Let’s be real folks..marginal tax cuts don’t motivate
From the LA Times op-ed page comes this piece by an entrepreneur:
I’m a venture capitalist and an entrepreneur. Over the past three decades, I’ve made both good and bad investments. I’ve created successful companies and ones that didn’t do so well. Overall, I’m proud that my investments have created jobs and led to some interesting innovations. And I’ve done well financially; I’m one of the fortunate few who are in the top echelon of American earners.
For nearly the last decade, I’ve paid income taxes at the lowest rates of my professional career. Before that, I paid at higher rates. And if you want the simple, honest truth, from my perspective as an entrepreneur, the fluctuation didn’t affect what I did with my money. None of my investments has ever been motivated by the rate at which I would have to pay personal income tax.
As history demonstrates, modest changes in the tax rate for wealthy taxpayers don’t make much of a difference if the goal is to build new companies, drive technological development and stimulate new industries. Almost a decade ago, President George W. Bush and his Republican colleagues in Congress pushed through a massive reduction in marginal tax rates, a reduction that benefitted the wealthy far more than other taxpayers.
We were told the cuts would accelerate business growth and create jobs. Instead, we got nearly a decade of anemic job growth, stagnating wages, declining incomes and high inequality.
The supply-side, trickle-down economic policies of the last decade benefitted people like me, but the wealth didn’t trickle down. So while we did quite well, people who live from paycheck to paycheck didn’t.
When inequality gets too far out of balance, as it did over the course of the last decade, the wealthy end up saving too much while members of the middle class can’t afford to spend much unless they borrow excessively. Eventually, the economy stalls for lack of demand, and we see the kind of deflationary spiral we find ourselves in now. I believe it is no coincidence that the two highest peaks in American income inequality came in 1929 and 2008, and that the following years were marked by low economic activity and significant unemployment.
What American businesspeople know, and have known since Henry Ford insisted that his employees be able to afford to buy the cars they made, is that a thriving economy doesn’t just need investors; it needs people who can buy the goods and services businesses create. For the overall economy to do well, everyday Americans have to do well.
(h/t Dan B.)
a thriving economy doesn’t just need investors
No no no!
In every circumstance, and under every condition, the garden needs more water! Even during a 16 foot flood!
The CEO’s of water production companies tell us they won’t have it any other way.
i don’t think it’s exactly that the middle class doesn’t have enough money. but they may have spent all they had and can borrow, and now they need a rest.
in fact the whole economy might need a few days at the happy hills rest and recovery center. time to detox from all the stimulants
y’know, something that grows without limit is a cancer. a healthy organism grows to a health size and then stops growing… not that it becomes static, but it finds something useful and interesting to do with all that growing it has done.
maybe it’s time to put our teenage years behind us.
that doesn’t mean we need to leave all the people we ran over on our drunken drive to get here lying in the street.
As I’ve posted with graphs in the past, Yes, the middle does not have enough money as it relates to a viable economy that promotes the qualities of living that a democracy offers.
The 1% is taking income out of the economy faster than the GDP can make it. That also means the middle class and all those below do not have enough money.
The only stimulants people need to detox from is Madison Ave. Shut off the marketing, and people will see the rat race they have been in. Granted it is a deep, deep trip they are on when you consider that the political parties are now accepted as “brands”!
Can we disassociate governments social purpose from the people any further than discussing ideas and ideals as “brands”?
not sure. when our indigenous population met fire water it didn’t take madison avenue for them to do themselves harm.
i am not sure humans are capable of doing any better. but the only points i was trying to make here is that economically “stimulants forever” may not be the answer this time.
and the middle class feeling sorry for itself doesn’t sound like more than an alcoholic’s rationalization for needing another drink.
there is some real poverty in America, and certainly waste of human potential for human life… but seeing what people who have money do with their lives, its not clear that more money is the answer.
I can buy this is one sense.
The “pure entrepreneurs” those who start, build and sell companies, probably are not as interested in tax rates. They tend to either make a very big score or go bust.
Those who hold and build companies have an entirely different focus.
I am no fan of tax foundation, what does it mean that “realized capital gains” have grown as marginal rates on what(?) have declined?
Whatever “realized capital gains means”?
What are the externalities etc.
Tax foundation has an agenda and don’t want anyone taking the red pills.
You should support their consclusions.
Does it matter wrt “realized capital gains” whether ownership is diluted or refined using or not using leverage?
“Realized” means the asset was sold and the gain was finalized, as opposed to holding the asset and deferring the tax on the gain.
sounds like doubletalk to me.
i have no doubt the big money boys play tax games. but i can’t see any reason in the world to give them lower taxes at this time.
All lovely, but the impact on actual output from tax changes at rates that obtain in the US is small. If there is a change in behavior, it is mostly behavior in the tax accountants office. It’s not clear to me why we should put aside a number of other economic and social goals merely so keep the well-off from telling their tax accountants to get busy.
If the real argument is that the well-off can avoid taxes, then a reasonable answer is to step up enforcement and perhaps to change the laws. The problem is that the rich get busy whenever there is an effort to change the laws, so that might prove counter-productive. Enforcement, then, is the way to go for now.
