Relevant and even prescient commentary on news, politics and the economy.

Leonard says GOP Is intent on sabotage

by Linda Beale

Leonard says GOP Is intent on sabotage
 
Andrew Leonard of Salon writes often about tax and economic issues. In Friday’s column, he addressed the increasingly obstructionist tactics employed by far-right representative Paul Ryan and a coterie of other GOP representatives who are willing to sacrifice core systems in order to keep the military machine humming (and putting money into pockets of GOP arms merchant constituents) while ensuring that anything that provides aide to the less well off is labeled as a disrespected “entitlement” that can be chopped and destroyed at will. See Andrew Leonard, Sabotage: the new GOP plan, Salon.com (May 4, 2012).

Ryan introduced a bill on Wednesday that would achieve the Holy Grail of GOP political goals–continuing the ridiculous Reaganomics militarization by ending the sequester that would cut $600 billion from the military entitlement budget, and at the same time cutting drastically almost every single program that protects ordinary Americans. See Ryan offers bill to end sequester in bid to eliminate defense cuts, The Hill (May 4, 2012).


As a commenter on the Hill piece noted, the US military budget is overblown and needs to be cut.
The U.S. Spends More On Defense than Next Top 14 Countries Combined Wiki List of countries by military expenditures SIPRI Yearbook 2011 – world’s top military spenders in 2010 (in billions).

1. United States…..698.0
2. China…………… .119.0
3. United Kingdom….59.6
4. France………….. ..59.3
5. Russia………….. ..58.7
6. Japan…………… ..54.5
7. Saudi Arabia……..45.2
8. Germany………… 45.2
9. India ………………41.3
10. Italy…………. ….37.0
11. Brazil…………….33.5
12. South Korea…….27.6
13. Australia………….24.0
14. Canada…………. .22.8
15. Turkey………….. .17.5

Unbelievably, one of the things that Ryan would prefer to cut, rather than see some of the military’s perks diminish, is Title II of the Dodd Frank Act. I guess the radical right in the GOP has a short-term memory: it thinks there is no need for the government to have liquidation authority over the too-big-to-fail banks. Instead, it apparently would prefer more outright bailouts of the well-to-do bankers who speculate with our economy for their own private gains. Oh, and the GOP-led House financial services committee wants to defund the Consumer Financial Protection Bureau–to again allow the banks and insurance companies to undertake the rapacious exploitation of ordinary Americans through exorbitant and unconscionable fees. Other GOP “reforms” include medical liability, with the GOP protecting medical establishments from facing the piper when they make mistakes that they could have avoided through appropriate care.

Pretty clear just how much the Supreme Court’s terrible decision in Citizens United with its warped view of free speech in relation to elections is distorting our government’s ability to function for the good of ordinary citizens.

crossposted with ataxingmatter

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Taxes and Economic Growth: Real World & Simulations

by Mike Kimel

Taxes and Economic Growth: Real World & Simulations

Over the past few years, I’ve posted many times on an unpleasant reality: despite the fact that so many people believe otherwise, in general, lower taxes do not result in faster economic growth. It is really too bad, because we could all be better off if only lower tax rates led to faster economic growth. However, the association between slower econoimc growth and lower tax rates is something we can see in data from the US, whether we use national level data, state and local data, or anything in between.

Here’s a post I wrote not that long ago noting that when top marginal tax rates are below about 65% or so, cutting taxes is associated with slower economic growth and raising taxes is associated with faster economic growth. Here’s something a bit more academic showing the same thing.

As I’ve noted before, there’s a logical reason why lowering top marginal rates slows economic growth (except when top marginal rates are very high), and it should be obvious to anyone who has ever run a business: the easiest way to avoid, or at least postpone paying taxes for is not to show taxable income. If your business looks like it will show a profit, reinvest the revenues, pushing up costs and voila, you don’t have any profits for the IRS to tax. But, by doing so, you are also strengthening the company, which means setting the stage for faster growth in later years. And you’re more likely to follow this strategy, rather than consume your profits, the higher the tax rate.
Notice that this little story depends entirely on the self-interest of people in the economy. Money collected in taxes could be put in a big hole and burned, and the story would still work. (Of course, the story works better if whatever is collected in taxes is actually used productively, but that isn’t a requirement.)

The response I’ve gotten via e-mail and commentary comes overwhelmingly in two flavors: a. You lie about the data and you don’t understand how people react to changes in tax rates. b. That may be what the data shows, but it can’t possibly work in theory so it must be wrong.

