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

Business income or personal income

In response to Small businesses and tax cuts and reporting by Daniel Becker, reader Betty, a long time small business owner and not a sole proprietor herself in one of the richer towns of MA with a median income over $180,000 , asked:

… I’ve always been baffled by the Republican complaint that it would be bad for the BUSINESSES of small business owners with incomes over $250,000 to be lumped with the Rich and have their taxes go up, or not go down, if the Bush tax cuts were not extended for the wealthy. What I don’t get is this: Even if the business earns millions, all business expenses are deductible. What’s left that’s taxable (the profit) is the PERSONAL INCOME of the owner or owners, right? So how does a higher tax adversely affect the business? Or are these large small businesses just corporations in disguise?

Dan Becker replied to Betty in two excellent posts from the past:

I posted back in July of 2008 specifically addressing the conflation of income and business taxes as Betty is noting.

Unfortunately, too many business people don’t get it either as I found after having a heated discussion with one of my colleagues. He insisted I must not be incorporated because I did not know what I was talking about.
At the time I posted it, a couple others at AB commented that I was making the issue too complicated and that the average reader did not need to know such details. Here we are 2012 discussing it again. We can not expect to solve our problems is we are going to avoid deeper understanding of the words we use and the concepts those word represent.
I suggest my posting on the 1936 tax tables is another one of those postings that not enough people have read. To many people really have little to no idea just what is being talked about when someone says “income tax” or “marginal rates”

(Dan C here…The small businesses many people, in my estimation, generally associate the term ‘small business’ are probably ‘companies’ under 50 employees but with a variety of legal and IRS oriented classifications. I may post updated versions of these posts…people tend to approach taxes with more religious fervor than understanding).

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Small businesses, tax cuts, and reporting

 I sometimes get the ‘eyes rolling’ reaction from people in my social sphere when I insist that at least linking to  original documents is important, and that someone needs to follow up on what an author says someone else says (as a way to gain traction and authority status for their own writing, such as saying the non-partisan Tax Policy Centers says).  I won’t go into the idea of spin, which involves figuring out intent.  Mine is a caution for readers:

The post is lifted from a note from Daniel Becker in response to a query I sent to him…Dan is a small businessman in the way most of us think of as small business.  (The IRS has a different criterion  of ownership that allows a company like Bechtal at $31 billion to be considered a small business).

Dan Becker’s note:

The Washington Post article is   Obama calls for small business tax breaks.   The article uses the  Tax Policy Center original under the title Temporary Tax Relief to Create Jobs  as the source for the reporting.

The WP article notes:

“The last time the country had a similar proposal to the tax subsidy was during the Carter administration, according to the Tax Policy Center. Research by the Labor Department found that few firms knew about the tax policy, but those that did increased employment notably.”

But from their source it actually notes:

“The last experience the United States had with a credit for incremental employment was with the new jobs credit enacted at the beginning of the Carter Administration in 1977. Evaluations of that credit and how it came about found that most firms were either unaware of the credit or did not respond to it. Research based on a Department of Labor survey found that only 6 percent of firms who knew about the credit said that it prompted them to hire more workers. Firms that were aware of the credit, however, increased employment about 3 percent more than other firms. ”   (bolding is Dan B.’s)

WP had another smoothing over (under the fold):
 

“An incremental jobs credit could be a cost-effective way of raising employment in the short run, the nonpartisan center said in a report this year. The effectiveness of any jobs subsidy depends . . . on how employers perceive its potential benefits when making hiring decisions.”

The actual statement:

In summary, the effect of this proposal on employment is very uncertain. In theory, an incremental jobs credit could be a cost-effective way of raising employment in the short run and some research suggests that the 1977 credit did increase jobs, although the evidence on that is far from conclusive.
The effectiveness of any jobs subsidy depends greatly on both the details of the proposal, still to be finalized, and on how employers perceive its potential benefits when making hiring decisions.

