Taxes and Business Creation
by cactus
Taxes and Business Creation
When you cut taxes, it leads to the creation of new businesses. By cutting taxes, people keep more of their hard earned money which gives them the resources to start new businesses. The cut in taxes also encourages people to take more risk knowing the fruit of their efforts is not going to be seized by the government and used on homeless orphans or other loafers. And its not all about folks getting off the couch and entering the business world – a low tax regime encourages those who are already in business to expand. Conversely, as we have been reminded ad nauseum as of late, rising taxes provide a disincentive to the producing class, whereupon their full-time occupation becomes going Galt (with occasional breaks to join together in large groups for some good old-fashioned collective Tea Bagging).
Of particular importance are cuts in marginal tax rates; potential entrepreneurs make their decisions at the margin.
This is all pretty basic stuff – you’ll find it in textbooks. But does the real world match up with the pretty theory? We’ll never know unless we find some data. So I got me some primo data. And as they say about data, flaunt it if you got it.
Up first is this cute sample from the IRS, which gives us the number of corporations, partnerships, and non-farm proprietorships filing taxes from 1990 to 2006. We can augment that by summing all those figures to get a “total business filings” figure. I figure the lower-taxes-leads-to-company-formation story allows us to break the 1990 to 2006 period into the following groupings:
1. Bush Sr. era (through 92)
2. Clinton era of tax hikes (through 96)
3. Clinton period including and following the cut in capital gains taxes (through 00)
4. Bush era or tax cuts (through 03)
5. Bush era once all the tax cuts have kicked in. (through 06)
Presumably, when it comes to the number of businesses, growth should be slower in Clinton’s tax hike era than in the Bush Sr. era before it – after all, taxes were higher. There should be much faster increases once the capital gains tax cut kicked in – it had both lower taxes plus faster economic growth, after all. 01 to 03 should see faster increases still as taxes came down further, but only slightly faster since the economy sucked at the time. However, from 03 to 06 we should see monster growth in business formation; taxes were lowest of all (following the cap gains tax cuts in 07 and the 01 to 03 cuts in marginal personal income taxes), plus those were the best years of the Bush Jr. era.
So here’s what it all looks like:
Well, this is disappointing. This graph really does not seem to conform to verses three through seventeen of Chapter One of the Gospel of St. Ronnie. The closest we get (and frankly, its not very close) to a pattern compatible with Revealed Truth is with partnerships, but there are a lot fewer partnerships than corporations or sole proprietorships. (e.g., in 06 there were 5.8 million corporations, 2.9 million partnerships, and 22 million sole proprieterships).
OK. So maybe this data sucks. The number of companies may not mean anything – many of these may simply be, er, vehicles for reducing one’s tax burden. So maybe we have to go elsewhere to get the kind of results that all the good people in the Robert-Mundell-to-Glenn-Beck spectrum would recognize.
And maybe we have to look at other things, like job creation, or the size of payrolls.
I pulled stuff like that from this SBA doc which in turn gets its data from the Census. The data goes back to 1988, but the breakdown of periods is essentially the same, except that now we can look a the change over the entire Bush Sr. era.
This time we can look at the change in the number of firms, the number of establishments (a company can set up multiple establishments – think of a restaurant chain opening up another location), number of employees a these firms, and payroll. (I adjusted the payroll figures for inflation using the CPI.
So here’s what that looks like:
Well, this isn’t cutting it either. The best period for firm formation is following Clinton’s tax hikes. The period with the fastest increases in employment and firm payrolls come after the cap gains tax cuts, but before the Bush tax cuts… and the second best period employment and payroll-wise comes after Clinton’s tax hikes. Clearly the data has to get with the program if its going to pass theoretical muster with the Chicago school or at the U of Minnesota, much less at Cato or with Sarah Palin. And let’s not even get started with the Austrians…
But the results might go a long way toward explaining this.
Smoke ’em if you got ’em.
______________________________________
by cactus
However, from 03 to 06 we should see monster growth in business formation; taxes were lowest of all
Uh, that’s what your data kinda shows. Using your first graph, the Bush period 03-06 had the highest number of new partnerships and proprietorships, and the 2nd highest number of corporations in the series, and the highest total number of new firms.
http://4.bp.blogspot.com/_RPTAaOI4RN8/S1L7uMWDWaI/AAAAAAAAAsc/59FVyzldzmY/s1600-h/taxes_and_company_formation_graph_1%5B1%5D.bmp
cactus, you do not seem to understand that facts like god are dead. That you seem to think economics is about facts betrays a certain level of naiveté. To mistake the promotional pamphlet for the product as it were.
I have no data, but a breathtaking theory.
