"Brother can you spare an economist?"
by Bruce Webb
One raging argument that needs to be settled by the end of this year is what to do about the sunsetting of Bush tax cuts. Now it seems there are three general end points here: one, do nothing and they all expire at year’s end; two, extend them all, perhaps permanently; or three do the Obama thing and selectively extend cuts for couples making under $250,000 while letting higher income households revert to Clinton era standards. Well I am perfectly ready to debate the political and social justice aspects of any of these but maybe am not equipped to answer the following technical question.
The argument against allowing tax cuts to expire on the top 2% is that it would be counter-productive in a time of recession presumedly because it would serve to cut back on investment by that same top 2%. But if they are all sitting on their money anyway, resisting personal spending and as the controllers of capital sitting not only on piles of corporate cash but also on huge banking reserves hence choking off liquidity via loans to smaller banks and small businesses how exactly is nicking them an extra 3% or so in top marginal rates actually creating a net retreat in investment? It seems the argument that “If you tax the rich in a recession they won’t lend/invest” kind of fails somewhat if they aren’t lending/investing to start with. What does Kent Conrad know about this equation that I don’t know?
Gosh, if I only knew some smart, forward thinking economists to pose this question to.
The fed and the various trust funds are holding $6.1 T is US debt. See The Big Picture.
Paying the treasury with cash from taxes frees up money to be lent/borrowed.
Cash for government war waste and corporate welfare that would otherwise be raised by taxes is borrowed and the needed green backs freely printed. Instead of inflation all that green went into the macmansion bubble (avoidable tragedy).
Money supply expansion is okay because: the money saved from not paying taxes neither increased consumption nor investment in anything but the war machine. There is excess war profits but no one in the US makes clothing. Capacity allocation gone bad.
Tax them.
Time for ‘pay go’ on the war. Maybe a 40/bbl surcharge on imported oil, to pay for CENTCOM being the Saudi royal’s private security firm.
If those patriots won’t send their money or their kids what is patriotism?
Bruce, as always, it depends on your goals. somewhere north of 1/2 of those in the targeted tax bracket are small business owners which are including business profits as income. The commentary is deafening from them that raising taxes on this income will lose jobs, or even more likely slow even more the jobs recovery.
The large number of related articles here and elsewhere, seem to indicate there is some questions and truth to these claims.
So, raising taxes this huge amount, if not automatically spent on more Lib/Dem long awaited dream program, could be a good thing if completely earmarked to pay down debt. But, there’s the rub, no one thinks that is possble regardless of party in control.
So, I expect some middle ground solution, but it must happen very soon, as time to legislate is quickly running out.
Well I think doing nothing is the way to go. Dumbya’s tax dcuts were an ill concieved sop to the rich, did nothing to help the economy, lead to greater income inequality and along with military spending served to greatly increase the deficit. The rich should pay more and the middle class should too. Then we can have a real debate on the size of government and where we want our tax dollars to go–it would not have been Iraq andd at this point I doubt if it would be Afgahnistan. The small business line is total bs. small business hires when they can make a buck. The tax rates were not 100% under Clinton and small businesses hired whem they could make a buck. The problem has been and continues to be lack of demand and that is not surprising with officially 9.5% out of work and underemployment closer to 20%. The government has to fill the gap and if you have concerns about deficit spending then you have to raise taxes. If all share the pain, maybe all will pay some attention. In any event, doing nothing does not require any dealings with GOP Senators and that would be an excellent thing.
Half by number? or half by gross income exposed to that top marginal rate? The argument that some (as yet) mythical small business owner or farmer not being able to hire or pass on the farm to his heirs justifies treating billionaire hedge fund compensation as ‘carried interest’ and then passing it on tax free to his heirs needs a little more more rigorous documentation than you are providing here.
I am even less a tax advisor than I am an economist but even in my limited experience the only reason to be operating a small business as an S Corp is because the small marginal costs of reorganizing it as an LLC or something else are given the low rates not enough to motivate the change. Change the incentives for the small business owner and you change the behavior. Axiomatic in your world. The idea that billionaires are weeping because certain small business owners would be exposed to a certain increase in accounting costs is ridiculous special pleading.
And not to put too fine a point on it : “So, raising taxes this huge amount, if not automatically spent on more Lib/Dem long awaited dream program, could be a good thing if completely earmarked to pay down debt. But, there’s the rub, no one thinks that is possble regardless of party in control.”
In fact that is exactly what happened between 1997 and 2000 when Clinton beat back Gingrich under the slogan of “Save Social Security First”. Republicans proposed that the right response to budget surpluses (initially driven by Social Security Surpluses and only in the last year by GF surpluses) be the justification for tax cuts, while Clinton and the much mocked Gore ‘lock box’ argued that they be devoted to paying down Debt Held by the Public led to Bush holdover Fed Chairman Greenspan boo-hooing that the result would be TOO LITTLE LONG TERM DEBT.
Debt held by the Public on Sept 30, 1997 was $3.789 trillion which was close to the time that Newt started bleating for tax cuts. On Sept 30, 2000 it was down to $3.405 trillion. And Clinton didn’t even have control of Congress. And frankly only morons thing that if Gingrich had been able to implement his own tax cut program in 1997 that those numbers would have been better.
Got Data?
http://www.treasurydirect.gov/NP/NPGateway
CoRev,
I am even more dense than usual today, could you please tell me how taxing profits will cost jobs in small business, in what time period?
And how does the perpetual flow of Fed printing greenbacks liquidity trap with all the money printed freely recycled into the US debt is helping small business grow other than to become a socialized supplier to the US G??
My last post ended with the idea: raise taxes pay as you go for some things besides SS, no one will get around to cutting big government and the socialized suppliers to big government until the cost of big government is borne by those other than payroll labor through losing the safety nets.
CoRev brings up the usual whine for the small business owners who will be forced to never hire anyone ever again….
What small business is making employment level decisions decisions like this? I will hire a new person if they are necessary to make me an extra $650/month ($1000 pre tax) but I wont hire a new person if they are necessary to make me an extra $620 ($1,000 pre tax). How did I ever run a decent business if I made my decisions like this? And if the business doesnt understand how taxes work, why would changing tax rates affect their hiring at all?
Very curious argument…..
ILSM, you gotta kinda follow the bouncing ball. There is much conversation re: businesses retaining earnings in order to cover future expenses that would normally have been paid for in a line-of-credt account. Which BTW are severely restricted if you can get them.
The we have the conversation of profits being upped due to the failure to hire or even laying off workers (productrvity gains.)