I can’t help the group folks in group a – I’ve offered up my spreadsheets, and frankly, anyone should be able to replicate it – this stuff ain’t rocket science. But this post is for the folks in the second group.

For grins and giggles, yesterday I made a simple little simulation tool in Excel which is intended to look at the behavior of a very wealthy person reacting to changes in tax rates. In any given period, the person consumes some percentage of the wealth they happen to have. The remainder, the savings, are allowed to grow. Individuals get a benefit from both consumption and holding wealth.

 Their goal is, given the tax rate, to maximize the discounted weighted consumption & wealth over all the periods of their working life. I set tax rates at 0%, 10%, 20%, … 90%, and used Excel’s solver tool to determine the percentage of wealth they will select under each tax rate.

Results are as follows:

Figure 1

Given the parameters selected, here’s what we find: the higher the tax rates, the lower the less of their wealth people consume in any given period and overall. However, the greater the wealth they accumulate… which is essentially the story I’ve been telling to explain the data. As noted previously, in general, higher taxes lead to faster economic growth.

A few additional comments:
a. The simulation is simplistic, and it does not show the quadratic relationship between taxation and growth we see in the real world data. I believe that this can be resolved simply by taking into account satiation resulting from consumption.
b. The simulation indicates that increasing tax rates makes people worse off (the discounted sum of the weighted wealth and consumption tends to be lower for higher tax rates).
b. i. However, they leave behind more wealth. Put another way – individuals in any given period are made worse off, but their descendants are made better off.
b. ii. A more realistic scenario probably shows increased returns as wealth increases. (Mr. Romney, to use one example, has investment options available to him that you and I do not, and Mr. Buffett has options available to him that Mr. Romney does not.) Higher taxes might very well make a person worse off today but better off in the long run. Its great to live during the Gilded Age, a period during which tax rates fell from 75% to 24%… provided you die before the effect of the Gilded Age spits out the Great Depression.
c. Because of the way taxes are defined in this model, they play a similar role to compulsory savings. Put another way: this model can also explain countries with relatively low taxes but compulsory savings, such as Singapore.
d. The model also explains Tyler Cowen’s Great Stagnation.
e. Government spending does produce a benefit, though that is ignored by this model.

I haven’t decided whether I want to spend time improving the simulation tool, but, as usual, if anyone wants my spreadsheet, drop me a line. I’m at my first name (mike), my last name (kime), at gmail.

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Reform that "high" statutory corporate tax rate? Not necessary

by Linda Beale

Reform that “high” statutory corporate tax rate? Not necessary

I got an interesting item pushed to me from an online-MBA website blog where today’s item was on “10 Big Businesses That Barely Pay Taxes“. It looks at companies like GE, duPont, Verizon, ExxonMobil, FedEx, Boeing, Google and others that aggressively maximize the offshoring of profits and the onshoring of deductions (like the “domestic manufacturing” reduction in the tax rate, the research deduction, etc.) in order to tap out on taxes at zero or awfully close thereto.

The companies tend to dislike such coverage of their very low tax rates of only slightly more than 0% when they are quite loudly (and hypocritically) protesting how uncompetitive the 35% statutory rate makes them. The site notes that most of the companies have claimed that they pay a higher rate than the one noted here–usually by counting their financial statement deferred taxes as though they were already paid. Deferred taxes, however, are just an accounting way of noting the possibility of future taxes–they may never be paid (for example, if offshore profits are not repatriated, or if corporations are successful in lobbying for another very-low-tax repatriation holiday), and years of deferral can convert what appear to be substantial taxes into de minimis amounts, since that money is meanwhile invested and earning more money.

Here are some excerpts (not in the same order as in the blogpost itself):