Dan B

(Editorial comment at end of note from Dan Becker….Man! They still want to believe that cutting taxes is actually the same as if the 99% were now getting that $1 trillion of income that is now with the 1%. Just like they believe cutting taxes will increase revenues (sure if you convince the dictator to stop taking a full 90% of all that his people produce, but that’s not US).

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An opinion on Thumtack.com/GW University Small Business Political Survey

I was forwarded an early look at a survey that was produced by George Washington University’s School of Political Management in conjunction with Thumbtack.com. As some readers know, I am an honest to goodness small business owner. Two business actually and they are as different as say a private practice physician and a florist. So…………I guess this is what has lead to a request of me to opine on this survey’s results.
 
 
I googled Thumbtack.com. I had never heard of them. There is some controversy out their regarding their business model. Yet, Thumbtack.com claims 250K users. The survey was of 6000 plus of their members. They have taken some steps to assure their sampling represents the distribution of small business throughout the nation. I’m going to trust that GW’s school knows how to do and produce a scientifically valid survey. Thumbtack.com had teamed up with Ewing Marion Kauffman Foundation early this year. This work attempted to come up with a ranking of business friendliness based on the experiences of small business within a given state.
 
The headline, take away finding is presented as follows:
 
40% of all small business owners nationwide rate the economy and jobs as the most important factor in choosing a president. Ethics, honesty, and corruption in government is the second-most important factor for small businesses.
Considering ethics, honesty and corruption came in at 15% and the next item to be ranked the top issue was so ranked by 6% with the percentages becoming smaller to 2% for the issue of foreign policy I would say 40%ranking the economy and jobs the number one issue is kind of an intuitively expected finding because every other issue considered in the survey fell so far behind.  After all, we are talking business owners.
 

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Two Important Op-Ed Pieces Today

I want to draw AB readers’ attention to two of the most important op-ed pieces I’ve read in a while.  They address entirely different, but profoundly important, matters.

One is Elizabeth Warren’s piece today in Politico, called Stop riggingsystem against small business.

The other is Bill Keller’s column today in the New York Times, called The Leak Police.

These articles speak for themselves just fine.  No commentary on them is needed.  

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Where’s Daniel Becker when you need him??

‘Small business representative’ still has some meaning for people, but of course the term is gamed constantly in the political arena. Via Alternet comes this example:

This morning, NPR’s Yuki Noguchi wanted to know how an ordinary small business owner feels now that the Obama health care law has been upheld. So she turned to this guy:

Well, as it turns out, Joe Olivo of Perfect Printing turns up quite a bit in public discussions of this and other issues. Here he is testifying against the health care law before House and Senate committees in January 2011. Here he is on the Fox Business Network around the same time, discussing the same subject. Here he is a few days ago, also on Fox Business, talking to John Stossel about the law. Here he is discussing the same subject on a New Jersey Fox affiliate.
And here he is in July 2010 discussing small business hiring with Neil Cavuto on Fox News. Here he is opposing an increase in the minimum wage in an MSNBC debate a couple of weeks ago.

Go to many of these links and you find out something about Joe Olivo that NPR and NBC didn’t tell you: he’s a member of the National Federation of Independent Business. NFIB’s site and YouTube page promote many of Olivo’s public appearances. He was the subject of an NFIB “My Voice in Washington” online video in 2011.

NFIB, you will not be surprised to learn, is linked to the ALEC and Karl Rove’s Crossroads GPS, and to the usual rogues’ gallery of right-wing zillionaires.

So Joe Olivo isn’t just some random business owner — he’s dispatched by NFIB whenever there’s a need for someone to play a random small business owner on TV.

The law will give some small businesses tax incentives to pay for employee health care. Starting in 2014, those with 50 or more employees will be required to provide it.

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Hey, didn’t the GOP say it cared about deficits?

by Linda Beale

 Hey, didn’t the GOP say it cared about deficits?