We also have seen conversations that many of these small business falling within that taxable income range are actually only there periodically or for short time periods.
So adding a 4+% tax helps this class of employers in what way?
If by ‘Big Picture’ you mean B.R. I would point out that interest on a $6.1 trillion in US Debt by the Fed and the Trust Funds hit the Treasuries books in different ways. As I understand it TF interest is taken as a deficit, just adding to long term liabilities whereas interest on Fed holdings of Treasuries just gets rebated to Treasury resulting in no net loss on balance sheets for the latter. But maybe I just misinterpreted Krugman on this point.
HELP BEAR ECONOMISTS, HELP!!! I am under assault by both Good Guys and Bad Guys!
” “If you tax the rich in a recession they won’t lend/invest” kind of fails somewhat if they aren’t lending/investing to start with. What does Kent Conrad know about this equation that I don’t know?”
To the question at the end of that statement the probable answer is nothing. The first thing to look at when faced with the canard, “The rich need to invest for the economy to grow, therefore, let them keep all their money,” is where does the perpetrator of the myth get his/her own income? If an economist is consulting to the Peterson Foundation is his/her analysis more or less likely to not be biased? Food for thought. Remember what Prof Sutton,
a banking industry icon ahead of his time, said. “Cause that’s where the money is.” That holds for all levels of professional theoreticians.
To the first part of the statement, above, it is equally logical to suggest that if the rich have to pay high levels of tax on income they will attempt to earn more income in order to offset the loss of net income from taxation. But the need is to tax all forms of income in an equal manner.
Of course the most appropriate approach to taxation is to tax as necessary relative to government funding needs and to tax in accordance with benefit from the economy. The very wealthy benefit most, as measured by their wealth, e.g. they owe a greater share of the taxes needed to fund their government. Trying to prognosticate on the effect of taxation on general economic activity is a fool’s errand. Income comes from too many disparate sources. The economy is too wide spread, extending across national boarders. And most interesting is that if ten different economists analysis the issue of taxation and economic performance we get ten different (and ideologically biased) analysis. It would be appropriate for all economic prognosticators to begin all their comments with the simple, “I think, but I could be wrong, that….”
Bruce, saying this you have hit upon why I keep saying the stimulus was misdirected: “Change the incentives for the small business owner and you change the behavior.” Now after nearly two years of lackluster performance, they are getting around to writing said legislation.
Why? Look at the underlying class warfare commentary and actions, this article being a possible example, and we get to the why.
We don’t wanna help those awwffulll risk taking successful folk. They are the cause of what … (fill in your own blank here). Let me reemphasize risk taking! They did/do/will and most of us will not. They grow our economy and we, who are not of the risk taking cadre, do not!
Nuff said! As always YMMV.
For those scratching their heads and wondering what this post has to do with the Masters of the Universe and the ‘skill premium’
http://www.library.csi.cuny.edu/dept/history/lavender/cherries.html
“Brother, Can You Spare a Dime,” lyrics by Yip Harburg, music by Jay Gorney (1931)
They used to tell me I was building a dream, and so I followed the mob,When there was earth to plow, or guns to bear, I was always there right on the job.They used to tell me I was building a dream, with peace and glory ahead,Why should I be standing in line, just waiting for bread?
Once I built a railroad, I made it run, made it race against time.Once I built a railroad; now it’s done. Brother, can you spare a dime?Once I built a tower, up to the sun, brick, and rivet, and lime;Once I built a tower, now it’s done. Brother, can you spare a dime?
Once in khaki suits, gee we looked swell,Full of that Yankee Doodly Dum,Half a million boots went slogging through Hell,And I was the kid with the drum!
Say, don’t you remember, they called me Al; it was Al all the time.Why don’t you remember, I’m your pal? Buddy, can you spare a dime?
Once in khaki suits, gee we looked swell,Full of that Yankee Doodly Dum,Half a million boots went slogging through Hell,And I was the kid with the drum!
Say, don’t you remember, they called me Al; it was Al all the time.Say, don’t you remember, I’m your pal? Buddy, can you spare a dime?
Formatting better at the link.
Jay22, see my answer to ILSM. I’m not sure, but you might have made my point. A lot goes into making hiring decisions, and costs to do said business, including taxes, is one of them.
The healthcare bill has perturbed that decision making in many different ways. Just the 1099 reporting issue buried in that ole bill is enough to forestall some risk taking. Raising the level of ROI needed to add an employee, is not insignificant.
Plus, we have not mentioned yet, the concern over regulation and tax uncertainty they are feeling.
Bruce
I think you are asking the wrong people the wrong questions. “Economists” will tell you whatever they have been literally trained to tell you. And the question “will tax raises cause the rich to invest less and prolong the recession?” really doesn’t matter. We got into this recession following a reign of tax cuts. Our friend Cactus has shown that the relation between tax cuts and growing the economy is, uh, not robust. And we have a huge deficit scare under way which is being used to justify cutting “entitlements,” as if poor people not having enough to spend will grow the economy.
So I think the right question is “how bout we sunset those tax cuts and just see what happens?”
I also think you may be doing yourself harm trying to figure out what “debt” counts as debt and what debt counts as assets on the fed books. That amounts to entering the world of a madman and trying to make sense of his construction of “the way the world works.” Just back away from the governmetn books and look at where the money comes from and where it goes. Treat the “budget” as a black box. You don’t need to know the details. Just look at the input and output.
Bruce
speaking of entering the world of a madman and arguing on his terms.
The rich have been telling us for years that raising taxes would break their hearts and they would stop working, leaving us second raters without jobs. Or, they tell us, taxes take actual money away from them that they were just about to invest in growing the economy. Neither argument makes much sense, and the historical record is against them meaning much even if they were “sensible.”
Take an ordinary poor person and cut his wages or increase his taxes, does he sit down and cry? No. He will try to make more money in orer to make up the difference. This business of not taxing the rich is plain stupid. Tax them, and they will get off their butts and go to work to make more money. They are not THAT different from you and I.
Trickle Down since 1980 being proven to be Warm, Salty, Yellow Rain. But why be bitter?
CoRev
you seem to be making the wildly fallacious assumption that “incentives” come from tax cuts. How about “incentives” comes from making money.
No one is proposing that high earners have their earnings confiscated. So I would suspec that a man who can make a million dollars and pay 20% in taxes would probably be almost as happy if he made a million dollars and paid 23% in taxes. Or, betcha, might go out and turn another deal to make up the difference.