1.Boeing may own and operate factories and research facilities all over the U.S., but the mega-corporation isn’t paying much back to the government for the privilege of doing business in this country. In fact, the company hasn’t paid anything at all for three years running. Over those three years, Boeing made $9 billion in profits but didn’t pay anything in federal income taxes, actually getting back more than $178 million in tax benefits. …
2. … A study found that in 2008 FedEx paid no federal taxes, which the company claims is an anomaly caused by depreciation deductions. …
3. … Verizon hasn’t paid a cent in taxes for the past three years. …[i]t actually makes money from the government in the form of tax subsidies and is the third largest collector of these benefits in the U.S., … . Like GE, Verizon has denied these tax evasion allegations, stating that they pay billions in taxes every year, but like GE, Verizon is counting deferred taxes in these calculations. …
4.GE has raked in more than $81 billion during the past decade, but little of that profit has been returned to the government in the form of taxes. While the corporate tax rate has held steady at 35%, GE has paid an average of just 2.3% of its income in taxes since 2002. And that’s just an average, some years the company didn’t pay taxes at all, getting off scot-free in 2002, 2008, 2009, and 2010 …

crossposted with ataxingmatter

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Common Cause Claims ALEC Violated Tax Exempt Lobbying Restrictions

by Linda Beale

 Common Cause Claims ALEC Violated Tax Exempt Lobbying Restrictions

 The Common Cause organization filed a complaint with the IRS under 26 USC 7623, the tax whistleblower act,  alleging that the American Legislative Exchange Council violated the lobbying restrictions applicable to tax exempt organizations through underreporting and operating in furtherance of private corporate interests.   The complaint argues that “ALEC’s primary purpose is to provide a vehicle for its corporate members to lobby state legislators and to deduct the costs of such efforts as charitable contributions. ALEC drafts “model” legislation provided by its corporate and legislative members, and lobbies for the adoption of that legislation. These goals are fundamentally inconsistent with ALEC’s claimed tax-exempt status as a charitable organization.”

The following paragraphs are from the introduction to the complaint.

This matter concerns the massive underreporting of lobbying by the American Legislative Exchange Council (“ALEC”). While ostensibly a nonprofit organization under Section 501(c)(3) of the Internal Revenue Code, ALEC’s primary purpose is to provide a vehicle for its corporate members to lobby state legislators and to deduct the costs of such efforts as charitable contributions. ALEC drafts “model” legislation provided by its corporate and legislative members, and lobbies for the adoption of that legislation. These goals are fundamentally inconsistent with ALEC’s claimed tax-exempt status as a charitable organization under 26 U.S.C. §501(c)(3), because (i) “no substantial part” of a charity’s activity can be “attempting to influence legislation,” and (ii) ALEC’s activities do not qualify under any of the enumerated purposes of Section 501(c)(3).

This scheme causes harm to taxpayers in two distinct ways. First, ALEC’s activities constitute an abuse of its 501(c)(3) tax exemption, which is reserved for organizations “operated exclusively ” for a limited number of purposes, such as “religious, charitable, scientific … or educational purposes ….” 26 U.S.C. §501(c)(3). Second, ALEC’s corporate members improperly deduct from their taxable income the dues and other contributions made to ALEC; such expenditures are non-deductible lobbying expenses under Section 162(e). In fact, because ALEC solicits very few contributions from individuals, its false claims of tax-exempt status appear driven by the desire of ALEC corporate members to deduct lobbying expenses as charitable contributions.
ALEC’s primary, if not sole objective is to “influence legislation.” Its bylaws state that its purpose is to “formulate legislative action programs,” “disseminate model legislation and promote the introduction of companion bills in Congress and state legislatures,” and “[e]establish a clearinghouse for bills at the state level, and provide for a bill exchange program.” 1 As recently as April 11, 2012, ALEC boasted that “for years, ALEC has partnered with legislators to research and develop better, more effective … legislation. 2Notwithstanding these claims, however, ALEC has reported ”for years“ to the IRS that it has not spent a single penny on lobbying or attempting to influence legislation. These tax returns are patently false.  (Complaint available here, on BNA’s tax service)

The complaint goes on to specify how ALEC develops legislation and works to get that model language enacted.  The following is an excerpt from this portion.

