Possibly true and a good sign if you are measuring the performance of the economy merely for economy’s sake. However, as with super-duper medical care, what good is it if the general welfare isn’t improved?
The economy grew tremendously in WWII under high taxes and strict government controls. Sure, the war created a vast market for all sorts of things so it would appear that one crucial factor is the existence of a market. During the great depression of the 1930’s federal taxes were quite low at the start but there was a significant lack of a market demand for anything.
Well, I thought it was germane given that the U.S. government has indulged in some merry deficit spending for a number of years now.
Not to mention that it’s all well and good to have a discussion in which “all else remains equal,” but especially in the field of economics, this assumption bears no relation to reality.
I’m just glad you know it’s a complex subject. The high rate of people who believe that reality is simple is one of the primary causes of simple people.
Actually the tax cuts are less about the economy than about starving the beast. Grover Nordquest quote about getting the government down in size and then drowning it in the tub is well known. Take all the money out of the government and make it impossible to pay for Social Security,Medicare and any other programs. The arguement about our responsibilities is tempered by the fact that the money is gone. That is a simple thread to follow. Huge defecits are being made for a reason. These are not stupid people.There is a plan and I \ hink it is ugly.
Bahh…These sort of arguments are silly. Do you have any strong evidence to back up your claims of what shape the economy would have been in in the absence of the tax cuts? Any evidence that wars (and the deficit spending that they entail) are, in the short term, actually a drag on the economy, rather than the opposite. After all, most people credit WW II with helping finally pull us completely out of the depression.
This supply-side garbage that you lower taxes and get higher revenues than you would have gotten has been shown to be nonsense but that doesn’t stop people from continuing to peddle it. The fact is that revenues generally increase over time as the economy expands and inflation rises (although I am hardly impressed by a one-month figure as you linked to). However, a careful look at things shows that no such magic occurs. For example, with the Reagan tax cuts, people like to claim that he cut taxes and revenues doubled over like 10 years. This, however, neglects inconvenient facts like:
(1) The revenues include a large increase in social security revenues because the S.S. tax was raised.
(2) Although Reagan cut taxes at first, he did raise some back later.
(3) Inflation alone accounts for most of the rise. (Note that 7% inflation over 10 years will, by itself, double everything.)
Once you account for the factors correctly, you find that in real (i.e., inflation-adjusted terms), the Reagan tax cut caused a pronounced dip in revenues from the personal income tax so that it took something like 6 years for them to recover to their pre-tax values. Such a long and pronounced dip is basically unprecedented…until the Bush tax cuts, which seem to have us back in the same boat. And, if you compare the growth in revenue from the personal income tax for the 1980s to either the 1970s or 1990s, the result is that it was anemic compared to those other two decades.
In other words, a careful accounting of things shows that a tax cut generally does just what people who don’t believe in magic expect, namely, it causes the government to get less in the revenues from that tax.
Evidence.You forget when Clinton was in we had nearly full employment and no National Debt. Your memory shouldn’t fade that fast. We are waging a war and cutting taxes.Why? something is fetid.Silly is accepting theses twisted statistics when they serve us.If are working, it is easy to say everybody should be. I am in the midwest. I see high paying businesses dissappear overseas.Replacements are lower paying jobs and no job protection. It is ugly.
My point is that when a company issues a share of stock, they receive the money from their sale of that stock to the first investor. After that, all of the trading of that share takes place between other investors. ISTM that most people investing in the stock market are buying existing shares.
I’m not foolish enough to bet real money with esteemed doper John Mace, but ISTM that the dollar volume of everyday buying and selling of existing shares would have to swamp issuance of new shares, whether IPO or secondary. I’ve looked for some statistics on this but haven’t come up with anything yet.
The point of all this was to investigate the claim that a cut in capital gain taxes results in more companies being able to make bigger investments in capability. I’ll agree that it might make investing in the stock market more attractive, but I’m still wondering how much of that additional money results in new factories that wouldn’t have been built without it.
To get the hard numbers to back up what I said in my previous post, you should go to the OMB Federal Budget historical tables. Table 1.3 is nice because it has a column giving revenues in constant dollars…however, unfortunately it only gives total revenues. Table 2.1 breaks revenues down by source but unfortunately only gives the figures in current dollars rather than constant dollars.
Someone who knows how to use Excel could presumably quickly use the “composite deflator” column in Table 1.3 to convert the numbers in Table 2.1 to constant dollars. But, even without doing that, we see:
(1) It took until 1985 for total receipts in constant dollars to surpass its 1981 value…and then just barely. The story would clearly be even worse for receipts from individual income taxes alone since they declined from being 47.7% to 45.6% of total receipts during that period.
(2) With the current Bush tax cuts, even in current dollars, it is not until 2006 that the receipts from individual income taxes are estimated to surpass 2001…and then just barely. If you look instead at constant dollars, it is not until 2008 that the OMB forecasts the receipts from personal income taxes to be higher than in 2001. [And, I assume these estimates are probably based on the tax cuts expiring as scheduled (although I am not sure)…so I don’t know how the extension of the cut on capital gains and dividends, for example, will affect these numbers.]