It is just stupid to pretend the rich are so stupid that they will work and invest less if their taxes go up a small amount. And if they are that stupid, i don’t think it would be hard to replace them with someone who can get by on 700,000 instead of 800,000.
one large issue that hasn’t really been hit here is the capital gains tax.
at present, it’s 15%. with the expiration of the tax cuts, it jumps to 20% (33% higher) layer in the new healthcare taxes on cap gains that will come in in the next couple years and you’re at 24% (up 60% from now). arguing that that will not be a large drag on investment is a tall order. a 60% hike in a tax rate is no small matter, and as much as cap gains is portrayed as a tax on the rich, american paricipation in equities and mutual funds is very widespread and that such a tax will hurt the savings of citizens across the spectrum.
another issue worth considering is the fundamental underpinnings of this notion that it’s OK to tax the rich if they aren;t using the money. by what ethical standard? it’s people’s money, not governement money. why should the governement be the arbiter and redistributor of capital?
do we really want this sort of keynsian decent into a command control economy whereby the governement takes on the role of trying to maximize GDP growth up to and inclusing taking money from those who they feel are not spending it rapidly enough and giving it to those who will spend it or spending it themselves?
“why not tax the rich if they are not investing anyway” sounds dangerously like a rationalization of governement coercion. “spend your money or we’ll spend it for you.” is the US federal governement really the agency you want taking control of this sort of economic decision? to you trust them not to be partisan, subverted by interest groups, farsighted, responsible or even competent? i’ve seen nothing from either side of the aisle lately that makes me want to trust them.
be very careful ceeding too much power/responsibility for driving economic growth to the governement. once granted, it tends not to go away. do you really want a governement that feels entitled to take resources it deems underutilized and put them into use through some kind of emminent domain? that’s a very slippery slope. the notion that “governement has to fill the gap” is simply untrue. no it doesn’t. it CAN try to (though track records on such are dismal) but it does not HAVE to.
this notion that a wise governement and fed can eliminate the downswings or the business cycle is precisely why were are in this mess. it creates vast moral hazard (greenspan put) and huge imbalances in capacity and debt.
money to the indebted will not drive growth, it will pay down borrowings meaning that stimulus will not do much stimulating. it will be spent to pay for consumption that has already occured. thus, the flip side of the “why not tax the rich if they are not using the money” arument would seem to be “why give money to those who aren’t going to spend it on new products anyway”. to do so is the quintessence of moral hazard: punish those who saved and acted responsibly to bail out those who did not. what sort of behavior do you suspect that will encourage in the future?
terry
I think O bama needs to hear you.
“Let me reemphasize risk taking! They did/do/will and most of us will not. They grow our economy and we, who are not of the risk taking cadre, do not! “
Like in the end AIG counterparties actually were exposed to risk. Even Tea Partiers understand the concept of ‘bail out’. Funny they don’t expect the bail-ees ‘risk taking cadres’ to actually bear any of that supposed risk.
Bruce,
No assault, just throw BR in I find some of his stuff reaaly interesting and should be shared.
I am on your side, just have my own veiws.
Hmm I sent incoming fire in the wrong direction. That shot was meant for someone below so I deleted it.
A stronger economy, helps the small businesses and is worth more than a few percent in taxes?
Retaining earning for a rainy day (rather than for investing/growth) is a self fulfilled prophesy of continuing monetarists busts if the current borrow spend on the wrong things continue.
I think US G policy is hurting business, but it is the policy which invests in PAC desires that is really harmful, not the policy to strengthen the economy and the financial stability of the USG and US Dollar.
The rich should wake up and recognize the US dollar is the foundation of their holding and the continuation of monetarism and rising federal debt will end in a bad wayt for the US D.
Hell the US D was 120 yen a couple of years ago, it is now 87 yen and they are the ones in a lost decade?
US Grant , I am plowing through slowly, had a discourse in his memoirs, during the Civil War, in the part soon after he relieved Chattanooga, he contrasted a society which valued free labor (the North) against one whch degraded labor, made slaves and poor “hangers on” among the white community. He felt labor should be honored and valued.
We know who won the War Between the States and it was not the side which opposed slave labor.
Well this is all fun and all, but I would still like the grownups to weigh in.
If we are sitting in a position where major holders of capital are unwilling to re-inject it into active investment why not raise rates on gains on previously invested capital in order to replace their failure to reinvest as opposed to simply consuming that capital? I don’t pretend to have the chops to moderate that debate but I would like to see it going on.
In this economic environment where is the reasoned argument for an across the board resistance to increasing marginal rates? That this might require some carve outs for small business is to avoid the point, because those people are at the lower end of the incidence scale to begin with.
Morganavich, is there any real world evidence that higher rates of taxation actually are a drag on investment? Because the whole argument seems to rely on a much lower co-efficient of frictional capital investment than actually exists. Not everyone can take their billions to the Samoas and still thrive.
Or are all those billionaires going to go Galt to the Asteroid Belt?
The tax debate rolls to ideology.
To many all taxes are bad. They are a threat to property and a brake to accumulation (gotta leave thoise retained earnings alone) of property, which is an inalienable right of the miniscule but powerful ownership class.
Then they go to Calvinism that being; the rich are there because of the divine right of property and ‘grace.’
Taxes are bad, accumulation by selling to the government overpriced useless stuff and being paid with money you lent them is good., comes from the grace of owning congress and the media.
Except the right to collect rents is only for the chosen.
Paying back SS is no grace because it means paying rents to the unchosen less than accumulative masses.
It is all a Calvinist kind of thing.
Accumulation as long as you can get away with the pillaging is the way and the light.
Forget that Nazarene guy He had no money.
CoRev–Poor ole dumb me, just a country girl down here in the South, I keep wondering why we have to help people that are doing alright. If you have a small business organized the right way, you end up having a lot of control over your NTI. Want to pay less tax as an individual, change how much you draw on your business. The business also has control over how it uses its income–a whole bunch of new tax cuts just got passed. Spend your money the right way and you can gain productive capacity, hire people, or do nothing and you’re no worse off if you aren’t worried about taxes.
We are reluctant to help people who are unemployed, but have all kinds of tender solicitude for people who are doing ok? I expect I’ll pay more taxes this year and I don’t lose sleep over it. I suspect a lot of people feel the same way. Taxes are just the hole in the donut. Keep your eye on the donut……Nancy O.
That progressive Teddy Roosevelt got his face on Mt Rushmore.
He said: The rich man has a large stake in the government and is bound by justice to pay for it.
I have no issue cutting taxes, but the patriots need to pay for the wars and not by using SS, and then destroying it.
The patriots who want this war ought to pay for it.
