Morning Report: Corporate tax reform 12/9/16

Vital Statistics:

Last Change
S&P Futures 2250.0 2.0
Eurostoxx Index 354.2 2.0
Oil (WTI) 51.3 0.4
US dollar index 91.8 0.4
10 Year Govt Bond Yield 2.41%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 4.08

 

Stocks are higher this morning on no real news. Bonds and MBS are flat.
Slow news day.
Consumer sentiment jumped in November from 94 to 98.
Negative equity fell 0.8% from Q2 to Q3, according to CoreLogic. Currently, 8.4% of all mortgaged homes have negative equity, and another 1.6% are near negative equity. In total, 14.6% of all mortgaged homes in the US have less than 20% equity. Home price appreciation has been one driver of this, as well as borrowers who have been switching to 15 year mortgages which pay down principal faster. Over the past year, the average homeowner has picked up $12,500 in home equity.
One of the best chances for bipartisanship next year is corporate tax reform. While Republicans and Democrats disagree on how much revenue corporate taxes should bring in, most everyone agrees that our current system isn’t working. Over the past 16 years, virtually all of our competitors cut corporate taxes, however the US has maintained its 35% rate. You can see how much the market has shifted over the past 16 years in the chart below. The new plan would eliminate the incentives that companies use to shift revenues and costs to various jurisdictions in order to minimize taxes. Rates would fall, however interest would no longer be deductible.

A notable bond bear believes the tipping point in the bond market is 3% yields on the 10-year. At yields above that, he believes the stock market and the bond market would suffer a vicious sell-off.

Morning Report: RIP the mortgage interest deduction? 10/10/16

Vital Statistics:

Last Change
S&P Futures 2158.0 12.0
Eurostoxx Index 341.2 1.6
Oil (WTI) 50.6 0.8
US dollar index 87.6 -0.2
10 Year Govt Bond Yield 1.72%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.54

Bonds are closed today, but overseas bond markets are weaker. Stocks are up.

No economic data today. The week after the jobs report is typically data light to begin with, and there really isn’t anything market-moving this week, except for may the PPI on Friday.

Dave Stevens of the MBA raised the issue of eliminating the mortgage interest deduction, albeit with the caveat that it be done in the context of tax reform, with lowering rates and eliminating deductions. He wasn’t advocating eliminating it in a vacuum.

If Donald Trump wins, tax reform is a definite possibility. If Hillary wins, will she be more like her husband, willing to deal with Republicans to get something done, or will she be more like Obama, where both sides had hardened positions? If you were going to eliminate the mortgage interest deduction, it will certainly make housing less affordable and would have a dampening effect on home price appreciation. That said, with rates as low as they are, interest payments as a percentage of your mortgage payment are at all-time lows. So if you wanted to eliminate it at the time when it causes the least amount of pain, now is the time to do it.

Republicans will never support eliminating deductions without cutting rates, and the historical bargain between right and left (Democrats trading increased taxes and spending for increased defense spending) might not work this time around. Believing in that trade was what got us the sequester, where Obama found his bluff called, as Republicans tolerated lower defense spending in exchange for lower discretionary spending. Given the general war fatigue of the American voter, Republicans are probably not going to be willing to trade increases in defense spending for more social spending, and certainly not for tax increases.

Punch line: the mortgage interest deduction probably isn’t going anywhere.

That said, the US subsidizes the residential real estate market six ways to Sunday, with the mortgage interest deduction, the 30 year fixed rate mortgage (try finding that anywhere else on the planet), taxpayer backing of almost all new origination, and the cornucopia of subsidies for affordable housing. Not to mention the central bank targeting of mortgage rates and real estate prices. And the powers that be still scratch their heads wondering why we had a real estate bubble…

Mortgage credit availability improved in September, according to the MBA.

Thought Experiment 5/26/15

If our federal tax system had a voluntary box for contributions above income tax due, and if the box allowed for contributions to be earmarked for any of eight major federal budget “needs”:
1]  debt reduction
2]  defense and national security
3]  medicaid
4]  highway, dam, and port maintenance
5]  national parks
6] VA
7] ag subsidies
8] health subsidies through ACA
9] Returned Directly to the State Treasury of Your Choice__________________________
10] Existing specific federal budget item of your choice_______
Would you check off for any?  $50?  $500?  $5000?
Which functions do you think would draw the most contributions?
Which the least?
Assuming the earmarks would be honored, would Congress immediately offset the predicted earmarks in the following year’s budget?  Would that be good, in that voters would have changed budget priorities to directly suit themselves, or bad, in that Congress would just waste the money?
Would it make a difference to you if the contribution were tax deductible in the following year?  I exclude the possibility of it becoming a tax credit as that would defeat this mind experiment. But see below.