Even during a recession some people have money. But they are not spending it… too scared. Nor are they investing it… too scared. So it could hardly hurt the economy to raise taxes during a recession and use the money to put people to work doing the sorts of things that need done but private enterprise can’t do.
Then .. and this is standard… the new people working buy stuff and store keepers make money and investors see opportunities… until of course the newly “rich” start to see taxes as theft of their hard work, so they join the Grand Old Party and insist on tax cuts. and deregulation, and lower wages… and pretty soon the people can’t afford to buy what they are selling… but they never learn.
I’ve been a part of entrepreneurial endeavors for much of my life. Never once was taxes a part of the decision to launch something new.
Unkie Sam may not have the luxury of deciding whether or not to cut taxes from now on. He may simply find he has to raise them, quite a bit, or indeed a lot. His economy is not in good health nor is the federal budget and that curtails one’s choices. I wonder if a lot of the “partnerships” were not new fangled hedge funds, etc., etc. I can’t say but if they were we must remember what Volker said so pithily: the onlly beneficial innovation of bankers in the last ten or twenty years was the ATM machine. LOL
The BEA publishes data on business fixed investment by type of organization. there are three types of organizations– corporations, non profits, and three, those subject to the individual tax code like sole propieterships and partnerships.
Roughly, corporations account for 82% of fixed investments, individuals about 11% and non profits some 7%.
Moreover, from about 1950 individuals share has fallen from nearly 25% while corporations share rose about 12 percentage points.
During this time we have passed all kinds of special tax laws favoring investment by these type of small firms. It looks like the individual savings laws. Since 1980 we have created many and varied special tax exempt vechicles to favor individual savings. But over this period the individual savings rate fell from about 15% to nearly zero.
In other words we have two clear examples where economic theory has been proven completely wrong.
But, economists and not only just conservative economists, completely ignore the fact that the dqata completely contradict theory and continue to advocate the same policies.
Why does the profession and the press allow this type of stupidity to continue?
caleb,
I’ve been a part of entrepreneurial endeavors for much of my life. Never once was taxes a part of the decision to launch something new.
This is true of many entrepreneurs. However it is NOT true for many financiers of new ventures. By and large, they are not interested in building something new, or changing the world. They are interested in getting a return on their investment, or getting their money back. They make loans or investments on the basis of projected after-tax returns, and if you increase taxes on those cash flows, reducing them, you are less likely to get the investment.
How much less likely? Well it depends on how much you increase tax rates. It’s kind of like the minimum wage, raise it 1 cent/hour you probably won’t see much change in employment. Raise it $1/hour, you will see more change. Raise it $5 per hour, and you will see a bigger drop. It’s the same with cap gain/dividend and income tax rates. Currently they might be 15%/38%. If you raise them significantly to say 40%/40%, that has a BIG effect on after tax cash flows. Will it quash all investment? No, some projects will still pencil. But a lot won’t, and all will require a higher risk premium.
I suspect Bush’s tax cuts, etc., as well as other “innovations” made it more profitable to create hedge funds and other unregulated vehicles that in fact proved as disaster for the economy. His tax cuts also doubtless made greedy execs more eager to take big risks to fatten their pay. Another source of our present problems. Properly analyzed I would think it might be that tax cuts were the opposite of good for the economy and helped overleverage it and send it down the tubes in 2008.
Sammy, don’t cantabulize. Re-read the paragraph immediately following the first graph.
Part of me believes that just as there was a transition from astrology to astronomy (thank you Tycho Brahe for taking the first step) there will one day be something that follows economics. I don’t know what it is, but 90% of what we know to be true will not be a part of that field that manages to sprout out of economics.
I wish I wasn’t so cynical, but I too believe a huge percentage of the population does not learn.
caleb,
My wife gives the same answer, just about word for word.
Sammy,
At some rate, there is an effect. The question is whether we’ve seen that rate in the US.
Margery,
I suspect you’re partly right, but I don’t know how to prove that quite yet.
Cactus,
Clearly the data has to get with the program if its going to pass theoretical muster with the Chicago school or at the U of Minnesota, much less at Cato or with Sarah Palin. And let’s not even get started with the Austrians…
What do they teach kids going to the Harvard Business School, MIT, Stanford, University of California at Berkely, and all the other programs accross the country that offer MBA’s or just a basic finance course; Or for all the people sitting for exams such as the CPA, CFA, or other financial exams.
Is it different then what they teach at the University of Chicago? Or Minnesota. And if so how so. I doubt you have an answer for this.
This column really is a continuation of a string of columns by Cactus where he shows some data, and then makes a claim, but then does not show how the data supports the claim. If you believe in Cactus then you would think that the investment tax credits have no impact on investment. Or you might think that accelerated deprection and its affect on after tax profits has no impact.
