amount of money that wealthy individuals could invest, but, again, the wealthy aren't going to invest until they're certain consumer demand is high enough to justify the risk. Somehow, we've got to get more people to spend more money on more goods and services. This seems to me to be a reasonable first step.

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

JB, your inability to see anything except increased aggregate demand as a way out of a recession shows how utterly your thinking has been shaped by Keynes. Hayek applies presently because the previous recession was (arguably? well barely so--more like demonstrably) caused by (government-fueled) malinvestment in housing and real estate. The recovery is slow in large measure because it takes time to shift economic resources to sectors of the economy that need investment and production. And that shift is arguably prolonged when the government aims stimulus at the very segment that needs to contract. For a primer, refer to the hip-hop video contrasting the two approaches to macroeconomics that we posted awhile back, noting the Hayek character's comparison of stimulus to "hair of the dog."

Macroeconomic considerations about unemployment insurance need to be thought of separately from the impact on individuals, though in the end political policy must be made from both considerations. It's a self-evident cliche to insist that the unemployed desperately want to work. It's also a self-evident cliche that if you pay for something you'll get more of it. The latter is the macroeconomic consideration. How many unemployed carpenters would have moved or taken other kinds of jobs by now if they weren't being subsidized to wait it out? What's the quickest way to get the economy healthy again?

So, JB, you've got a point if taxing the rich would help the poor. But that's exactly the problem: it seldom seems to. Here's the question simplified: who invests wealth more productively in the main, the people who earn it and own it or the politicians who tax and spend it? Answer: obvious. Sources: Adam Smith and universal human experience.

"Trickle-down" economics indeed. Let us contrast the "trickle-up" poverty of the politics of envy.

JB in CA said...

Let me ask a hypothetical question. Suppose we were to cut taxes for the wealthy all the way down to 0%. Would that eliminate all future recessions? If not, then what would we do to try to get ourselves out of the next recession? Raise taxes on the middle and lower classes to subsidize the wealthy so they could create jobs?

Here's another hypothetical. Suppose we cut taxes for the wealthy, and they invest those savings in "sectors of the economy that need investment and production". And suppose their investments do not stimulate "increased aggregate demand". Does the economy thereby improve? I'd be willing to bet that even Hayek would answer No to that one. The question is not whether increased spending is needed to get out of a recession but, rather, how to best stimulate increased spending. You think there's only one way: cut taxes for the wealthy. I think otherwise.

At some point, cutting taxes for the wealthy would have a diminishing marginal utility. The fact that right now the wealthy are, for the most part, investing their money in corporations that are increasing profits by downsizing their labor force rather than investing in those that are increasing profits by creating new jobs is reason to believe we may have already reached that point.

Another, and more sobering, reason for the same conclusion is related to the disappointing results of the most recent series of tax cuts for the wealthy (2001–03). After those cuts began, (1) jobs were created at a slower rate than they had been during any other post-WWII period of expansion [ Figure 1], and (2) median household income never recovered to its pre-2001 (i.e., 2000) level [, Table A-1, All Races].

Now, I realize that none of the evidence backing up either 1 or 2 has the authority of a hip-hop video, but its non-partisan, empirical nature should, I believe, carry at least some weight. And that weight, from my perspective, tilts against cutting taxes for the wealthy and in favor of looking elsewhere for a solution. Surely you would agree. (I know, I know. You don't agreed, and I should stop calling you Shirley.)

JB in CA said...

One more thing. Remember that one of the requirements of unemployment compensation is that you don't get it if you aren't looking for work. Also, as Christine pointed out above, unemployment benefits pay only a portion of one's salary. There are, therefore, at least a couple of incentives for the unemployed carpenters you mentioned to find new employment.

But even so, some disincentive still remains. After all, what you said is true: "if you pay for something you'll get more of it". (Case in point: tax cuts/breaks for the wealthy.) Does that mean we should provide extra incentive to find employment for those that are unemployed by denying them an extension to their benefits? That may at first sound reasonable until you realize that most of the long-term unemployed are older. Is it realistic for them to try to start a new career? And if they did, how willing do you think employers would be to hire them? Indeed, how many new-career 55+ year-olds has your employer hired lately? Where I work, the answer—as far as I can tell—is 0. So I think the answer to your question "How many unemployed carpenters would have moved or taken other kinds of jobs by now if they weren't being subsidized to wait it out?" is "not too many" if they, like most of the long-term unemployed, are older.

It would appear, then, that the best chance the long-term unemployed (as a group) have at regaining employment is to continue looking for it in their respective fields of expertise. Extending their unemployment benefits would give them some much-needed time to do just that—not to mention some much-needed money to buy those goods and services that help make the economy go 'round.

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


1. All taxes have a chilling effect on economic activity. Raising taxes on the rich is just more politically palatable in a democracy. And since we're not talking about eliminating taxes, just not raising them or maybe lower them a little, your hypothetical is a red herring. Mr. Laffer, may we see that curve again?

2. We recall you once insisting that industries these days don't try to meet existing demand but to create it. Indeed! So-called supply-side economics insists that one can increase economic growth through more efficient production. Make "better" stuff for less and you stimulate demand.

3. We don't think cutting taxes for the wealthy is the only way out. We think it's stupid to discuss raising taxes for anyone in a recession, and we think that cutting any tax is better stimulus than taxing and spending, and we discuss the wealthy's taxes often because they're the only taxes anyone wants to raise.

4. Corporations are saving cash because of economic uncertainty, which is compounded by uncertainty about tax policy. The government has control over one aspect of that: tax policy. So settle tax policy without raising taxes and you've got more likelihood of increased investment. QED.

5. Mind your post hocs. Taxes were cut, but government spending was raised, wars were fought, etc. If taxes on the wealthy were the only economic variable, hearkening back to the halcyon days of post-WWII expansion could be discussed as simply as you do.

6. Yes, the unemployed have to "look for work" while getting compensation. That's a reason why employers get so many unqualified applicants these days: folks have to meet their quotas. And we argue not for an end to unemployment compensation, just a recognition that unemployment benefits doubtless slow some people's re-entry into the workforce, with the marcroeconomic effect of slowing recovery. It simply argues against glib equations of unemployment compensation with economic stimulus, entirely Keneyesian, missing the supply-side observation.

7. Finally, as a general rejoinder: cuts in marginal income tax rates, wherever applied have historically led to increases in economic activity and in government revenues. Sometimes less, sometimes more, but the reasons for such and the equations to explain such are obvious and well established. They only thing we have to fear is the loss of envy as a political incentive.