Raise taxes to pay off the trillions in war and militarists’ profit debts.
CoRev–If you are settin’ down and figuring your gross each month down to the last $100 or $200 bucks, you are never gonna hire anyone. There’s training time, sick time, personal time, overtime, health insurance and Workers’ comp going into the productivity of every employee. Taxes, schmaxes. Are you already making money and want to make more? Hire someone and work the devil outta ’em. Then if you don’t make your nut, you fire the guy. You have to have a way to pay any taxes or avoid them. But you have to have a way to keep the gross up or you are gonna go broke, taxes or no taxes.
I imagine you’ve been self-employed. My husband was. My paycheck paid his employees’ wages and we made money over that most months. When we didn’t make enough, we fired people. There you go. That’s small business. When Silicon Valley moved to Seattle, orders for fancy solid rosewood office furniture dried up and we closed the business. No one wept when we went out of business. Taxes had nothing to do with it. I gave at the office. Nancy O.
Why be bitter? Ummmm. Well, that ain’t rain, is why. NO
If we are sitting in a position where major holders of capital are unwilling to re-inject it into active investment why not raise rates on gains on previously invested capital in order to replace their failure to reinvest as opposed to simply consuming that capital?”
bruce- underpinning this logic is the assumption that capital belongs not to those who accumulated it, but rather to the goverment as custodian for the society. that’s certainly not a social and property rights structure i want to liove under nor one supported by our constitution. acceptance of the government as the primary determinant of how much we should be investing/saving/spending sounds worryingly like fascism.
what makes you think that it is either ethical or effective to have government play such a role?
regarding the effects of tax on investment, take a look at countries like sweden and those in eastern europe that have driven investment way up through lower taxes and less regulation. egypt provides another excellent example of an investment boom driven by priovitization and tax policy. conversely, look at what happens in a place like venezeula whent he governement starts allocating capital for the public good.
higher taxes reduce return on invested capital. lower ROIC leads to less investment. that’s pretty unarguable. further, with investment now far more global that ever before, out tax hikes just favor investment elsewhere. as some one involved in capital management, i can tell you that interest in offshore vehicles is way up. capital is very, very mobile and will move where it is treated well.
perhaps the most destructive tax in terms of capital accumulation and investment is the inheritance tax. consider what a 55% estate tax does to a family business. if that is you primary asset, you may need to sell a controlling stake in what you built just to pay for your death. had steinbrenner died next year instead of this, his family would have had to sell the yankees. is that a desirable outcome? under what theory of ownership is it correct for the assets you accumulate in life to revert back to the state upon your death? the implicit fact in such a system is that they are ultimately the state’s and you are just borrowing them for a little while. the property of the wealthy is not a resopurce to be mined by the demos. such notions are not consistent with priavate property. worse, such forced governement stimulus will cause spending that the private sector does not view as beneficial (if it did, it would do it itself). so, it’s pretty nearly defacto inefficient spending. driving more and more of such id the road to ruin, not recovery.
but there is a bit of an elephant in the room here: overcapacity. with the current state of US underutilization, a great deal of capital investment is undesirable. we need to work through this excess, not enhance it. we also need to work down consumer debt levels, but doing so by creating moral hazard is just going to leave us in a more precarious situation for the future. you cannot spend your way out of debt.
the fact is that we are looking at a sustained period of below trend growth as we pay down the excesses of the borrowing driven period of above trend growth of the last decades. there is no redistributionist policy that can mitigate that without massive moral hazard (take from those who acted responsibly to the benefit of those who did not).
as rouibini has said (and i agree): we don’t have a good choice here, only bad and worse. we missed the good choices years ago.
Morganovich–Have you ever been drafted? Or just have to register for it? Or get a driver’s license? The nature of government is to direct and channel human behavior. I notice that you equate paying taxes to being punished or subjected to theft. Why is it ok for other people to pay taxes when it’s not ok for higher income people to pay taxes?
Tell me this: how do you know that all higher income people “saved and acted responsibly”. Remember Bernie? The GS gang figured a way to game the system of high volume trading. Should that exempt them from taxation purely on the amount of money they earned? Are capital gains better in kind somehow than hourly wages or salaries? Money’s money, isn’t it? So, why do people with dividend income pay less tax on it than on ordinary income?
As far as the government having control over the economy, I suggest that if you want an example of something NOBODY wants to privatize, it’s military spending. True, the government uses contractors and to build information and weapons systems, Hummvees, SAM’s and so on. But, do we want to turn control of the military to private industry? Certainly military spending about equals what we spend on SS. The rest of the budget goes for Medicare/Medicaid and some discretionary spending. So, right up front, you’re perfectly happy for the government to keep a standing army, no questions asked. But, SS is different.
I don’t see how your argument makes sense. But, it’s clearly all above my paygrade, I guess. Nancy O.
Ideology supports this “the fact is that we are looking at a sustained period of below trend growth as we pay down the excesses of the borrowing driven period of above trend growth of the last decades. “
Taxes are not the only ,nor even the necessary condition to make that statement work.
Let’s see; growth trends in the past 8 years have not been ‘high’ in fact employment did not grow since 2002.
That excess growth since 1980 was at the cost of bubble-burst cycles, much different than boom bust. Monetarism and the run to be ahead of inflation is the growth trend the past 30 years. The financial sectro is twice the part of GDP in the past 30 years.
Ideology, if nothing changes and the USG keeps borrowing to pay war profits and keep it socialist suppliers paying out excessive dividends for non market performance, nothing will change.
You do point to the fact that more needs to change than marginal tax rates.
Laffer and monetarism have not worked so let’s get back to basics.
Ideology.
Check this out:
http://www.huffingtonpost.com/robert-creamer/why-congress-must-end-bus_b_661872.html
ilsm-
that’s not the argument i was making. i’m not making some anarcho-capitalist claim that all taxes are bad and evil. my argument is aginst the keynsians who argue that increasing taxes to the the governement can control the business cycle is a good idea. it’s both counter productive (like the asymetric fed responses to bail out every crash but never head off any bibbles) and ethically unsound. the keynsian argument to take from the wealthy because they are not investing so what harm could it do is what i object to.
it essentially amounts to a threat: spend your money or i will spend it for you. that is a fascist doctrine. it is not a coincidence that the first US leader to really go in for keynsianism (FDR) was also an admirer of mussolini. nor is it a coincidence that his attempts to spend our way out of the debt bust of 1929 were so unsuccessful. absent WW2 and the destruction of the capital base in the rest of the world bailing us out, that result would be painfully clear. as there appears to be no similar exogenous driver at present, the detrimental effects of keynsian spending on a debt bust are going to be quite apparent.
politicians love keynes as hsi doctrines allow them to shower largess upon constituents and play the savior, but you cannot spend your way out of debt any more than there is such a thing as a shumpeterian bailout.
the illusion that enlightened governement can take the shocks out of the business cycle is a dangerous lie. it’s what got us into this debt mess by encouraging over investment and consumption driven by debt for decades.
it’s not the concept of tax i object to, but rather the increasing of taxation for political gain while wreaking economic harm and enhancing moral hazard.