But way you know this analysis is fake again is that Cactus can’t find other expert opinion that backs him up.
“Why does the profession and the press allow this type of stupidity to continue?”
That, I believe, is the right question. In physics, biology or chemistry there are respectful disagreements between people about things for which the evidence isn’t in yet. On the other hand, if you walk into a room of biologists and try to explain that Lysenko was right and none of them will so much as talk to you. In many econ departments I imagine its tough to get tenure unless you are a big proponent of Lysenkoism.
Cactus,
Clearly the data has to get with the program if its going to pass theoretical muster with the Chicago school or at the U of Minnesota, much less at Cato or with Sarah Palin. And let’s not even get started with the Austrians…
What do they teach kids going to the Harvard Business School, MIT, Stanford, University of California at Berkely, and all the other programs accross the country that offer MBA’s or just a basic finance course; Or for all the people sitting for exams such as the CPA, CFA, or other financial exams.
Is it different then what they teach at the University of Chicago? Or Minnesota. And if so how so. I doubt you have an answer for this.
This column really is a continuation of a string of columns by Cactus where he shows some data, and then makes a claim, but then does not show how the data supports the claim. If you believe in Cactus then you would think that the investment tax credits have no impact on investment. Or you might think that accelerated deprection and its affect on after tax profits has no impact.
A way you know this analysis is fake again is that Cactus can’t find other expert opinion that back him up.
Sammy: Yes, VCs and investment bankers look at projected profits after *corporate* taxes. Also cap gains on their investments. They don’t give a damn whether the company owners will have high personal taxes. Just doesn’t matter.
And to echo Caleb: I have been a principal and/or equity partner in a whole string of ventures (all sold for tidy sums) with total values in the tens of millions of dollars. I have never considered–and to the best of my knowledge none of my partners have ever considered tax rates–when deciding whether to start or enlarge a business.
Or be more accurate: the only effect on me of high personal tax rates (notably cap gains rates) has been to spur me to build businesses faster and bigger:
http://www.asymptosis.com/you-deserve-it.html
Also, be aware that investment capital is the very last thing on business-owners list of constraints:
http://www.asymptosis.com/the-sky-is-falling-business-lending-down-1-2-percent.html
http://www.asymptosis.com/we-need-to-spur-business-investment-yeah-right.html
http://www.asymptosis.com/businesses-constrained-by-lack-of-investment-oh-maybe-not.html
According to Cactus the cash for clunkers program had no impact on getting people to invest in a new car or the incentives on buying a home hand nothing to do with more individuals investing in a new home. Such is fantasy land.
More optimistically, a huge percentage of the population hasn’t learned yet. Unfortunately, the overall effect is the same. * sigh *
cactus,
What? Ok I re-read, and I’m coming up with the same result: According to your graph, the number of new business formations were greater in the 2000-2006 period (Bush) than in any other period you show.
http://4.bp.blogspot.com/_RPTAaOI4RN8/S1L7uMWDWaI/AAAAAAAAAsc/59FVyzldzmY/s1600-h/taxes_and_company_formation_graph_1%5B1%5D.bmp
A lot depends on whether investment is equity financed or debt financed. A lot depends on depreciation allowances and deductibility of interest. Not so much depends upon the corporate tax rate itself. For example, let’s just make up some easy to work with numbers to illustrate my point. Suppose there is no corporate income tax, no inflation and no depreciation, and an interest rate of 10 percent. And suppose that investment is debt financed. A profit maximizing company will set the desired capital stock such that the marginal product of capital equals the rental cost of capital, which in this example is 10 percent. Now let’s introduce a corporate income tax of 35 percent, with everything else held constant. The after-tax marginal product of capital is now 6.5 percent rather than 10 percent. The naive freshman econ student will conclude that the firm will scale back on investment because the after-tax return has fallen. But hopefully that freshman will have learned to think like an economist before he graduates. If the interest rate is still 10 percent, and if the business can deduct the interest cost from its tax liabilities, then the firm gets to deduct 35 percent of its interest payments from its taxes. That means the after-tax cost of capital will be only 6.5 percent rather than 10 percent. This means that the amount of capital investment ends up being exactly the same. The corporate tax rate itself has no effect on the amount of capital invested, which is always such that the after-tax return equals the after-tax cost of capital. It’s only when you introduce complexities like depreciation allowances, equity funding and non-deductibility of interest that things start to get messier. But if someday you want to grow up to be an economist, then it’s important to understand how these things work.
OK. So what you’re going to hang your hat on is the fact that less ten percent of all companies fit two and failed three of the predictions you’d expect for Graph 1.