Just when you think those on the radical right had gone about as far as they could go without recognizing their own zaniness, those in Congress have revived their version of a tax “reform” for businesses.  It was first proposed in 2009–as an alternative to real stimulus spending on infrastructure .  And yes, it is yet another tax cut.  An even zanier one than the rest that they’ve come up with while at the same time whining of deficits and suggesting that longstanding social programs like Social Security and Medicare must be cut back.
Eric Cantor, in a memo last month to fellow Republicans, announced that the House would be putting this proposal forward–let every business with 500 employees or fewer deduct off the top 20% of their income.  And they want to pass this rot by the filing deadline–on the pretense that it will help ordinary folk.
See Richard Rubin, Hedge Fund Tax Break May Come in Republican Small Business Plan, San Francisco Chronicle (Bloomberg News, Mar. 8, 2012).

Now, folks, there are some mighty BIG businesses with fewer than 500 employees.  Like just about every hedge fund and leveraged buyout fund. (The latter, of course, like to call themselves “private equity” these days–let’s people overlook the fact that they have destroyed many a stable, profitable business by loading them up with debt and sucking out all the cash while firing employees or making the business focus on paying back the debt and not on doing business).  Why would the GOP want to reward those funds with even more tax breaks than they already grab for themselves–carried interest, pass-through taxation, and the ability to avoid the payroll taxes since they treat their compensation as though it were an investment gain?  Because that is what they are all about–making sure the richest people in the country get all the breaks.

Then there are sports teams.  Liquor stores.  Golf courses. Gambling dens….. Hotels. Restaurants.  Engineering firms. Accounting firms.  Law firms.  Architectural firms.  Big Business that normally make Big Money.
Just goes to show that the corporatist GOP never saw a tax break for the monied class that it didn’t like.

crossposted with ataxingmatter

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Small businesses and drive the economy?

Taxprofblog
points to research suggesting a tipping point about the notion that small businesses drive the economy:

Martin A. Sullivan (Tax Analysts), New Research Weakens Case for Small Business Tax Relief
The National Federation of Independent Business states on its website: “Small business has created about two of every three net new jobs in the United States since at least the early 1970s.” And on its website, the Small Business Administration claims, “Small firms accounted for 65 percent (or 9.8 million) of the 15 million net new jobs created between 1993 and 2009.” These claims are endlessly repeated on television and in print. And both political parties are perfectly happy to leave them unchallenged. But two new strands of academic research are quietly shredding the idea that policies to support small businesses hold the key to job creation.

  • [John Haltiwanger (University of Maryland, Department of Economics), Ron S. Jarmin (U.S. Census Bureau, Center for Economic Studies) & Javier Miranda (U.S. Census Bureau, Center for Economic Studies), Who Creates Jobs? Small vs. Large vs. Young
  • Erik Hurst & Benjamin Pugsley (both of the University of Chicago, Department of Economics), What Do Small Businesses Do?]

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This is the reality of a real small business

 By Daniel Becker

This is a bit of an interlude in my writing regarding the income tax of yore. Though, this does involve taxation. This is also a continuation in my postings regarding real world small business experiences. Yes, you are going to get to read about a real situation that involves a real small business and tax policy.
Before I mislead anyone, the taxes of concern are not about income taxation. Your business has to actually have an income for that tax to matter. I’m not talking personal income. I’m not talking capital gains taxes. Darn few honest to goodness small businesses ever have to worry about that in their daily activities. Maybe in the end you will have some capital gains after you pay yourself back all the personal money you put into your small business. I’m not talking payroll taxes cuts. Yeah, on what was a $100,000 payroll you gain maybe a couple thousand dollars, but on what was a ½ million business that is now 55% of what it was with payroll adjusted to match, it means little. I mean, that business is sure going to be hiring new people with that!
 Oh, just in case you think I’m off the mark, consider this poll from 11/10.   In the poll, 90% hired what was needed or fewer than needed. The catch: Only 1% hired because of the a new tax break. 41% were to replace an employee. When asked why they hired fewer than needed: 79% worried that sales or revenue would not justify more employees. However, 13% did hire because business was better. The lucky ones. So go ahead, keep giving me tax cuts, blah, blah, blah and all that monetary relief because that US Chamber of Commerce sure represents my thoughts and desires. NOT! Idiots!
Some perspective on small business.