In the alternate mind experiment, in which one can choose to contribute one’s tax payment to selected budget items, which items do you think would be funded?

—–

I will post this at PL.  The reactions there should be – uh- different.

FYI – a chance to comment on a proposed regulation

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today will issue initial guidance regarding qualification requirements for tax-exemption as a social welfare organization under section 501(c)(4) of the Internal Revenue Code.  This proposed guidance defines the term “candidate-related political activity,” and would amend current regulations by indicating that the promotion of social welfare does not include this type of activity.  The proposed guidance also seeks initial comments on other aspects of the qualification requirements, including what proportion of a 501(c)(4) organization’s activities must promote social welfare.

The initial guidance is expected to be posted on the Federal Register later today.

There are a number of steps in the regulatory process that must be taken before any final guidance can be issued.  Given the significant public interest in these and related issues, Treasury and the IRS expect to receive a large number of comments.  Treasury and the IRS are committed to carefully and comprehensively considering all of the comments received before issuing additional proposed guidance or final rules.

“This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,” said Treasury Assistant Secretary for Tax Policy Mark J. Mazur.  “We are committed to getting this right before issuing final guidance that may affect a broad group of organizations.  It will take time to work through the regulatory process and carefully consider all public feedback as we strive to ensure that the standards for tax-exemption are clear and can be applied consistently.”

“This is part of ongoing efforts within the IRS that are improving our work in the tax-exempt area,” said IRS Acting Commissioner Danny Werfel.  “Once final, this proposed guidance will continue moving us forward and provide clarity for this important segment of exempt organizations.”

Organizations may apply for tax-exempt status under section 501(c)(4) of the tax code if they operate to promote social welfare.  The IRS currently applies a “facts and circumstances” test to determine whether an organization is engaged in political campaign activities that do not promote social welfare.  Today’s proposed guidance would reduce the need to conduct fact-intensive inquiries by replacing this test with more definitive rules.

In defining the new term, “candidate-related political activity,” Treasury and the IRS drew upon existing definitions of political activity under federal and state campaign finance laws, other IRS provisions, as well as suggestions made in unsolicited public comments.

Under the proposed guidelines, candidate-related political activity includes:

1.      Communications

  • Communications that expressly advocate for a clearly identified political candidate or candidates of a political party.
  • Communications that are made within 60 days of a general election (or within 30 days of a primary election) and clearly identify a candidate or political party.
  • Communications expenditures that must be reported to the Federal Election Commission.

2.      Grants and Contributions

  • Any contribution that is recognized under campaign finance law as a reportable contribution.
  • Grants to section 527 political organizations and other tax-exempt organizations that conduct candidate-related political activities (note that a grantor can rely on a written certification from a grantee stating that it does not engage in, and will not use grant funds for, candidate-related political activity).

3.      Activities Closely Related to Elections or Candidates

  • Voter registration drives and “get-out-the-vote” drives.
  • Distribution of any material prepared by or on behalf of a candidate or by a section 527 political organization.
  • Preparation or distribution of voter guides that refer to candidates (or, in a general election, to political parties).
  • Holding an event within 60 days of a general election (or within 30 days of a primary election) at which a candidate appears as part of the program.

These proposed rules reduce the need to conduct fact-intensive inquiries, including inquiries into whether activities or communications are neutral and unbiased.

Treasury and the IRS are planning to issue additional guidance that will address other issues relating to the standards for tax exemption under section 501(c)(4).  In particular, there has been considerable public focus regarding the proportion of a section 501(c)(4) organization’s activities that must promote social welfare.  Due to the importance of this aspect of the regulation, the proposed guidance requests initial comments on this issue.  The proposed guidance also seeks comments regarding whether standards similar to those proposed today should be adopted to define the political activities that do not further the tax-exempt purposes of other tax-exempt organizations and to promote consistent definitions across the tax-exempt sector.

DO AWAY WITH THEM

Do Away With Them
John D. Colombo

John D. Colombo is the Albert E. Jenner Jr. professor of law at the University of Illinois College of Law. His primary research area is federal and state tax-exemption for nonprofit organizations.

May 15, 2013

The best solution to the problems with 501(c)(4) organizations is to eliminate them completely. The problem with the (c)(4) designation is that it is essentially a charity that is permitted to engage in unlimited lobbying and some significant amount of political campaign activity (as long as that activity isn’t the organization’s “primary purpose”) in exchange for denying the organization the ability to receive deductible charitable contributions.