That said, the other 90% also more or less do just as well (or as poorly).
Cantab,
This “expert” nonsense is something you keep bringing up. Let me tell you a story you’ll be able to verify with a quick google search not long from now when I “come out” in case you haven’t tracked down who I am yet. Some years ago, I came upon some data on software projects that included the software language used. A friend of mine and I did some simple number crunching and voila, we got the software track award for best paper at a somewhat prestigious conference for cost engineers.
By your standards presumably that makes me not only an expert on software languages, but better than most others in that field. After all, they wouldn’t have given me an award otherwise, would they? So presumably on programming issues you would take my word over that of some dude who designs software for a living but hasn’t gotten himself a similar award. And the one thing I am qualified to say with a software engineer hat on is that you’d be making a serious mistake.
Do you know know people who bought houses last year? I bought two. Income and capital gains taxes weren’t a consideration in either case. I think Uncle Sam is making a mistake with this program, but who am I to turn down free money?
One house we bought to live in as it was affordable (after a big price drop) and within walking distance of work. The other we bought because after expenses (including property taxes – the one tax we did pay a bit of attention to), the rent is providing a 15% return a year. (BTW… as far as I can tell, the rental won’t benefit from a tax rebate.)
As to income taxes increasing or decreasing – what sort of a cretin turns down a 15% a year return because his marginal tax rate increased?
Your analysis shows nothing. Correlation isn’t causation.
The time periods are much too small. People need years to make the decision to start a business. Business cycles, random technical developments etc. can have much more influence on the data, than the relatively small changes in the tax code etc.
I have some ideas for better measurements of he effect.
First: Ask people, especially people who do not work full time, why they aren’t working more. Ask people, if they have ever considered to found a business, and why they haven’t done it.
The first question will be answered quite often with reference to the marginal tax rate – at least in Germany, where the typical marginal tax rate is something like 60%.
Second: Compare different countries. The conditions are much more stable over time and the differences larger. People in Europe are working considerably less than in the US and Japan. This is at least partially the result of higher marginal taxes.
This is of course not in contradiction to coberlys theory, that in times of a liquidity trap taxing high incomes won’t have a negative effect, as this assumes, people, who want expand there hours will find work, which is currently not the case. So a temporary recession tax would make sense.
And this is not in contradiction with conventional economic theory. The gov’t shouldn’t act procyclical, but taxing income that isn’t spend isn’t procyclical in the recession. The gov’t can use the money to spend elsewhere on better and longer unemployment benefits, infrastructure, and one-off payments to people, who are likely to spend the money.
But once the economy goes better again, and there is reasonable inflation and low unemployment, taxes on high incomes should be reduced again.
what sort of a cretin turns down a 15% a year return because his marginal tax rate increased?
Income tax rates have a smaller impact on investment return than the capital gains/dividend tax. You might not have figured cap gains in because you are happy with the income stream, and figure the cap gain is just gravy. Like I said, some investments will pencil regardless of the tax situation (within reason).
However in a typical VC type investment, cap gains taxes can have a significant impact. Projections always have some sort of terminal value by which they get their money out. This can involve a sale (IPO or to another company) refi, or dividend. That is where the biggest cash flow comes from, so that is where the action is.
Currently the cap gains/dividend tax rate is 15%. If you raise this to say the regular income tax rate of 39%, it can make a substantial difference in the return.
The relative difference between other types of taxation is has more effect on investment compared to the absolute rate of taxation. Hedge funds for instances has a huge advantage as their profit is considered ‘capital gain’ and taxed at 15%.
The idea that the average taxpayer will reduce their consumption based on fear of a tax hike in the future does not pass the ‘laugh out loud’ test. Either way, the government can always inflate the debt away, five years of 15% inflation and you’ll half the deficit, with the additional benefit of completely screwing up China.
Sammy
so maybe the investments that don’t get made weren’t such good investments.
Maybe by not getting made they left room for more efficient companies, better use of the money, or necessary public services.
you see the fallacy you make is not necessarily that high taxes don’t reduce investment, but the reducing investment is ipso facto a bad.
marger
you haven’t been keeping up. they won’t raise taxes they will cut social security and medicare.
I agree with your story Coberly except you imply that we must raise taxes to pay for the spending we want to do in this recession…………………..we dont. Its not necesssary, particularly helpful nor politically palatable.
I know you are older than me but I also know you can learn new tricks. Its time for you to think out side the “taxes pay for the governments spending” box.