“In 2009,there were 27.5 million businesses in the United States, according to Office of Advocacy estimates.The lastest available Census data show that there were 6.0 million firms with employees in 2007 and 21.4 million without employees in 2008. “

I know it is soothing to croon over the days when the Dodge Brothers, Ford, Colt, Walton and Gates were small and became major examples for their time of the American Dream of economic power. But really, the truth is most small business were and are people earning a living on their own vs working for Microsoft (the definition of part time abuse) or Walmart or GM, or GE or Boeing… They were huge numbers of small local retail. All gone. Small local banks? Going. Small local agriculture (RI used to have a state fair), forget about it.  Look around.
So lets get to the heart of it. First a bright spot. The flower shop had it’s first month this year that was better than last year. August. No, I’m not assuming this is a trend and here is why.

The city of Woonsocket has lost it’s Walmart to the town of North Smithfield, it’s neighbor. Major tax hit to the city. N. Smithfield got the Walmart because it decided that building a 650K sq ft shopping development would offset their rising taxes. I mean really, when in the last 30 years have we seen big business pay enough in taxes such that they actually were paying for their presence? Cut, cut, cut has been their chant. So, I can expect my property and inventory taxes to rise unless something replaces that Walmart. Say the state stepping up. Which tends to happen via the state giving less to the towns like North Smithfield.
I wrote about this type of tax chasing in one of my first posts.

“You know what is missing in this discussion (a discussion happening in every town USA)? The question: Compared to what? What are we basing the above statements on? Is it simply that we have less money after the bills are paid? Well, from 1955 to 1998, GDP rose by a factor of 20. Tax burden as a percent of income rose by a factor of 26.7. But income for a family of 4, 2 people working (sound familiar) only rose by a factor of 11.5. From 1976 to 2001 the top 1 % share of income went from 8.6 % to 21%. Yes, we have less money at the end of the day. Unfortunately, not benefiting from the national wealth as we had in 1955 (when the tax burden was 18% of your pay and would be today if all was equal) is a national policy issue.”

This is the issue of small business. See, we are all just trying to earn an income. Just like the person who works for the multinational. The income is much less because business sales are down. So, how should I plan for the pending tax rise? Do not just give me an answer that involves further big business moving into the area, because as I showed in the post on property taxes and development, it’s not so simple as welcoming Mr and Mrs. big business into the neighborhood.

“But, for my purposes Smithfield (an abutting town) presented the most interesting data. They had a new retail development go in, but ½ the size of that proposed for my town. It’s citizens have seen since 1999 in sequence a 9.8, 4, re-val, 5.5 and 8.7 percent rise in the tax rate. It’s commercial development has been only 10% industrial. My town only had a 6.4% total rise in the same time span.”