Tax Cuts Expiring in 2010
1.)Tax Rates. The top tax rate will go from 35% to 39.6%. In addition, if nothing is done, it will mean higher taxes across the board, all tax rates on every income group increase. See the proposed 2011 tax rates for more information.
2.) Capital Gains. The 0% long term capital gains rate will go away. Capital gains rates will go up to 10% for lower tax brackets and from 15% to 20% for higher tax brackets.
3.) Dividends. Dividends will be taxed as ordinary income, with the new higher rates. Right now the dividend tax rates are 10% and 15%.
4.) Child Tax Credit. The child tax credit will return to $500 from the current $1,000 per child. In addition, it may not be refundable for some taxpayers.
5.) 529 Plans. 529 plan withdrawals will not be allowed tax free for computer or Internet access.
6.) Business Taxes. In addition, various business taxes will change including the payroll tax credit and section 179 expense deduction.
7.) Estate Taxes. Without any action, the estate tax (or death tax as some like to call it) exemption will go back to a $1 million exemption.
8.) Other Tax Credits. The tuition credits will be limited, as will the
It is all a Calvinist kind of thing.
That’s why these arcuments go nowhere. You can’t refute a theology. A theology is impervious to any logic but its own, and a revealed theology — like marketolatry — doesn’t even rely on that.
In the middle ages they used kindling and a stake and a medieval box of medieval kitchen matches.
We don’t roll that way any more.
bruce-
that data is very muddy. sure, there used to eb a 90% income tax on the very rich, but it’s not comparable to today is it was so laughably easy to shelter oneself from that tax that no one paid it. this is not so today. just comparing tax rates leads to too simplistic a picture. there has been a great deal of trading for lower tax rates for greater tax reach/enforcement. seem to me you’d need to use overall tax burden to GDP as a figure, but even that will kick out spurious results around a recession. GDP drops, losses go up, so taxes plummet more. this makes for a period of apparent low taxes but also with low investment. this is a much noiser system than many suspect. we’ve tried to build some models around it without much emerging. i’ve seen a few stabs taken here on angry bear, but they have run into the same issues and i fear their predictive/correlative value is not what has been claimed. mostly, they are just mistaking the correlation of reduced taxes due to economic performance and reduced investment because of the same as a causality between taxes and investment.
taxes get cut in recessions when there is overcapacity. thus, the lead time on driving onvestment is long as you need to chew through excess capacity first. but if you take away that retained capital, there will be less to drive growth when spening becomes attractive again.
it’s a very thorny issue and the time and capacity shifts are very difficult to build into models.
instead, let’s consider a thought experiment for a moment:
there is a risk free rate of return. at the moment, let’s call that 3%.
to invest in a risky venture, you need some premium in expected return to compensate for the risk.
i presume we are in agreement so far?
just what that premium is will depend on how risky the venture is. for the sake of discussion let’s call it another 3%, so we need 6% expected return to make a further investment in our small dry cleaning business. faced with a marginal opportunity offering 6%, we’ll go ahead. but take our tax rates up from 33 to 36%, (a 9% increase in tax) and at the margin, it isn’t worth it anymore. the effetcs of the 60% hike in cap gains will be even more pronounced. 6% return taxed at 15% is 5.1%, taxed at 24% its’ 4.56%. that’s a big difference. even if the return were 10% and we would still be attractive at the risk adjusted rate, certainly we will have less money left to put to work under higher taxes.
between reducing the number of attractive opportunities and the amount of capital left to pursue such opportunities that remain, it’s pretty difficult to argue that the investment pool hasn’t shrunk.
there is no economic doctrine that describes tax increases as stimulative. not even keynes goes that far.
Morganovich–What moral hazard are you talking about? The one that hungry people face every day or the one faced by people who pay taxes and kvetch about it? You don’t make your case because you are using a priori reasoning. And, are even more repititious than I am. That’s saying something. NO
“…. the keynsian argument to take from the wealthy because they are not investing so what harm could it do is what i object to.” morganovich
Well then how about the Jacksian argument that taxes are not for the purpose of redistributing wealth, nor for the purpose of tinkering with the economy based upon some fool economists’ hypothetical construct. Keep it simple stupid. Collect taxes for the purpose of funding the government as it carries out its appointed tasks, whether those be wars of adventure in the middle east or building an interstate highway system, or whatever.
“…it’s people’s money, not governement money. why should the governement be the arbiter and redistributor of capital?” morganovich again.
Well that’s one short sighted comment. Did those people get all that money without participating in an economic environment made safe by their government’s rules and regulations? Remember that the government carries out the will of those people and in so doing has expenses to pay. Are you suggesting that those wealthy investors don’t have a major say in what their government decides to do regarding any issue? Arbiter and re-distributor? is the military budget really a form of wealth distribution? Or, is it the people’s responsibility to fund a defense department created by its elected representatives? You speak of the government as though the wealthy had no role in selecting the representatives that decide what that government will do with the wealth of the nation. As noted, short sighted to the extreme.
Maybe you are trying to suggest that the government is controlled by the poor and the working classes. Maybe Obama is really a socialist in spite of his significant support of corporate America, of the financial industry and of the status quo. The Executive Office is over flowing with the ideology of wealth redistribution. With guys like Larry Summers, Rahm Emmanuel, Ben Bernanke and Timothy Geithner I’m sure that the socialist agenda is well represented and that the wealthiest Americans have no spokesman at the President’s ear.
Morganovich, Are you nuts?
Jimi
thanks for the facts. actually, it all looks like sound fiscal policy to me. at least until we stop hearing doom and gloom about the deficits.
Who’s running and growing the business while the owner spends all his time figuring how how to dodge taxes and filing relevant paperwork?
Also, what you call reluctance I call being pro-active. Teach someone that they can depend on the state, and they will, well, depend on the state. What you call “helping out the poor” many would call “locking the poor into their place through perverse incentives”
What I find in these forums seems to be a bunch of people saying, “3% wouldn’t make me change my behavior”, ignoring the macroeconomic effects. Perhaps that 3% would change 3% of business owners decisions to hire a new employee. What we do know is that 3% of extra income to the feds ain’t going anywhere productive.