You can’t look at taxes in a vacuum. Rates ate effected by other factors like deductions that affect the actual taxes paid. I’d argue overall taxes have not fluctuated wildly over the past 20-30 years despite changes in marginal rates. In fact taxes have been pretty stable. Reagan raised taxes as well as cut taxes. He raised the payroll tax, and eliminated many major deductions in 1986.
artin HeckMartin Heck said: “Correlation isn’t causation. “
Funny how seldom people make this statement when something nice happens while their pet politician’s in charge. However.
OF COURSE correlation isn’t causation. But correlation is suspicious. If your kid’s school friend Maynard G. Krebs stops over every Tuesday, and each Wednesday you notice another silver spoon is missing, are you going to suspect Maynard? If you don’t, you’re not normal. Correlation is what catches our eye — proof comes after.
Cactus’ correlations, taken from federal data, exhaustively worked out over the past four years, are almost completely consistent — not only do the common people do better under Democratic administrations, but so does business, overall. With or without FDR, with or without WWII, blue edges ahead. Those numbers have been batted around on this blog for four years at least, and looked at from all angles very stringently. I haven’t heard a new objection to any of them for at least 2 years.
We have a saying up here in Canada “Tory times are tough times.” It’s a rather sardonic saying, because what it really means is, “Tories make tough times.” That’s certainly been our experience here. We’ve had two Conservative govenments here in the past 30 years, and each of them (but not the Liberals, in between) has taken us deep into deficits. Coincidence?
Noni
Cactus,
This “expert” nonsense is something you keep bringing up.
You’re analysis is outlandish. I thing you need an expert to act as your second.
Your software example does not work since whatever you were doing in a global sense was simple. Moreover, if it solved the problem you were working on then that’s the only proof you need that your software solution was effective. You offer no such proof on raising taxes having no negative affect on investment or economic growth.
“Your analysis shows nothing. Correlation isn’t causation.”
The same could be said for arguing “…once the economy goes better again, and there is reasonable inflation and low unemployment, taxes on high incomes should be reduced again.”
People don’t start businesses because tax rates change, they start businesses in hopes of making money and they generally borrow the money. So, to say that people start businesses because they have money in their pocket from incremental tax cuts seems kind of silly, unless you are talking about microfinancing. The last thing on most start usp si their tax rates. “Hey Bob, we can finally start that business because the tax rate went down 10%” and I’m getting an extra $600 buck a year in my bank account”. Are you kidding me? People start businesses because they see opportunity to make a buck and they get most of the their capital from a bank.
Frankly, I’ve done quite a bit of reading on this subject and I don’t see a real strong relationship between between tax rates or changes in tax rates and economic growth. I might be willing to concede that there could be a small relationship, but not enough to make the bold statements that I heard in college or in virutally every political debate since 1980.
Frankly, you hit on a good point. The facts don’t really bear out the line we have heard about taxes and growth. It just isn’t in the data.
What will happen is that new venture cap gains will be at a lower rate than cap gains in general, which was true for a while in the past. I.E. if you finance a venture, the gains in the first X years will be taxed at a lower rate. This will stop once the company is sold or goes public, and the VC got his money out.
What would be the bad thing if the managers of the hedge fund had to pay full rate? Only that they would have less of a share of the fund than otherwise. Recall that LTCM partly crashed because the managers decided to return public money so that they could make there money grow faster. They truly got what they deserved.
2slugs,
The corporate tax rate itself has no effect on the amount of capital invested, which is always such that the after-tax return equals the after-tax cost of capital
Let me guess……you’ve never done an investment analysis in your life. Not even in school. Am I correct?
Oh but that won’t be enough; they will need to do, most likely, three things at least: cut benefits, raise taxes, and inflate. Inflation is always the final and best way to pare down debt.
“You offer no such proof on raising taxes having no negative affect on investment or economic growth.”
Actually, I am not trying to prove that raising taxes is good. In this post (and many others) I am looking claims made by the folks who talk about cutting taxes. The claims have implications about what data should do. I merely write posts about whether the data meets the claims.
Not that I’ve ever cared to present myself as an expert – I present data rather than make grand statements and insist on my opinion having value – but if being an expert is what I need for my claims to ,ale sense, what does it take to be an expert?
Also, how do you decide between the claims of competing experts? I would assume that by your definition of expert, whatever it is, both Keynes and Friedman were experts. But they had very different views about how the world works. How do you pick among them? Clearly the data doesn’t matter and you have experts on both sides.
sammy,
In this process of buying a home, I’ve learned that “investing capital” is a lot easier than working. I’m lucky I have managed to save up some money through working. If you’re saying that investing capital should stop being rewarded by being taxed less than working, I’m with you.
My guess is that’s not what you’re saying.
Martin Heck,
Correlation and causality can also go for Europe.
My guess is that taxes are what they are in Europe because of the differences betwene European and American culture.