Oh save me great god of the mega corporations from the evils of local taxation. Yeah, I didn’t think praying would work.
Next up involves a CVS move. CVS is headquartered in Woonsocket. It obviously has some new hot shot who has a better way. They are looking to own their stores and not lease. They are consolidating 2 stores into one bigger store on new property. Yes, about ½ the property was zoned commercial, the other ½ was residential (real houses on it) turned commercial. This is important, because the CVS consolidation will leave 2 existing commercial spaces empty. We’ll add them to the Walmart space and potentially the Lowe’s space as it is suppose to be moving to the new North Smithfield development which is built on what was 126 acres of woods.
Sticking with Woonsocket, the location of my flower shop, the city has managed to add to its commercial property stock while turning a good portion of it into none productive commercial property stock. How soon do you think those empty places will fill up? Don’t hold your breath.
Some more good news. I managed to cut a major expense for the shop just this June to the tune of $379/month. We were in a unique position in that they kind of needed us. It’s not going to happen again. $4548 per year. Nice. It’s the heating expense for a year assuming the speculators don’t get active again. Yep, get rid of those government regulations as they sure are doing me harm. NOT!
The plaza that one of the CVS stores is moving out of is a customer of ours. We do seasonal decorating for them. It is about $3900/yr. Well, we’re not decorating with mums this fall and Christmas looks to be out too. How much you wanna bet spring next year and for some years to come is out? Gonna bet enough to do Washington a favor and higher someone?
Are you seeing where all this is going? I saved us some big coin. I’m loosing the same amount. Now, this is not the first hit from a CVS decision. Some other person there decided to make it simple for them to pay for their flower needs by going with Pro Flowers instead of feeding the 4 local florists which they had done for decades. They think they are getting a 20% discount from Pro Flowers. Little 
do they understand the flower business. Not the first time mega corps thought they new more than the little guy. It represented about 2.4% of our business at the time. May not sound like a lot, but when you consider the extra business generated by CVS using one’s shop to send flowers, it becomes significant.
Let’s add a third issue. Refi. Time to take advantage of the low rates. The purpose is to improve, that is reduce your monthly cash outlays. But as any real small businesses owner learns, there is no such thing as a fixed rate. We have paid off 22.2% of the loan that combined the original purchase of the business and property with the rehab that needed to be done in 2004. We have about 36% of the tax appraised value in equity of the property.
Here’s the concern, do you take a 20 yr loan with a rate of between 5 to 5.5% to be reset in 5 years or do you take 6 to 6.5% to be reset in 10 yrs? Do I bet that in 5 years business is better because the economy is better which could also mean all that projected inflation do to the Fed monetary policy and at least protect my self for 10 yrs? Or do I bet that nothing will be much better and try to preserve my cash flow (in a small business it’s always about cash flow, accrual be damn) and go for the 5% figuring the Fed money flood won’t roost for at least another 5 yrs? Oh, the refi cost are going to run you about $4000. There goes that big saving from my hard nosed negotiations again.
Your facing tax increases beyond the usual but, not because the public employees are paid too much. Your running out of area’s to cut. Major corporation moves are working against you just as off shoring is working against the middle class, the very class of your concern as you are in it and draw your income from it. And all the policy talk being pushed has little to do with the issues that you are facing because the number one issue you are facing is a lack of a middle class.
Have you heard of the “hourglass strategy”? Look it up. Ah, no it’s not a strategy you can use, but is one that will work against you.

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Small Business=Fraud, Countercyclical Planning, MMT, and Other Economics Catch-up

Note:This was going to be short pieces about things I missed during a week of illness. It turned into a Very Long Piece riffing on two posts from Capital Gains and Games. And that’s without even mentioning the bravura work Stan Collender is doing there: see, for instance, this note that a deficit reduction bill with tax increases is very possible if you just ignore John Boehner.

  1. Small Businesses exist in the United States solely as a vehicle for people to commit tax fraud more easily.

    I don’t see any other realistic conclusion from this piece by Pete Davis. He tries to hide it, putting an idiotic suggestion with an Order of Magnitude’s less value fist, and mostly got people in comments to talk about COLAs, because economists are stupid that way. But the big number—$2,900,000,000,000—remains the big number.

    The only proper conclusion from the entries after the first two would be that Pete Davis can’t do mathis very fond of negative-NPV solutions. You could conclude from this that Pete is really stupid, but we know better. Besides, Len Berman of Forbes already went there, concluding, “Pete, you know better, and you’re just enabling them.” The integrity of posters at CG&G doesn’t usually get questioned so directly in the mainstream.