CoRev
i would sign a pact. use the tax increase to pay down the deficit. when the deficit is paid down to where the screaming stops, reset, using whatever argument you think will work for you.
You are making the fallacy of equating wealth to money. The rich could easily relocate their wealth to be denominated in rupies and Indian assets. If you tax them enough, they probably will, too.
This is why you don’t run a business. Employees don’t just start work and immediately you pocket the money. You invest time, energy, wealth into training them, filing paperwork and adding to the payroll, dealing with the risk that the employee might be a loser, etc., and then you reap the benefits later. Taxes reduce the amount of capital available to small business owners to make the initial investment, and making hiring that much more of a too-risky proposition.
Morganovich
as ususal, you don’t know what you are talking about, and are incohernt to boot.
Keynes was not interested in a command and control economy. He was an “investor” himself.
I can’t make myself think that making the taxes on capital gains more or less the same as taxes on earned income is a real injustice, or disincentive to invest. If I have idle money sitting around, i will do whatever i can with it that makes the best return for a reasonable risk. whether that return is five percent or ten percent would make no difference in the world to me if i didn’t “know” i “coulda” gotten more “if only” i didn’t have to pay taxes.
as far as it being the rich guys money, well, yes. but the rich guy lives in a country he gets some advantage from, so he might as well pay his share. it’s a damn shame, but it’s true, you can’t expect people to voluntarily pay their fair share for the benefits of civilazation. that’s why taxes were invented. been used by all societies. even right wing ones. except were the rich got so much power over the government they stopped taxing themselves. that usually led first to economic catastrophe, then to revolution. but what would you know about that?
I love how you mention training time, health insurance, workers comp, etc., but when it comes to taxes you say “taxes schmaxes”. That is hilarious. All those other costs are the important ones, but taxes are somehow special and can be dismissed out of hand. Unbelievable!
coberly:
>you seem to be making the wildly fallacious assumption that “incentives” come from tax >cuts. How about “incentives” comes from making money.
uhh… tax cuts increase money made. how is this not an incentive again?
cob-
and as usual, you are rude and add nothing to the debate.leaving me with no interest in speaking with you.
happy trolling.
Morganovich,
I am nothing of a keynesian, I am more a Marxian. (I used to be an enemy of Marxism).
There seems to be a big problem taxing capital (maybe that the owners control the USG), but it is all right to tax labor, into poverty. And the deficit commission seems to wish to extend it to death.
What incentive to work? Much less to continue to suffer under the current regime.
nancy-
of course the purpose of governement is to provide some structure to personal behavior. the question is “what and how much do we want”?
my view is that demanding that those who do not wish to spend thier money or have it spent for them in a pointless and counterproductive attempt to control the business cycle is taking it too far, just as kelo vs new london’s seizure of an old woman’s home to that a mall could be built is taking it too far. i do not view controlling the business cycle as a legitimate (or even possible) role for governement.
my arument is that governement policy cannot eliminate the busts of the business cycle, only move them around a bit until we get backed into the sort of corner we are currently in. thus, i am uninterested in paying higher taxes to allow the pursuit of a policy i deem to be a failure in much the same way you seem to be unhappy paying taxes to fund military adventurism. arging that governement has infringed on liberties in the past (like a draft) does not excuse future infringments any more that you can justify a war atrocity by claiming the other side committed them too.
i’m not sure where you’re going with this army example. it’s certainly not an arument i’ve ever made. can one potentially make an arument that a poweful army beneifts the US by deterring attack and keeping our shores in peace. the extent of spending is needed to do so is obviously a very debatable issue. i suspect we’d be fine with a great deal less.
personally, i favor a flat tax accross the board, no business or mortgage subsidies of any kind and a smaller government that the one we currently have. there’s lots of room for well intentioned intelligent people to disagree on how much governement we want, but asking governement to take investment and spending decisions is essentially an invitation to the sort of fascist policies popular in the 30’s. that, to my mind is worth opposing.
i do not understand your GS argument at all. who said they were not paying taxes? regarding high income taxes, please keep in mind, the high income americans already pay essenttially ALL federal income tax.
the top 1% pay 40% of taxes. the top 10% pay 70%. the top 50% pay 97%.
notions that somehow they are not paying their share seem a bit shaky in light of those numbers.
it’s always easy in a democracy to gang up on a small group. the whole reason for rights is to prevent that from happening. how would you feel if your town voted to take your house so 5 other people could live in it? you’d (justifiably) feel tyrannized. sure, perhaps the rich could pay more to benefit some others, but that’s not the same question as asking “is it fair to make them” much less “will they produce less and shrink the pie for everyone if you do”.
why is it fair for 2% of taxpayers to pay half of income taxes? they certainly don’t consume half the benefits of governement.
why is it fair to take 55% of someone’s wealth when they die? by what rationale should wealth revert to the governement when you die?
Actually tax cuts increase money retained by the beneficiary of the tax cuts.
When there were surpluses as far as the eye could see and long term USG was dropping maybe they should have cut SS payroll taxes because there was the first father of the surpluses.
the moral hazard i refer to is that the government steps in and bails you out when you do stupid things like overborrow. if you beging to expect this, you take more risk secure in the knowledge that rates will go to zero and the government will let you squirm out of your bad decisions at the expense of those who acted responsibly. under such a system, the incnetive is to take too much risk.
marxist? talk about a bankrupt ideology. look how well command and control systems did protecting labor in the soviet sphere. look at how it’s ruined venezeula. it’s causing FAMINE in just a few years.
equal in starvation is not somehting to aspire to.