By the way, didn’t I just see research showing big swings in realized capital gains in response to changes in tax policy tend to be one-off responses around the time the policy changes? One of Goolsbee’s papers.
That is to say, lots of options are exercised to take advantage of the more attractive rates on one side or other of a policy change. The implication is that there is little actual change in business behavior – only in financial behavior at highest ranks of corporations. I don’t see that as a very convincing basis for setting tax rates.
Yes, the grandaddy of this was December 1986 when a lot of businesses and stocks were sold to avoid 1987 changes.
Realized means they declared their gains for tax purposes. So it seems reasonable that if the tax on capital gains is lowered, more gains would be declared. The same effect might come about if a raise in the rate is pre-announced. People would declare their gains before it became more expensive to do so.
Probably the most effective dynamic affecting the re-direction of capital gains would be the appearance of more opportunities for more capital gain investments. And IMO that seldom has much to do with capaital gain taxes.
Not to mention the Bush 5% corporate tax holiday for profits left in overseas subsidiaries.
What then would be the reason to raise marginal tax rates? You must believe that higher revenues will be the automatic result with the concept of taxable income elasticity not applying.
Sounds like another misguided reminiscence for the Clinton tax hikes, which did not raise significantly higher revenues until several years after the actual change in marginal tax rates. Individual income tax collections flatlined for two years after the 1993 tax hikes as a percent of GDP and were no higher in 1995 than in 1987, despite the higher top marginal tax rates. Revenues did not begin to surge until after the internet/telecom boom got underway, a boom which was undoubtedly aided by telecom deregulation and the 1997 capital gains tax cut.
Ah, one of those people who figures a quick sneer is the way to win hearts and minds. Supposedly read? What a small, small little person you must be.
Here’s the way it works. There are these theories, see? Lots of theories. Then, clever people test those theories against the data to see what happens. Dr. Goolsbee did. He found that most of what you claim to be true is not. You insist that it is true, insisting that what you want to see is clear in the data. Except that Goolsbee is the one who actually did the study. Which you presumably haven’t read. The data don’t support your claim. And while it’s clever and all of you to point out that the editorial writer guy is not a proxy for for this or that, what he claims to be true is, in fact consistent with some data.
You can toss around all the “obvious support for” and “marginal” that you want. Let you in on a secret. Most of us has seen this approach to making unsupported claims before. Manipulation of language doesn’t change facts. So, have a look through Goolsbee’s work. Have a look through Kimel’s work (easier for you to find than Goolsbee, since you are already here). See what you can learn. But don’t bother with the undergrad seminar language. Seen it. Seen through it. Not gonna work.
I thought the “realized” part of “realized capital gains” was the problem. Small business owners during high tax times keep their capital gains in the business, growing, investing and hiring new workers. Small business owners during low tax times take money out of the business and spend it on whiskey and hookers, which supports the economy less.
Jaundiced idealogue…oh dear, a familiar voice, and facile reasoning.
Wow, that’s calling the kettle black,
ya know, hon, the reason to raise marginal rates would be to collect more money for the government.
it might take eliminating some tax dodges, or putting up a tariff barrier, but at some point the bastards are going to decide they’d rather make money and pay taxes than not make any money at all.
hopefull before they destroy the country.
Just to say that I, like this guy, have been an equity partner and/or principal in whole string of startups, whose combined net worth ran into the tens of millions. (I’m starting another one right now.)
And I’m here to say that he’s absolutely right.
Raising marginal rates to raise tax receipts???
How about because the grandkids are not voting to spend today the we money borrowed that they will pay back?
Why worry about whether you pay 15% or 30% taxes on your realized “gains” it is going for a civil society?
If you don’t want to keep a civil society then I suspect you are no patriot. Do you want Sha’ria? The imams in Riyadh want you bowing eastward 5 times a day. The Sha’ria does not allow usury either!
And what is the issue?
Is there nothing in the future to invest your gain in which would yield as much?
Have you got to keep more 20% than the guy earning it through income? Why?
I think the wars and keeping a civil society are necessary and the realized gains are better spent there and you can finance the next big deal with leverage.
If it indeed is giving a decent return.
If it is not giving a return or too risky or just riding a buble up then pay the taxes!
Mike is a serious mathematician.
It is called hypothesis testing, something that is not allowed by the right wingers as it might present logical conclusions which at least explain how the hypothesis was derived.
What then would be the reason to raise marginal tax rates?
So the taxpayers, most of whom are too young to vote today, don’t pay more than 60% of their taxes to T-Bill holders in 2040.
So you don’t pay your tithe to some imam from Saudi Arabia.
Take care of veterans keeping the terrorist in Afghanistan.
Care for the poor people.
i am thinking that Steve Roth agrees with you… and the LA Times “entrepreneur”… and not with El Numeraire. one difficulty with blog comments and js-kit is that “this guy” becomes a dangling reference especially after js-kit rearranges the comments.
almost as bad as someone taking “realized capital gains” as a measure of “good for the economy.”
or taking “good for the economy” as “good for people.”
And it’s anti-unemployment – probably a lot of bookkeepers and accountants could be hired to do forensics on high income returns and earn their salaries by collecting owed taxes.
A pro jobs anti deficit initiative! And all it takes is making the political contributing class nervous! No, wait…