  2. And there’s good reason for that. Andrew Samwick has argued for years that stealing from the Greenspan Commission’s “making Social Security solvent for future generations” fund, and I expect him to continue to do so, just as I will continue to argue that everything in the Greenspan Commission documents says that was not the idea. But Andrew has me worried—possibly in a good way—about his idea of how to combine economics and family:

    Actually, the government should budget the way families should. It’s just not clear that families actually do what they should. Both families and the government should budget countercyclically — their savings rates should be higher during periods of growth than during periods of economic decline, so that their consumption can remain steady across booms and busts. The problem that both the government and families are having today is that neither one saved enough during the most recent boom, and so both are having to cut back more than would be ideal during this protracted downturn.

    Now Andrew—who is younger and cuter than I—is starting to sound like the old man telling us to get off his lawn. Either that or he has just discovered that Lifecycle Theory of Economics doesn’t work so smoothly in reality as in the standard models. Or both. So it’s probably safest if I use that paragraph as a springboard to talk about Countercyclical Policy, Rational Expectations, and MMT (below the fold).

The glory of Accounting Identities is that they must be true; the truth of them, though, is that there are many ways to get there. (“What do you want it to be?” is not just a joke; see Point One above.) So let’s start from an Accounting Identity:

Y = C + I + G + NX

Now, Andrew might have argued—and I might have agree conceptually—that transfer payments such as Unemployment Insurance, Social Security, Disability Insurance payments, and Medicare/caid Prescription Drug Coverage should be counted as C, not G. But since Andrew insists that Social Security benefits can be cut without Social Security payments being reduced, he’s clearly treating those payments as part of G, not C.* So I will too.

Now, MMT people—as I think of them, the ones who make certain that only Kevin McHale can “spike” the punchbowl**—argue for Nominal GDP targeting. This would keep the overall risk-free rate (r) relatively stable*** since the components of r combined— π + ie —pretty much has to equal “5” at all times.

Given that, the expectation should that the nominal Yt+1 should equal about 1.05Yt on an annual basis.

Several of you are looking up and saying, “Nu?” So let’s go back, then, to Andrew’s “all should budget countercyclically” claim and see what happens in a stable-NGDP, possibly-MMT, world.****

Let’s make one more assumption (not necessary, just easier for maths): at stable equilibrium,***** π and ie are both equal to 2.5: that is, 2.5% growth, 2.5% inflation. So, all else equal, half of the return on savings is going to be taken by inflation and half of the cost of debt is inflation. In an environment with no tax distortions and in which all lending is done sensibly and prudently (I’d like a pony, too), this is pure realisation of Modigliani-Miller: businesses should be indifferent between raising capital and borrowing, either of which is an Investment (I).

So assume that the growth rate for the economy—as a reminder, that’s the π portion—is expected to be three percent this year (it’s a good year). MMT would tell us that, to stay stable, we have to reduce inflation expectations to 2%. This means draining money from the system to reduce Isl (supply of loans) in the financial system.

(As noted above, at equilibrium, there is just enough loan money to go around. Since this is above equilibrium, profits will be reduced and businesses will have to raise I through capital, not loans.

Andrew would tell us that people in good times want to save more. This means that C should go down, relatively, which means that Isc (supply of capital) goes up.

Since—again, an identity—Is = Isc + Isl, MMT demands that personal savings rise to cover the tighter monetary policy. Just as Andrew wants. And just as is more possible in growth times than tight times.*******

So, ideally, I remains constant, if dIs = dIc. Not my favorite assumption, but a working one.

So far, in the boon environment, C is down and I is, at best, neutral. What about G?

Well, in Andrew-world, government is “saving for a rainy day.” Which means on balance that it’s trying to make more and spend less, just like the family. Which means there are two forces at work—(1) monetary policy, as the interest rate is tightened to control demand and/or reduce inflation, and either (2a) tax rates or (2b) spending cuts in some manner—that are working in the market.

I doubt 2a (tax increases) is the desired method of slowing growth (if you’re MMT-inclined) or stabilizing to equilibrium (which I assume to be Andrew’s goal). So let’s assume spending cuts.