Jack–Coberly has given up on Mr. Morganovich. I have given up. Possibly Bruce, too, from what I gather. Mr. Morganovich is right by his standard and no other standard exists for him. So, I propose we thank Bruce for another excellent post and geddouddahyah. I need to go hang out on DKos and FDL and all them other Commie pinko anti-capitalist sites to recover my equanimity. Bruce has been knockin’ them outta the park lately and I am looking forward to more such discussions. But, look at the time, gotta go. NO
Businesses are taxed on net income (i.e., revenue less expenses), unlike personal income taxes which are based on gross income (with a few deductions). Employee compensation is an expense that reduces a business’s net income (e.g., if the business hired someone for $50k per year, its net income would be corresponding reduced by $50k, with a corresponding reduction in the taxes), so taxes on net income should not directly affect hiring decisions. The business has significant flexibility to reduce its taxable net income by hiring. Any taxable net income essentially is either saved by the business or distributed to the equity owners. Any reduction in taxes on the equity owners would have only an indirect effect on hiring (e.g., equity owners invest the tax savings in different businesses — if the business needed the money, it wouldn’t have made the distribution). Claiming that lower taxes on the equity owners will spur hiring is incorrect functional analysis, similar to the claims that subprime mortgages are not a concern because no lender would approve a borrower who couldn’t repay the loan.
isn’t it amazing how we used to emerge from recessions all by ourselves back then federal outlays were only 2% of GDP (pre hoover).
the rest of your argument seems like confused straw men. so you support the notion of government being able to force you to use your resources for the common good just because you aren’t using them? that, to me, is a very dangerous rationale. using it, they could come borrow your car for pro growth pizza deliveries because you are out of town for the weekend and won’t miss it. hey, unlike taxes, at least you’ll get it back.
i’m not objecting to the notion of tax, rather the rationale that is being discussed to rasie them namely that it is the governement’s job to make us act in certain ways as economic actors. i beleive in the primacy of the rights of the individual over such collectivist notions.
your democracy arument is pure non sequitor. i’m making an argument about rights. the purpose of rights is to prevent democracy from devolving into tyranny of the majority. you appear so used to thinking in terms of “common good” that you have embraced ends justify the means thinking.
there are legitimate reasons to raise taxes. if a town need to rebuild a school ruined in a flood, that’s a legitimate reason to tax. but taxation for the puropose (as was described in the initial piece above) to take from the rich to drive growth is not a legitimate reason. it amounts to kelo vs new london all over the country.
just as murder to stop an armerd assailant in your home from attacking your children is not the same as murder to steal a car, you need to seperate the what from the why to see what i am arguing.
Justin,
I agree…The question is why would we even risk any tax increase on that 3% in an ugly economy, when the money that is gained from it is like pissing in a lake and trying to measure how much the water level in lake rose?
It’s all about Class Warfare!
But I say let them go ahead, it just polishes ’em off in 2012 and insures the Republicans end up with the same majorites as the Demcorats had in 2008.
Ilsm,
A Marxist?….And you at one time question me about Freedom?…….Pathetic!
No wonder you keep going on and on with all the Military Industrial Complex B.S. Why didn’t you just fess up about being a Commie back when I first accused you of being one?
Didn’t have the guts…eh? Needed some to take over the government and the Executive Branch before you felt comfortable?….Figures!
justin,
How unbelieveable? Explain.
jimi, morganovich,
Guts, hey I am a veteran. Don’t need to worry about my guts. How bout you? Earned your spurs?
Guys you might know that Marx was an economist and that his theories were not applied by communists like Lenin or Mao? Or all those guys in central Europe?
Do you know the difference between economic theory and dictatorship by megalomaniacs?
Do you know that Hitler was closer to Marx than the US at the time? National socialism…………..
Marx’ theories on labor are interesting and really scary as they recognize that capital gets paid rents but labor is exploited to make the rents.
That is the issue here, you fear labor vis a vis capital.
St Peter established something like Marxism in the early christian communities. As did some of the monastic orders in the late middle ages.
Mao’s marxist successors seem to be buying up the US.
I just don’t understand. I am long in the tooth and it has been quite a long time since I did my MBA.
There are many more sources of working and long term capital than retained earnings.
Explain ROI and why paying taxes affects ROI of an investment in plant, inventory or equipment, particularly when real interest rates are 0.
And a small business can sell ownership to avoid borrowing and so forth.
Some one aside from the USG should use leverage.
USG leverage is bad.
Apologies to all if this note of mine repeats or represents data posted by another. I’ll confess to having made it only half-way through the comments list before cilcking away in annoyance to find data on SMB jobs creation/destruction. Not surprisingly, I landed on a Scott Shane data set.
Here’s the link
Shane’s point is that to put all SMBs in a common bucket is to make a significant category mistake. I believe this point complements and amplifies the above made (and remade) point that putting all SMB owners into the same bucket as all >$250,000/yr income earners is also a category mistake. Not only do 2 wrongs fail to make a right, but committing 2 “kantian” category mistakes in 1 argument foreshadows the judgement of a self-impeachment trial.
justin
well, no doubt if the IRS comes to me and promises to cut my taxes if only i will go out and make more money, i will begin to understand your point.
” In addition, if nothing is done, it will mean higher taxes across the board, all tax rates on every income group increase.”
Jimi that would be more convincing if the Right hadn’t been arguing that the lower 50% don’t pay taxes to start with due to deductions and EITC.
Get your talking points straight.
The stimulus package had big tax incentives for small business. Misguided in my view, but they were there.
justin
sho nuff. that business is risky business. cain’t see how anybody would bother makin money if they had to pay taxes on what they made.
oh, hell, morganovich
i guess i am better than Keynes then, because i go that far. tax the bastards enough so they have to go out and make more money to get by. that oughtta stimulate em.
morg
can’t help myself. i always kick a cripple when i see one.
“it was so laughably easy to shelter oneself from that tax that no one paid it.”
Yeah that is why public debt as a share of GDP dropped so sharply from 1946 to 1964 at 90% marginal rates, and continued dropping at a slower rate from 1964 to 1980 at 70% marginal rates only to start increasing rapidly at Reagan’s initial 50% rate. Because no rich people were paying taxes at those higher rates.
http://en.wikipedia.org/wiki/File:USDebt.png
Pull the other finger.
“…so you support the notion of government being able to force you to use your resources for the common good just because you aren’t using them? that, to me, is a very dangerous rationale.”
Again our friend morganovich, and note he does digress from my own point.
For the common good? Just because you aren’t using them? What did you read of what I wrote? Certainly not the words on the page. There is a diagnosis for seeing things that aren’t there. If highways, the military, the Coast Guard, the SEC, etc, etc. are the common good, I guess I’d say that taxes should go to the common good. The government that we all elect determines what is the common good, though Georgie Boy was stretching the concept in Iraq and Afghanistan. You failed to address the issue of representational selection. The very wealthy have the greatest influence on the elected members of the government. Therefore they have no basis to bitch about the taxes that need to be collected in order to fund the activities of that government.