ALEC boasts about how frequently its bills are introduced in state legislatures to show its influence over the legislative process, publishing “scorecards” to demonstrate the high numbers of ALEC bills enacted. [Exhibit 9] In its 1995 scorecard, then-ALEC Executive Director Samuel A. Brunelli explicitly stated that corporations join ALEC to drive a legislative agenda in a cost effective way: “’This was a landmark legislative year in ALEC’s history,’ said ALEC Executive Director Samuel A. Brunelli. ’With our success rate at more than 20 percent, I would say that ALEC is a good investment. Nowhere else can you get a return that high.’” [Exhibit 11] Similarly, in a brochure that ALEC distributed to recruit more corporations for its private sector membership, it claimed that “during each legislative cycle, ALEC legislators introduce more than 1,000 pieces of legislation based on these models, approximately 17 percent of which are enacted. ” [Exhibit 12] It is telling that ALEC expresses its success in corporate terms, as a good “return” on a corporation’s “investment” in tax-exempt lobbying.
Beyond quantifying its influence by measuring how often its lobbying efforts succeed, ALEC trumpets how its Task Forces and other programs provide corporations with direct access to state legislators. In a near textbook definition of lobbying, the recruitment brochure states “ALEC provides the private sector with an unparalleled opportunity to have its voice heard, and its perspective appreciated, by the legislative members.” !d. The brochure further explains that “[t]his partnership identifies issues and then responds with common-sense, result- oriented policies. The two groups work in unison to solve the challenges facing the nation, with results that will define the American political landscape in the 21st century.” Jd. In other words, ALEC provides a network to influence the legislative process and deliver “results” to its private 13 corporate membership – namely, legislation favorable to corporate members’ interests. These statements by ALEC belie any claim that it is engaged in “education” rather than lobbying . The ALEC Task Forces provide a venue for corporations to lobby legislators while deducting the expenses as charitable donations.

The complaint goes on to outline the way ALEC presses for legislation, including issue alerts and one-on-one contacts with key legislators, bill tracking documents, model press releases and talking points to assist legislators in getting its model legislation passed,  hearing testimony by staffers in support of the ALEC legislation, and even  luxury conferences three times annually to which legislators are encouraged to bring families for subsidized work/vacations.

Legislator members on ALEC Task Forces are also eligible for “ALEC scholarships,” which reimburse a legislator’s accommodation, transportation and other expenses to attend the ALEC national conferences. Scholarships are also available for legislators to attend other events, including “ALEC Academies,” which are described as a “two-day intensive program on a specific issue;’ attended by invited members of both the public and private sector. Contributions to the ALEC scholarship fund are made by corporations who are solicited directly by legislators at the individual state level. See Exhibit 18 (a breakdown of payments to the ALEC in Ohio scholarship fund). According to the tax filings of PhRMA, the pharmaceutical lobbying group and ALEC private sector member, it provided $356,075 to the ALEC scholarship fund in 2010. 13Many of these expenses are likely deducted from corporate taxable income. The ALEC conferences are nothing more than a forum for tax-subsidized lobbying. ALEC provides logistical support in the form of travel, accommodations, entertainment, and family services, in order to facilitate lobbying by ALEC’s corporate members targeting ALEC’s legislative members.

The complaint considers whether ALEC even qualifies as a 501(c)(3) organization.  Suggesting that the only possible qualifying purpose that might be claimed is educational, the complaint concludes that ALEC clearly fails to satisfy any concept of an educational non-profit.

[E]ven if a tortured interpretation of the regulations led to the conclusion that ALEC is not engaged in lobbying, ALEC would fail to satisfy the most basic requirement for 501(c)(3) status – operations that are exclusively for charitable purposes . ALEC’s operations are neither charitable nor educational, much less exclusively so. They are pecuniary and political, and devoted to fostering the enactment of bills that will financially benefit and further the ideological goals of ALEC’s corporate membership.

crossposted with ataxingmatter

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Tax cuts for jobs. NOT! Another tax cut that is not paying out

First a qualification. I am basing the following on info I found on the net. If the info is wrong, then I stand corrected as to who is or is not paying but not as to what happens when a large entity does not pay. The specific city and company are used purely for example purpose because of familiarity. What follows could be any municipality with a similar size company calling it home.
 
Lately in the city of my flower shop the big talk is a $10 million deficit in the school department. It’s a funny story. See, the department hired a couple people and these people, along with the help of the city council and the school committee the budget numbers became not real. They budgeted $59 million but have spent $66.6 million. The total $10 million is a 2 year deficit. The funny part…we had a surplus. Though, where the surplus went to no one knows. The school committee insists there was no funny business and even voted down an investigation. So, if there was no funny business, then who gained and what did they gain by covering up a deficit? What benefit is there about lying about a deficit?
 
Of course, this is also a state funding issue. You see, the city has the typical city size problems that the surrounding town do not have. This article notes:
 
 
“The committee chair pointed out that Lincoln has a budget of $48 million to educate half the students Woonsocket teaches with a mere $59 million.
 
“And they don’t have the special needs we have. They don’t even have a quarter of the IEPs we deal with,” she said.”
 