Here those transfer payments come in. As the economy grows, UI costs are reduced. Let’s assume similar, smaller gains in other areas and stipulate that G declines in an above-equilibrium state due to a reduced need for spending—not “spending cuts” per se, but rather people being employed as growth comes.********* Best case scenario, fewer UI payments are made, debt is repurchased with those funds, future liabilities is reduced, and more revenue comes in as business expands—which is used to pay down debt so borrowing can be done more easily (read: at a relatively lower rate) during a downturn.

G declines. As Andrew would want, for good and proper reasons.

Which leaves NX. An expectation of 3% real growth is higher than the market had expected. Currency appreciates; exports become more expensive to buyers, who buy fewer. Imports become less expensive, relatively. dNX is negative (dX=0).

So with moderately higher growth, C, G, and NX all decline, while I either (a) increases slightly (in the absence of the need for and use of monetary policy, and not greater than C declines) or (b) declines (if monetary policy is used to reduce loan demand, since that pesky C0 rather ensures that dIsc |).

If you don’t use monetary policy to drain funds from the system, in which case (C + I) remains relatively stable or rises slightly, NX is more ambiguous (effectively=0), and G still realizes those spending cuts (paying down debt—more tax revenues at the same rate as business expands—which cet. par. increases the spread between r and equity investment and means some of that Is becomes Ic, but that’s a side discussion).

The implications here, and for a downturn example and the full cycle model, are left to the next post.

*This should make it clear that this point was not opened with an ad hominem attack, so anyone who suggests so in comments—even on the basis of “well, I didn’t read below the fold”—will see that comment deleted. Assuming, of course, that I read the comments on a regular basis, so you’re probably safe, if warned.

**Glee, not old NBA, reference.

***Still some uncertainty and timing issues, but a relatively flat but upward sloping yield curve would be a perpetual result.

***The coolest thing about working with everything in Nominal terms is that we can basically eschew calculus and natural logs. The worst thing about working with everything in Nominal terms is…

*****You’re driving down a dessert highway in a two-seater. By the side of the road, miles from the nearest water source, you see A Gorgeous Blond(e), Santa Claus, and an old, tired-looking Stable Equilibrium. Which one do you offer a ride?

A: The Gorgeous Blond(e). The other two are figments of your imagination.******

******Yes, think joke works better with “a brilliant violist.” But this is an economics blog, so live with it.

*******I would quibble Andrew’s statement that people borrowed too much for two reasons: one is that market transactions where the borrower is the one most subject to getting a poorer deal due to issues of asymmetric information hardly call to mind the borrower’s irrationality. Second is that many of those transactions were people “trading up” without clearly taking on a greater burden. (That is, $200K in equity on a NYC 1BR became a $200K down payment toward a home whose costs would be similar or lower, cet. par. The household balance sheet was not necessarily expanded on purchases. (That those purchases were at a higher direct cost than the available OERs is a separate, significant issue.) Similarly, HELOC borrowings that were invested into the property—all those effing marble kitchens for people who don’t know how to cook—are only negative to the balance sheet to the extent that they don’t have a reasonable ROI in the first place. That is, the deadweight loss is probably 30% or less on any portions of HELOCs that were used for Home Improvement projects.

Collaterally, if the HELOC was used in place of savings or 401(k) borrowings or other assets (for those who have same)—or even a higher-interest rate “bank” loan—as the method of buying a new car or other necessity, the fault lies not with the borrower, who made the rational (ex ante) choice to stay invested in “the market” and/or maintain Investments (savings).

In short, since all mortgages and HELOCs have been getting tarred with the same brush, we cannot be certain the extent to which “bad borrowing” was actually bad borrowing, or whether it was just borrowing based on the expectation that jobs and income would remain fairly stable—not drop the f*ck off the cliff and be reduced in even nominal terms for the survivors—concurrent with “investment” values dropping into an abyss.