And taxation has nothing to do with what one might be doing with the money one has earned. Whether you do something productive with it, or put it in your mattress, it is the stuff that will enable you to pay the taxes that your government sees as necessary to fund the conduct of its activities. I don’t like to pay taxes that support stupid wars of no good consequence. I don’t like to pay taxes that provide corporate welfare to agrobusinesses and resource extraction businesses. What, morganovich, is it that your government does that you
object to? You can’t complain about taxation if you’re happy about all of the government’s activities. And no, before you go there, the Social Security contributions and Trust Fund weren’t meant to be a means by which we supplement the general fund. So don’t gripe about paying the interest on those special T-Bills. They are equally, maybe more so, legitimate as are the ones that you may have in a vault. Maybe you would be willing to give up the interest on what ever T-Bills you hold.
I suspect I know who Morganovich actually is and why engaging him gets you nowhere. But Dan makes those calls.
Thanks H-Bob and wphurley. I am not sure I agree, disagree or even understand your arguments but this is the kind of participation I was hoping for.
There really are theoretical arguments beyond “Taxation is theft” on the one side and “Property is theft” on the other extreme and Angry Bear is in theory devoted to bringing those theoretical arguments in line with practice.
Thanks again.
funny ideology for someone so anxious to live of the taxes of others…
bruce-
out of curiosity, who is it that you think i am?
given that i don’t thnk i know you, i suspect you may be in error, but one never knows, so i thought it was worth asking.
and what is it about indivudual rights you guys find so offensive? seems to me they were the foundation of a very successful country.
is it just that you hate wealthly people (and here i speak of nancy and cob, not you bruce)?
seems that any time discussions on these threads head into philosophy, we get utilitarian arguments based on ends justifying the means. to me, that’s antithetical to rights and liberty.
if your beleif is that ultimately, we all work for the good of the nation, then yes, we are absolutely at an ideological impasse. i beleive governements should exist to safeguard personal liberty, not as ends to be served by their subjects.
if you disagree, i doubt we’ll ever see eye to eye on the matter. libertarians and marxists are awfully far apart in ideological terms.
Fine with me.
Let them go then they can get India to build a war machine and plunder its working classes.
Good grief…there goes the religion and there goes any connection to possible polcy questions. No wonder Bruce Bartlett is sick of this kind of thinking…
And there goes the class warfare trumpet. For a 3% change. Don’t you ever want to try to provide examples of data…even Greg Mankiw might blush.
morganvitch — according to the NBER in the pre-hoover days when the US came out of recessions all by itself the economy was in a recession 48% of the time.(1864-1919 peace time cycles)
Since 1945 the US economy has been in a recession about 15% of the time.
I’ll take the time with a mixed economy and large government, thank you.
Under the modern mixed economy real per capita GDP growth has been almost 50% higher than in your good old days.
morganovich also knows that at least in general, spencer…he is simply goading us and is being dishonest about basics…I also did not know Calvin was anarcho-capitalist, another duck and weave piece of simple lack of honesty.
dan
hard to tell if he is being dishonest. i think he is just a lonely neurotic with nothing better to do than destroy the possibiity of an intelligent discussion.
you have to watch him over a longish time because he can begin with what sounds like a colorable argument. but it always breaks down into special pleading an rationalization for “taxes is theft. and the rich are gods walking the earth among us. don’t anger them or they will withhold the rain and crops will wither.”
of course he could just be an intern at a think tank assigned the task of disrupting conversations before they have a chance to inform the as yet uninformed. given that AB is on a list of influential economics blogs, i don’t think it is paranoid to suggest such a thing.
Rdan,
It is not a 3% change it is a 4.6% increase for the top 5% of people who already pay 60% of the tax bill, or a 4.6% increase for the top 3% people who already pay 40% pf the tax bill.
The reason I don’t need to use numbers to prove that the left’s motivation is strictly class warfare, is because of a basic knowledge of history.
The revenue has never been higher than 20% of GDP, even when tax rates for the highest earners were at 91%. The average is 18% of GDP. The first year we will see a bump in revenue but it won’t last, and the consequence in economic activity will out-weight the increase shortly after. How do I know…Well….there is plenty of evidence to suggest that the population changes it’s behavior based on tax structure.
When GDP is in a decreasing trend the effectiveness of a tax increase isn’t going to produce the results required, but may actually make it worse. It is spending that is the controlling factor when GDP growth is in a decreasing trend.
http://blogs.marketwatch.com/fundmastery/2010/07/02/does-hiking-tax-rates-raise-more-revenue/
Lets look at a holder of capital. Presumably it is not in a mattress in cash. It may either be in a bond or in a bank. A bond provides funds to allow a company or municipality to build something or do something. Banks don’t park their cash in the vault, (except now that the fed pays interest on reserves they do) but in general loan it out keeping say 10% as reserves. So the capital involve is in all probablity not idle but doing something. It may well not be invested in equity but rather in debt which is by far the larger market.
So short of the mattress money market (or the hole in the ground equivalent) the money is invested likley in fixed income not equity. As our society gets older in general more investment is supposed to be in the less risky fixed income market.
On the corporate side I suspect the reason that cash balances are so large is that having had a problem with borrowing in 2008 many companies want to be able to go a while if lending dries up before failing.
I am joining this a bit late, but Bruce asked about how the interest on public debt may be different from interest on intragovernmental debt (when the Treasury borrows from Social Security, etc.).
Interest on public debt is a cash outlay, affecting the current budget.
Interest on intragovernmental debt is “paid” by issuing Treasury securitiues, so there is no cash outlay, and no current effect on the budget.
From a paper entitled “Financial Audit, Bureau of the Public Debt’s Fiscal Years 2000 and 1999 Schedules of Federal Debt.”
Page 5 “Interest on debt held by the public is a current burden on taxpayers. In contrast, intragovernmental holdings perform an accounting function. They do not have the current economic effects of borrowing from the public.”
Page 13 “The interest paid on the debt held by the public affects the current spending of the federal government. Interest credited to federal government trust funds and other federal government accounts, on the other hand, does not result in an immediate outlay of the federal government because one part of the govertnment pays the interest and the other part reeceives it.” (sounds like a marriage made in heaven). The interest on intragovernmental debt, by the way, works just like the principal. When the Treasury borrows from the Social Security trust fund, it is an asset for the trust fund and a liability for the Treasury. Thus, in budget reconciliation, it’s a wash. In the meantime, the Treasury uses the asset part immediately for current giovernment expenses. The liability part does not affect the budget – principal or interest – until the trust fund’s outgo exceeds its income, excluding interest, (which happened this year with Social Security). Thus, it was many years, over 25 years, of “float” that the government used the asset without expending any money on the liability.
Now, that’s my kind of debt!
Go to: http://www.gao.gov/new.items/d01389.pdf.
Don Levit