 
On top of this, we’re one of those states that has been passing ALEX type legislation. In particular we passed the one that thinks it is smart of a state to set a cap on how much a municipality can raise taxes in any given year. The city notes that default is an option, but is currently begging the state legislature to allow a supplemental tax bill.

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Buffett Rule rejected by Senate

by Linda Beale

Buffett Rule rejected by Senate

The Senate rejected the effort to make tax policy commensurate with the slogans about American values that we parrot freely–opportunity, paying fair shares, etc. Given the now rigid “phantom” filibuster rule requiring a supermajority to pass anything in the Senate, the Republicans –especially if joined by a few of the right-leaning Democrats–can defeat just about any attempt at reasonable taxation.

So Senate 2230 got only a majority of the SEnate (51 votes) in support of the effort to move the Buffett Rule–calling for a phased in increase to 30% minimum tax on taxpayers with income in excess of a million a year.


Minority Whip Jon Kyl (radical rightist Republican from Arizona) said Congress should instead be focussing on the economy. BNA Daily Tax RealTime (Apr. 16, 2012 at 7:35pm). Shows how completely out of tune with reality the Republican right is. Focusing on the divide between rich and poor is the best way to focus on the economy these days. We are so busy redistributing upwards through tax and fiscal policies that we are rapidly driving the middle class into extinction and depriving those who are disadvantaged by income and other demographics (like location in inner cities) of a fair opportunity to live a decent life. Watch Angela Grovers Blackwell on Bill Moyers PBS program (4/15/12) for more on what equity really means and how our policies are ignoring the real equity issues surrounding us.

crossposted with ataxingmatter

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More on Private Equity, Carried Interest, Wealth, and Romney

by Linda Beale

More on Private Equity, Carried Interest, Wealth, and Romney

Those who’ve read much of this blog are aware of the various arguments against the notion that private equity firms are “do-gooders” that we should encourage and even subsidize (through the carried interest provision). On the whole, I believe they are part of a harmful trend towards consolidation of enterprises that weakens links to communities, makes caring for workers seem like too great a cost, and encourages over-leveraging and instability that ultimately is devastating to the economy. Add to that the egregiously inappropriate tax treatment of “carried interest” paid to managers, and you have a wealth-building machine for a small, elite group that does not pay its fair share of the tax burden and whose activities are likely a net social detriment.

Specifically, private equity firms historically have looked for good, stable businesses with decent cash flows, low leverage and decent but not high profits that they can take over, leverage highly (to pay for the acquisition and to provide quick funds to fuel their own ultra-high profit demands), with the cash flow from the ongoing business paying off the debt. The result in these leveraged buyout cases may be that a stable busienss with a profit of 5-6% that spent what was needed on maintenance and new investment, expanding gradually and paying its workers a decent wage and its owners a small but decent profit becomes an overleveraged company that is less stable and has to use more of its cash flow to pay off the debt.

One result of excessive debt is that expenditures for maintenance and investment in new equipment are deferred. and business stalls for the time it takes to pay off the debt. Sometimes that stall is merely a bad time for the business (and often its workers). Liquidity problems can result in proclaimed “efficiency” decisions to fire or lay off hundreds of workers and to reshape benefits like pensions and health care. That’s if the company stays in operation. Sometimes the debt service and resultant deferral of investments and change of focus of the business will be fatal. Costly leverage results in bankruptcy or in the business being broken up and sold in pieces, either way with many workers losing jobs (and benefits) and many communities suffering dire consequences. Whatever happens, the equity fund managers gets high fees and “carried interest” profits taxed at inappropriately low tax rates. Romney, for instance, continued to get a “carried interest” cut from Bain Capital’s activities in compensation for past work done, long after he retired from doing any work at the firm in 1999. See Romney using ethics exception to limit disclosure of Bain holdings, Washington Post (April 5, 2012).

And of course, private equity firms do not necessarily invest only in domestic companies. They may hold considerable assets offshore–possibly in some of those very companies that represent low-wage, low-benefits, and low-worker-rights havens for US multinationals that end US jobs here in order to hire more cheaply abroad….. Romney, for instance, has holdings in “a high-tech sensor control firm that has moved U.S. manufacturing jobs to China.” Id. (noting that these holdings were revealed through SEC filings).

One wonders if those realities of equity funds is a reason that Romney has used an ethics exception to limit his disclosure of Bain holdings. See Romney using ethics exception to limit disclosure of Bain holdings, Washington Post (April 5, 2012).