As to time frames… click the last link in the post. That goes back to 1932. It also doesn’t fit with what I’m told about the effect of taxes.
In this post I’m working with the data I have.
“Ask people, especially people who do not work full time, why they aren’t working more. Ask people, if they have ever considered to found a business, and why they haven’t done it. “
I had my own business (as a consultant) for years. My sister had her business for years. My wife has never had a job working for someone else – she’s always had her own business. Of my closest friends, only one has worked for a company for most of his adult life and even he started a business on the side. So my circle of friends is very entrepreneurial. I;ve been there at the start of many of these decisions… and they never involve taxes.
WJ,
Click the last link in the post. You’ll like it.
MH,
BTW, in the Arabian peninsula, taxes are lower than in the US. They have always been that way. Your comparison between Europe and the US – leaving out culture – would has implications about that region too.
you see the fallacy you make is not necessarily that high taxes don’t reduce investment, but the reducing investment is ipso facto a bad.
Well stated Coberly.
Sammy,
Your mythical “rational investor” who wont waste his time if he cant guarantee X% return on his investment would likely, in a correctly functioning world, be replaced by a guy who either saw that the first guy didn’t know how to calculate his return correctly or by a guy who was willing to take X minus 10% return on his dollar. Theres not just one guy and one formula. If there is money on the table to be made, ALL economic theories agree that someone will take it………period. If its a complete money loser to the private sector, the govt can just pay for it and contract a private sector person to do the work. Someone will want to earn a salary.
Slugs,
Making interest tax deductable lowers the cost of debt financing which lowers average cost of capital and amount of investment then would would be invested if interest was not tax deductable. However, this contradicts the claim that taxes don’t matter.
A large part of corporate investment comes from net income. A company will typically pay out part their net income in the form of a dividend and reinvest the remainder in the company. So when you increase taxes you lower net income leaving less funds available for reinvestment. Less reinvestments means less corporate investment, which also means less GDP growth.
Also, the diminished flow of net income coming from the company according to Modiliani and Miller lowers the value of the company, which will translate to a lower stock price. Further, a lower stock price whacks the consumer through the wealth effect. And just for the record, the catalyst of the current recession and its resistance to a quick rebound is because lost equity (aka wealth) from falling house prices. So the wealth effect does matter — and so does taxing it away.
One cause (as a retired tax lawyer I personally think it was the most important one) in the significant increase in partnership filings in 1997 and later years was the adoption by the IRS in 1997 of the so-called “check the box” rules governing the classification of entities for tax purposes. Under those rules it became much simpler to assure that a limited liability company (LLC) would be treated as a partnership for tax purposes and the use of a corporation as a new business entity was only rarely the best choice. Instead, the standard legal advice to clients starting a new business was to use an LLC that would elect, i.e. eck the box”) to be taxed as a partnership.
Cactus,
But they had very different views about how the world works.
I don’t think their views on how the world works is all that different. Thus, I don’t think you can find a reputable expert from any of the left, right, or middle that will agree with your theme that taxes don’t matter.
How do you pick among them?
I jumped all over you on the president/policy issue because what you were saying was about 180 degrees off from an interview of Milton Friedman that I had read. I suspected that if I quoted Friedman you would argue with an appeal to prejudice against Friedman so I did not use him. Then through kicking around I found the paper by Christina Romer that was well researched with references and examples that agreed with my take on economic history and contradicted your general themes. Using Romer given her role as Obama’s top economic advisor I knew any appeal to prejudice would fall flat. So I posted a link to one of her papers and forced a consideration of what she was saying. I won that one.
Cactus,
Currently the cap gains/dividend tax rate is 15%. If you raise this to say the regular income tax rate of 39%, it can make a substantial difference in the return.
What if the government puts a tax on your appartment income stream that drops you rate or return down to 5%. No effect?
I’ve been there at the start of many of these decisions… and they never involve taxes.
They probably don’t involve much income either, at least at the beginning.
Ever go without healthcare? An extra 5k a year healthcare mandate must be like being hit by a hammer for someone starting their own business.
Here’s a nice one about the alliance between fundamentalist religion and Christian crusading and warmongering.
http://news.yahoo.com/s/ap/20100120/ap_on_go_ca_st_pe/us_military_weapons_bible_passages
I thought only Muslims were supposed to ally religion to war. Ooops. the US does it too. LOL
Mad Marg,
You post like Gilda Radner’s Emily Litella character.
http://en.wikipedia.org/wiki/Emily_Litella
Other mis-heard topics to which Litella responded were “saving Soviet jewelry [really, Jewry]”, “endangered feces [species]”, “violins [violence] on television” , “busting [busing] school children”, “presidential erections [elections]”, “flea [free] elections in China”, “pouring money into canker [cancer] research”, the “Eagle [Equal] Rights Amendment“, “conserving our natural racehorses [natural resources]”, “youth in Asia [euthanasia], “sax [sex] on television, and “making Puerto Rico a steak [state]”. About the last of these topics, she complained, “Next thing you know, they’ll want a baked potato with sour cream!”