OK. so after 9/11’s economic damage, 2 wars and a bunch of hurricanes I wanna hear your reasoning behind a booming economy and low unemployment. No posting of sites you don’t understand. I want you to personally explain how the release of earned income back into the economy had no impact on purchases or investments. Where is all this record tax revenue coming from?
Ultimately, it’s not tax cuts that make an economy efficient - it’s smaller government and freer markets. If you cut taxes but still increase the size of government and the reach of regulation, you’ll just wind up with a big debt that has to be paid back later, and that carries its own negative effects.
Smaller government is better for the economy, because it uses up less of the economies resources. This is a good thing, because government is lousy at allocating resources and using them efficiently. A tax is a redirection of capital from where it wants to go to where an elected official wants it to go. Unless you believe that politicians in Washington are economic geniuses (can you say “Bridge to Nowhere”?), you can see why government uses up society’s resources in an inefficient manner.
At some point, you can shrink government to the point where it can no longer carry out its basic functions of defending the country, providing police and courts, and maintaining a civil society. Then you’ve gone too far. But we’re light-years beyond that. There’s plenty of room to shrink the size and scope of government. And when you do, taxes will come down.
So looking at taxes is the wrong metric. Taxes are a byproduct of the real problem, which is huge government.
Billions and billions of dollars can be raised in additional public offerings of stock. Then too, the company can and usually does trade its own stock. When they buy shares they become treasury shares. They can be issued again. Companies can and do participate in an active trading market.
Ok. Let’s discuss a capital gains tax cut and its potential effect on capital investment by corporations.
First, let’s look at it generally. A capital gains tax cut made as a policy decision would generally be considered accomodative. That is, it is perceived to promote an increase in the money supply. An increase in the money supply means that money is easier and thus available for new investment or large capital expenditures like your hypothetical factory.
A capital gains tax cut is also perceived to heighten the efficiency of investment. For example, let’s say your Dad has stock in Walmart that he bought decades ago. It has increased in value manyfold over the decades he owned it. 90% or more of the value of the stock might be a capital gain. Your father though is loathe to sell it as doing so means that he will have to realize and pay taxes on those profits.
Let’s say your Dad passes away and leaves the stock to you. You get a step up in cost basis to the Date of Death. You are now free to sell the stock at the current price without sharing the profits with the government.
There is a lot of property tied up this way because of the penalty of capital gains. One can assume that anytime the penalty of that capital gains tax is lessened, it will serve as a stimulous to cause a certain percentage of those assets to move and take advantage of the cut.
Bringing your father back to life for a moment, let’s lower the capital gains tax instead of waiting for him to die and see what happens.
Maybe instead of hanging on to his millions of Walmart stock your Dad decides to sell some because of the reduction. He invests some of that money elsewhere, and also buys himself a nice big boat. Your father is one of a group of people who take advantage of this tax relief. Some of those other people buy boats. The company that makes the boats sees increases in demands and so they build another factory to keep up with the demand for boats. The boat salesmen all make big commissions and they spend those commissions on luxury automobiles. The luxury automobile salesman see the demand and build another factory. They then take their profits and they by… boats.
Now all of a sudden the economy is booming, and your father is alive and having the time of his life drinking martinis on his yacht, while everybody prospers, thanks to the capital gains cut.
Remember also that the corporations themselves must pay capitol gains taxes, too. An easing of the tax frees up their money for investment.
I’m simplifying and hyperbolizing here, but the effect is real. It is real provided that the economy is one that will respond to such a cut.
Some economies won’t. This and other types of monetary accomodation only create the opportunity for new investment. Before this accomodation can work, there must be people willing to take the risk of taking advantage of it. Sometimes they don’t. Sometimes they may opt to use accomodation to pay down debt, or they may opt to save instead of buying or investing.
For many years in Japan, there was an extremely accomodative monetary policy with real interest rates approaching or even past zero. Yet, few had the confidence to take advantage of it. Few were willing to take the risk.
Accomodation, like a capital gains tax cut works best when you have a precipice type situation where there is a lot of money that would like to move but is unwilling to do so under current restrictions. Easing those restrictions moves a lot of money. If the money is not looking to move though, easing policy doesn’t necessary help.
After the crash of '87 a trader I worked with used to reflect on it by saying “Waiting for the capital gains tax cut killed more WASPS than Raid and averaging down killed more Jews than Hitler.”
Ugly stereotyping and prejudicial perjoratives aside, another benefit to accomodation in terms of a capital gains tax cut this quote alludes to is that it allows money to seek cover in overbought markets (as evidenced by the WASPS.) The negative is that it can also promote good dollars after bad (as evidenced by the Jews.)
I always like that quote as it seemed to contain a clever bit of wisdom concerning economic theory disquised in an offensive context.