By offering a limited description of his assets, Romney has made it difficult to know precisely where his money is invested, whether it is offshore or in controversial companies, or whether those holdings could affect his policies or present any conflicts of interest.
In 48 accounts from Bain Capital, the private equity firm he founded in Boston, Romney declined on his financial disclosure forms to identify the underlying assets, including his holdings in a company that moved U.S. jobs to China and a California firm once owned by Bain that filed for bankruptcy years ago and laid off more than 1,000 workers.
***[M]ost of the underlying assets — the specific investments of Bain funds— are not known because Romney is covered by a confidentiality agreement with the company.
Several of Romney’s assets — including a large family trust valued at roughly $100 million, nine overseas holdings and 12 partnership interests— were not named initially on his disclosure forms, emerging months later when he agreed to release his tax returns.
***
Several outside experts across the political spectrum, however, say Romney’s disclosure is the most opaque they have encountered, with some suggesting the filing effectively defeats the spirit of disclosure requirements.
***
[Romney’s failure to disclose these assets, and the inapplicability of conflict-of-interest “must sell” requirements to a President, mean that we may never know and that Romney may continue to hold positions that would be inappropriate for a sitting president.] Although still subject to the disclosure requirements, a president cannot be compelled by OGE to sell undisclosed assets, according to an OGE official. Romney’s would be the first presidency to face this circumstance. Id.

As the article notes, one reason Romney doesn’t disclose Bain’s underlying assets is that Bain (a fund he created) requires its participants to enter into confidentiality agreements. Handy for a politician with considerable wealth that the institution he created “requires” him to keep its investments secret. But not so handy for the people whom a president is supposed to serve. As Democratic Party lawyer Joe Sandler noted, “Romney’s approach frustrates the very purpose of the ethics and disclosure laws.” Id. The disclosure is intended to “allow the public to identify potential conflicts of interest and the personal economic priorities of candidates and elected officials.” Id. (quoting Fred Wertheimer, an advocate who worked on getting the law passed after Watergate). The right answer to a refusal to disclose is that the candidate should divest or else not run for office. Id. (noting that various Washington lawyers provide this advice to candidates who cannot disclose underlying assets).

As the campaign progresses with continuing claims by GOP advocates that Romney’s “entrepreneurial” activity at Bain demonstrates that he has the business sense we purportedly need in a president, more scrutiny will fall on his current holdings as well as Bain’s past and present activities and just how well such an organization does (or does not) support the country’s economy.

crossposted with ataxingmatter

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Explaining Why Low Tax Rates are Correlated with Slower Economic Growth, Once Again

by Mike Kimel

Explaining Why Low Tax Rates are Correlated with Slower Economic Growth, Once Again

One of the regular mysteries facing economists is why the US economy fails to display evidence of a relationship that everyone seems to accept implicitly, namely that lower taxes lead to (or even are correlated with) faster economic growth. Sure, the argument is sometimes made by academics using rather heroic assumptions. The paper everyone seems to cite these days uses the assumptions made by politicians before a change in the tax rate as the “effect” that actually occurred after the change in the tax rate. Non-academics rely on other heroic assumptions. My favorite is attributing the rapid growth during the three years of the Kennedy administration to a cut in tax rates that occurred the year after he died. (Actually, even Alan Greenspan made this one well before he made the transition from Maestro to goat.)

I’ve taken a crack at explaining that puzzle, most recently here:

people will want to minimize their tax burden at any given time subject provided it doesn’t decrease their lifetime consumption of stuff plus holdings of wealth. Put another way – all else being equal, peoples’ incentive to avoid/evade taxes is higher when tax rates are higher, and that incentive decreases when tax rates go down. Additionally, most people’s behavior, frankly, is not affected by “normal” changes to tax rates; raise or lower the tax rates of someone getting a W-2 and they can’t exactly change the amount of work they do as a result. However, there are some people, most of whom have high actual or potential incomes and/or a relatively large amount of wealth, for whom things are different. For these people, some not insignificant amount of their income in any year comes from “investments” or from the sort of activities for which paychecks can be dialed up or down relatively easily. (I assume none of this is controversial.)
Now, consider the plight of a person who makes a not insignificant amount of their income in any year comes from “investments” or from the sort of activities for which paychecks can be dialed up or down relatively easily, and who wants to reduce their tax burden this year in a way that won’t reduce their total more or less smoothed lifetime consumption of stuff and holdings of wealth. How do they do that? Well, a good accountant can come up with a myriad of ways, but in the end, there’s really one method that reigns supreme, and that is reinvesting the proceeds of one’s income-generating activities back into those income-generating activities. (i.e., reinvest in the business.) But ceteris paribus, reinvesting in the business… generates more income in the future, which is to say, it leads to faster economic growth. To restate, higher tax rates increase in the incentives to reduce one’s taxable income by investing more in future growth.