This is certainly a topic that has been flogged to death. And to what purpose? The issue is never how the revenue is raised, but how it is spent. NY State, the Governor that is, is looking to avoid tax increases while claiming that the piggy bank is broke. So what’s a good alternative to finding more money. Go the other route and stop “wasting” money on government services. We don’t need schools. We don’t need to fix the infra-structure. We can all bounce along the highways and by-ways and send our kids to school wearing hard hats.
My point is that there are essential services that must be provided by the government. That governmental necessity has a bill to pay attached to it. So taxes are a necessary thing. They are not a necessary evil. They are needed to cover governmental essential services. They reduce incentives you say? So where soes the money go after it reaches the Treasury? What, it evaporates? It gets spent on essential sevices. I’m tempted to use an expletive to describe those who suggest that taxes reduce spending when in fact taxes are the source of government spending. If you don’t like what the government spends its money on then challenge those issues. But taxes are only a result, not a cause.
Greg
hell, i can’t even remember the old tricks.
i don’t know that raising taxes is necessary: i was just saying that “you can’t raise taxes in a recession” did not make compelling sense to me. it is obviously politically unpalatable. but only eating our dessert is making us sick.
as for the box: what DOES pay for government spending if not taxes?
margery
i think you are right about that. after they have cut social security and reduced the population to “work house” and “fear of the work house” they will still spend more than they have. and then the country really will “go bankrupt.” but this is the stupid pattern of greed in high places that has brought down every empire since Babylon.
Cantab
the reason you never understand anything is because you can’t read. Cactus has never said “taxes don’t matter.”
cantab: the winner in his own mind.
Cantab
i am inclined to agree with you here. my democrat friends have been stupid about this health care thing. a gradually increasing tax would work… because the tax fits in with the economy at it’s present state of development. a sudden change will cause heartache and resistance. which is what we are seeing in Massachusetts… and even out here in Blue Oregon.
Martin Heck
thanks for partially agreeing with me. i partially agree with you, but
first, someone who doesn’t want to work when taxes are too high is not going to be missed. we are not talking about Einstein throwing down his pencil here.
second, while taxes during good times should look different from taxes during hard times, it still seems to me that taxes on the people with money to spare are necessary to pay necessary government expenses, including paying down debt incurred during hard times.
noni
thanks for saying that. i hate to have to be the only one to remind people that correlation is not causation, but it’s a good place to start looking for it.
Cantab
the reason you never understand anything is because you can’t read. Cactus has never said “taxes don’t matter.”
So then you agree that the Chicago school, U of Minnesota, Cato, and Sarah Palin all had it right in the first place?
Cactus argues with innuendo so he often does not say explicitly what he wants to reader take away from the analysis. I put his innuendo’s into words to flush out the complete argument. If I get it wrong then blame Cactus for using innuendo in the first place.
Jack
exactly. I am an old hater of schools, so I am sensitive to the “save our children” argument that always comes out when the schools want more money. but the sad fact is that we need the schools, and the “waste” is no worse than… say… the way i waste my own money by being stupid and… human.
Jack,
Thanks for the romper room lecture on the need for taxes. Now find me a single person that argues that we don’t need the government to provide any services.
If you don’t like what the government spends its money on then challenge those issues.
This was my intention when I voted for Scott Brown yesterday.
cantab,
The thread on this post: http://angrybear.blogspot.com/2009/12/economic-growth-blood-suckers-v-free.html
You won that? If you want to believe that, feel free.
BTW… you don’t understand the difference between saying:
a. its not true that cutting taxes creates more businesses
b. raising taxes creates more businesses
The large increase in partnerships from 1996 on is probably due to (1) the use of limited liability companies in place of corporations; (2) the IRS’s 1997 “check the box” rules making it easier for an entity to be taxed as a partnership; and (3) lenders requiring that commercial real estate borrowers be single-purpose entities (typically LLCs, which have fewer legal/administrative formalities).
Also, most political discussions about corporate taxes incorrectly assume that corporate taxes are similar to personal income taxes (i.e., corporate taxes are levied on profits rather than income; also there is no interim withholding). A corporate tax rate cut will not have any monetary impact until the returns are filed, typically six months after the end of the tax year, so any “stimulating” effects are purely psychological (i.e., vaporware) — given the extreme focus on short-term results, a tax cut that pays out in 18 months is not likely to have much immediate impact.