(1) Huge deficit spending (at a time when interest rates have been held low). As has already been noted to you, the wars are probably more a plus than a minus as far as the economy is concerned.
(2) Housing bubble caused by said low interest rates.
Despite this,
(1) Job growth has still been rather anemic compared, e.g., to the 8 years under Clinton (including after some tax increases).
(2) Increases in real income for those at the median and below have been anemic (or maybe even non-existent; I’m not sure).
Have the tax cuts helped any? Sure, in the short term, the huge injection of money into the economy by the combination of tax cuts and increased government spending have to have had some effect. I can also make my own economic situation look pretty rosy over the short term by maxing out my credit card. However, this is hardly sustainable. The amazing story is how little results we have gotten for such a huge investment. It is like paying for a Rolls Royce and getting the performance of a Chevy and then gloating about it.
As for the “record tax revenue”, you’ve already had it explained to you that it is sully to look at only 1 month (and also to look at a number in current that almost always rises over time and call it a record). THis is called “cherry-picking”. The fact is that in the Bush Administration’s own projections for real revenues from the individual income tax, they are not expected to reach back to 2001 values until 2008…and, again, I worry that even those projections may have been based on the expiration of tax cuts that they have now extended (although I am not sure on this point).
I’ll have to ask for any relevant evidence to support that the wars actually are a plus. Considerable amounts of manpower and treasure are being sent abroad, for few tangible gains, and don’t forget that dead and wounded are in addition to a human tragedy (as if that wasn’t enough), a loss of productive work and treasure as far as the economy’s concerned.
Wars do generate demand - but they generate it for some of the least economically profitable goods - munitions and weapons. The relative benefit down the road of producing a passel of guided missiles instead of a new tractor for Farmer Brown or a new stretch of highway for Pasadena or a new electric plant for Hoboken should be obvious.
The effect of wars on GDP is pretty obvious - the Army spends $9,000 on a prosthetic arm for Corporal Smith - but to claim that this increase in consumption is a beneficial one is to fall victim to the Broken Window Fallacy.
wevets: I am not sure we really disagree. I was a bit sloppy with my words. What I should have said is that because of the way we measure economic activity, the war is likely to look like a net plus for the economy (at least in the short run).
There are lots of problems with the way we choose to measure the strength of the economy. As you noted, the GDP can be really nutty in some ways. (GDP also takes no account of the costs of the destruction of environmental “capital”.)
But, what I was responding to was Magiver’s question about why the economy looks pretty good right now as measured by these traditional measures. That was the context in which I meant that the war is probably helping the apparent economic situation for Bush more than it is hurting him.
Seriously though, changes in shares outstanding for a typical firm (which is a net number as opposed to a gross number I realize) are typically far smaller than stock market volume for a given quarter. Or at least that’s my impression. If I’m wrong, I’d like to know.
That said,
[sup]1[/sup]One gazillion is a fictional expression and is therefore equal to zero by my definition. Do not remove this tag. Do not fold, staple or mutilate.
No. A change in a tax rate is considered fiscal policy. Changes in the money supply are implemented by the central bank: in the US it is called, “The Federal Reserve”.
As a form of fiscal stimulus, a cut in the capital gains tax is fairly weak (relative to resulting deficit incurred). Firstly, tax cuts in general have a lower multiplier than spending increases. Secondly, the beneficiaries of capital gains taxes have a lower marginal propensity to consume than the average citizen, as a group.
Following Scylla, tax cuts also have microeconomic effects. That is, they may change the behavior of its beneficiaries.
In this case, the argument is that there is a sub-optimal level of stock trading in the markets. Let’s say the stock is GM, bought in 1950. It’s now 2000. Unless the seller is highly sophisticated, he will be reluctant to sell the stock, because of the tax bill that will result. It would be better if holders of such dinosaurs entered the market and thereby drove down the stock market price.
The investor could then bid up the price of undervalued stocks, such as Priceline.com.
That’s the argument, right? It implies that existing capital gains taxes prevent stocks from trading at their fundamental value.
Ok, under that scenario, a cut in the capital gains tax will tend to stimulate consumption- or reduce savings.
Reductions in savings tend to drive up long term interest rates, which discourages purchases of plant and equipment.
What’s missing here is any sort of empirical evidence.
How true. I was at a seminar in Berkeley, Ca. one time when the subject of the GDP (then called GNP, Gross National Product) arose. We had previously discussed the hydraulic mining operations in and around the Mother Lode country in the San Joaquin-Sacramento vallley. Those operations got so big and used so much water that the town of Marysville was quite regularly flooded and portions of it had to be continually rebuilt.
We pointed out to the guy from Dept. of Commerce who was defending the GDP that use of that measure gave credit for the economic gain both from the mining itself and from the rebuilding of Marysville that the mining washed out. Therefore, by washing out Marysville often enough you could run the GDP up as high as needed to make the economy look good.
His answer? “If you don’t like GDP as a measure invent one that you do like.”
The high rate of people who believe that reality is simple is one of the primary causes of simple people. 