Restating again: when the tax rate is 75%, a business owner has a strong incentive to reinvest all his/her profits in the business rather than take those profits out and consume them. This is because reinvesting in the business means the profits aren’t pulled out and thus aren’t recognized as income by the IRS. Reinvesting in the business also increases the business’ chances to do well in future years, which generates growth for the economy. On the other hand, when the tax rate is 15%, there is more of an incentive to take out profits and engage in consumption of the type that does not generate much growth.

David Glasner has another (albeit complementary) suggestion:

The connection it seems to me is that doing the kind of research necessary to come up with information that traders can put to profitable use requires very high cognitive and analytical skills, skills associated with success in mathematics, engineering, applied and pure scientific research. In addition, I am also positing that, at equal levels of remuneration, most students would choose a career in one of the latter fields over a career in finance. Indeed, I would suggest that most students about to embark on a career would choose a career in the sciences, technology, or engineering over a career in finance even if it meant a sacrifice in income.  

If for someone with the mental abilities necessary to pursue a successful career in science or technology, requires what are called compensating differences in remuneration, then the higher the marginal tax rate, the greater the compensating difference in pre-tax income necessary to induce prospective job candidates to choose a career in finance. So reductions in marginal tax rates in the 1980s enabled the financial sector to bid away talented young people from other occupations and sectors who would otherwise have pursued careers in science and technology. The infusion of brain power helped the financial sector improve the profitability of its trading operations, profits that came at the expense of less sophisticated financial firms and unprofessional traders, encouraging a further proliferation of products to trade and of strategies for trading them.

Comments?

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Senate Dems unveil their tax cut proposal

by Linda Beale

Senate Dems unveil their tax cut proposal

Senate Democrats, led by majority leader Harry Reid, unveiled a $26 billion tax-cut bill on March 26, 2012. See, e.g., Richard Rubin, Senate Democrats Said to Prepare $26 Billion Tax Cut Measure, San Francisco Chronicle (Mar. 26, 2012).

The proposal revives the lapsed 100% expensing provision for capital investments, extending it through the end of 2012 and would provide a tax credit for businesses that expand their payrolls this year.

The expensing provision is foolish, but it looks like Senate Democrats are more interested in playing the bipartisanship game than they are in good legislation. Why is it foolish? For several reasons.

1) there is already a (temporary) bonus depreciation deduction of 50%.

2) an expensing provision that applies retroactively to already-purchased capital equipment cannot, by definition, have incentivised the purchase of that equipment.


3) providing this kind of additional break to large corporations is a corporate subsidy that has little to do with creating jobs and nothing to do with good tax policy. It has little to do with creating jobs because corporations will simply accelerate purchases to garner the benefit but may not increase production correspondingly. It has nothing to do with good tax policy because accelerated depreciation already allows deductions faster than economic lossm amounting to yet another pure tax subsidy for businesses.

4) Companies that need to purchase equipment in order to compete will make the appropriate decision to purchase based on company revenues and expenses, without needing a subsidy from the tax code. For businesses where some investment in capital equipment is expected eventually, it is likely that the provision will subsidize an acceleration of an investment that would have been done anyway, amounting to a mis-allocation of resources to garner the extra tax break, while temporarily available.

The subsidy for payroll expansion is at least more directly connected to a desired social goal of creating more jobs to reduce the unemployment problem and something that both small and large businesses can benefit from. The proposal calls for a 10% tax credit for the first $5 million of payroll expansion in 2012, capped at half a million. Payroll expansion can be either new hires or wage increases.

Meanwhile, the GOP-led House is planning about double that amount as an outright giveaway to business. Cantor sponsored a 20% tax cut for all businesses with fewer than 500 workers. Those businesses are not necessarily “small” and the provision is not linked to payroll expansion, as Schumer noted. Id.

crossposted with ataxingmatter

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