Coberly,
correlation is not causation
As I move around during the day my feet tend to move in the same direction as my nose. If you take the location of my feet and nose every minute recording their location i’m sure they would be correlated. But one should not say that my walking somewhere causes my nose to move because correlation is not cauality? Interesting.
“Now find me a single person that argues that we don’t need the government to provide any services.” Cantab
I don’t know where to find someone who thinks or argues that the government isn’t needed to provide essential services. That’s why we have a government, to organize our social and economic systems and to provide essential services that do not lend themselves to a profit motive. Thanks for making the point, even if you’re confused about it.
sammy,
No. You’re wrong…again.
cantab,
However, this contradicts the claim that taxes don’t matter.
Reread the example. You get exactly the same level of physical capital investment. EXACTLY. The reason is that the additional increment of capital is set such that the marginal product of capital equals the rental cost of capital. Taxes lower the marginal product of capital, but deductibility of interest gets it back. The net return to the investor is lower, but the amount of physical capital is still the same amount as you’d get without the tax.
Cactus.
You won that? If you want to believe that, feel free.
I showed that your analysis was fatally flawed and that expert opinion lined up and made the direct opposite conclusion that you did. They blame JFK and Johnson for policy changes that let the inflation out of the bottle and blame Carter for following a failed policy and making the situation a crisis, and then they say that Reagan and Volker set it right again laying the foundation for the next 25 years. So the democrats had the bad policy and the republican set it right again. So you lose.
Cantab
another brilliant analysis that succeeds by ignoring the rest of the story. there is no law of nature that says we have to invest every possible dime. in fact your econ 101 book somewhere in the first chapter has a graph showing the trade off between investment and immediate consumption. there would be no need for a trade off if people did not value immediate consumption.
you can view taxes as paying for immediate consumption, or as investment in future consumption, of the kinds of goods and services that private enterprise cannot supply.
but stay with your half-assed analyses if they make you happy.
cantab
you need to look in the mirror, because your analysis above depended, in strict logic, on not needing any government services.
Coberly,
you need to look in the mirror, because your analysis above depended, in strict logic, on not needing any government services.
My view is that we are better off with government services. So you’re wrong on this point.
Given your stated point of view of the need for government services, how do you suggest that those services be paid for? On the one hand you advocate reducing taxes. Now you’re saying there is a need for government services. Yes, I agree that the need is there. So how does the need get accomplished if the govenment does not institute a revenue stream?
cantab,
“I showed that your analysis was fatally flawed and that expert opinion lined up and made the direct opposite conclusion that you did. “
If that’s what you think you did, fine. Clearly we disagree about what you accomplished. Thus, I provided a link. Anyone else can go and read that thread and see if they feel your description is accurate.
cantab,
Let’s see. I put some money aside that, as far as I can tell at this moment in time, I have no need or desire to spend for the next 30 years. I can either let it sit under my mattress and risk going up in flames or get a return of 5%. What do you think I’m going to do with it?
Thanks for clearing that up.
Part of the reason I provided “totals” was because I didn’t know why the composition had changed.
Jack,
I think it’s obvious that its the size of the government that’s the issue. I don’t see any justification of an unward trajectory and the percent of GDP directed by the federal government. To fund a small limited government we do the current way, but perhaps make the tax code simpler by not using it manipulate us to appease special interests.
cactus,
What was your objective? Sounds as though you need a tax expert in creating this series.
How can you not consider the effects of U.S. trade policy during the periods displayed? There are some obvious gains and losses tied directly to business sustainability and creation as a result of trade policy shifts. Some of the differences are…huge. Same story for types of businesses created. The breakdown by industry is downright ugly for certain industries.
As an aside, if you did a series on temp employment over the same period, you probably won’t like the results.
I will add that if you operated a captial and equipment intensive industry, you would be very sensitive to taxation policies. Ownership vs. lease. Number of crews. Shifts. The works.
Talk to some of the business owners who struggled through the Carter Administration years. Now, that was just ugly.
Some of that post is a little confused, but I’ll accept that you see the issue as one of government spending rather than taxation. Granted that taxation is an expected result of government spending. So the only argument is what services need to be provided, how best to provide those services and how to do it all at a reasonable cost. So why are we arguing over how much tax to collect?
“To fund a small limited government….” Ours is not a small, limited country. As a result the government has big responsibilities to its citizens. You want less spending? End the wars of empire. Stay out of the poliltical affairs of other countries. Put an end to corporate welfare. There are lots of effective ways to reduce government spending. Make a better argument for why we should have less education and not have a better health care finance system.