Anyway, since C0 is still essentially constant (“sticky”) even as income first declines, it is intuitive that saving is easier (consider the effect on S = Income – [C0 + Cchoice] as Income approaches C0) in more prosperous times, on balance, for most of society, distributional effects being constant (or changing incrementally).

*********In such an environment, monetary policy may not be used so proactively. This should be fine for all, given that 5% NGDP is the target, not the absolute. Over time, it will smooth. I guess.

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Dealing with the Sunset of the Bush Tax Cuts (Part IV in a series)–the Tax Relief Coalition

by Linda Beale
crossposted with Ataxingmatter

Dealing with the Sunset of the Bush Tax Cuts (Part IV in a series)–the Tax Relief Coalition

The Tax Relief Coalition–another of the myriad anti-tax groups comprised of Grover Norquist’s group and those of similar ideology–is at it again with a letter to Congress (available on BNA) urging the passage of new legislation to pass tax cuts to extend the temporary cuts enacted under the Bush administration. The group is spending millions lobby for its interests with the dubious claim that discontinuing tax cuts for the wealthiest Americans will hit small businesses the hardest. See, e.g., Jensen & Salant, Leader on Bush Tax Cuts Wins Allies to Keep Provisions in Place, Bloomberg.com (Aug. 20, 2010) (noting that the coalition groups have spent $3.8 million since Jan. 1, 2009 on candidates and advertising, and that the Chamber of Commerce plans to spend $75 million influencing elections in its favor).

Note that the coalition–formed of “trade associations, advocacy groups, and corporations”–calls itself favoring “pro-growth tax policies”. But what it means is favoring tax cuts. It is arguable that tax cuts support economic growth–at best they are a second-rate stimulus compared to direct government spending on public and human infrastructure that provides long-term support for economic stability– such as public transportation, public communication networks, development of alternative energy sources, education (K1-university), and basic research.

These claims that the tax cuts help small businesses are at best dubious. (See, e.g., yesterday’s post outlining various reasons why the capital gains preference has very little to do with stimulating entreprenuership or helping small businesses.) The coalition tries to cast the Bush tax cuts in terms of job creation. But the fact is, the Bush regime had a lousy record for job creation, and the tax cuts that were especially favorable to corporations probably did almost nothing to contribute to job creation. The “American Job Creation Act of 2004” for example, mainly acted as a tax cut for multinational corporations that used the very low taxation of repatriated money to pay big dividends to shareholders even while they were laying off thousands of workers. Similarly, expensing provisions and other tax cut provisions (especially for oil and gas industry and other targeted industrial provisions) mainly gave more money to managers and owners, not workers. Real wages of workers have fallen, while corporations sit on big kitties of cash–keeping the productivity gains for managers and owners and not sharing them with workers and certainly not creating new jobs for new workers.

What about the small company owners that the National Federal of Independent Business brings in to calim that any tax increase is a job killer? See Bloomberg article, above. That’s a superficially self-serving claim that is probably in truth a case of blind greed keeping business owners from admitting that federal dollars spent for unemployment, infrastructure, education and other important programs will actually create a more sustainable economy that will be better for their businesses. A little bit more in taxes now will have positive impact, not negative, on the economy. And those arguments also leave out a few of the details–like the fact that the proposed tax increase on joint returns with $250,000 or more impacts very, very few small businesses.

The hypocrisy is also evident, as coalition members refuse to limit extension of the tax breaks to the lower income group, even while they complain about deficits. The deficit argument is essentially brought out to create fear in average voters and to provide a salient objection to any additional spending that does not directly go to the benefit of business managers and owners, but it isn’t a real concern since it doesn’t enter into the discussion of whether or not to extend tax breaks to the wealthy who don’t need them.

Regretably, the Democrats don’t have much backbone on this issue. Senators Conrad and Bayh, for example, have accepted the idea that it is problematic to raise taxes on anybody during an economic slowdown. That their position doesn’t make sense–a little bit more in taxes on the wealthiest Americans won’t really affect either consumption or investment in new businesses–doesn’t seem to matter.

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