The I.R.S, will never be able to satisfactorily police the line at which political activity becomes “primary.”

But the Internal Revenue Service will never be able to satisfactorily police the line at which political activity becomes “primary.” Since “issue advocacy” (for example, lobbying) is permitted in any amount, the problem isn’t just one of identifying when political campaign activity becomes primary; it is also identifying the line between permissible issue advocacy and political campaign activity. This line is hard enough to enforce in the 501(c)(3) context, where political campaign activity is absolutely prohibited and lobbying permitted only to an “insubstantial” degree. The loosening of these restrictions in the (c)(4) context virtually invites wholesale noncompliance, which is pretty much what we have.

Further, the (c)(4) designation has no real purpose. The best explanation, in my view, for tax exemption for charities is that it is a sort of partial government subsidy for organizations that offer services that the private market will not offer, and that government either will not or cannot offer directly. I find it hard to believe that lobbying suffers from such a serious market failure that we need to subsidize organizations whose primary activity is to lobby. In fact, it seems almost perverse that the government would subsidize organizations whose primary purpose is to lobby the government.

So let’s make it simple: if you want to be a charity, be a charity and live with the 501(c)(3) limits; if you want primarily to be engaged in the political process through lobbying or otherwise, pay taxes like everyone else or register as a 527 political organization.

A Not So Modest Proposal

I was thinking today about our discussion regarding what method the Feds should use to fund federal spending, and it suddenly occurred to me that we don’t actually need a single method.  This is the beauty of a federal system.  If we think of the nation as it was originally conceived, a collection of semi-sovereign states bound together through the Constitution and governed by a federal government, then it is easy to imagine a system in which the federal government simply tells member states how much they owe, and the states themselves figure out how to come up with the money.  So if Californians like a a progressive income tax, they can have one, and if Texans prefer a consumption tax, they can have that too, and New York can have a transaction tax on all the evil Wall Street transactions , if that is how they prefer to raise the funds owed to the Feds.

The issue then becomes how to determine what the burden should be for each state.  If a balanced budget is desirable, the states, combined, need to be charged whatever the Feds are going to spend.   Since federal spending is generally measured as a percent of GDP, and since GDP is basically the sum total of either all income or all expenditures in the economy (depending on how you set out to measure it), making an individual state’s contributions a function of GDP makes sense and can be viewed as either a tax on income or consumption, depending on your preference.  And, interestingly enough, we can and do measure each state’s share of GDP, called GSP (Gross State Product).  So we have a ready and easy metric to determine what a given state’s share of the federal tax burden should be. If, say, federal spending is going to be set at roughly 20% of GDP annually, why not make each state’s contribution to the federal coffers be 20% of each individual state’s GSP?  Again, individual states can determine for themselves how to actually raise the amount owed from its citizens.  This would put an end to divisive national discussions about tax rate disparities, different “kinds” of income, and who is paying their  “fair share”, and would create a system of competition among states for the most efficient and “fair” method of raising funds.

Thinking about this, I decided to check to see how such a methodology would compare to what individual states have actually been contributing to the federal coffers.  The most recent year for which I could easily find both GSP figures and federal taxes paid broken out by state was 2007.  Note that the federal taxes broken out by state include both income taxes and corporate taxes.  It turns out that 2007 is actually a good year to use, because total revenues that year amounted to 19.5% of the sum of all state GSP’s, and the last time we actually had a balanced budget, federal spending was roughly 20% of GDP, so if we use that as a baseline for what spending “should” be, 2007 would have produced a balanced budget.  The results were interesting.

In 2007, the top 5 states in terms of GSP were also the top 5 states in terms of taxes paid to the federal government (see chart below).  Note that the positions of New York and Texas flip depending on whether the order is GSP or taxes paid, but otherwise the top 5 is in order either way.  The rest of the states are also roughly in the same order, which is not that surprising since GSP is a measure of all income received in that state, and federal taxes are currently based on income.  There were a couple of outliers, however, for example, Minnesota is number 9 in terms of taxes paid, but drops to 16 in terms of GSP, and Connecticut, which is 16 in taxes paid drops to 23 in GSP.  But for the most part the order of states is pretty close.

Next I compared what states actually paid with what they would have paid had their “bill” to the federal government been determined by a “flat” tax of 19.5 percent of GSP which would result in total revenue equal to that which was actually collected.  There were some interesting disparities.  For example, California, which had the highest GSP and paid the highest taxes still only paid 17.42% of its GSP in taxes, more than 2% less than it would have paid under a “flat tax” of 19.5% on GSP.   Another way of saying this:  Californian’s share of GDP was 13.14% but it’s share of the federal tax burden was only 11.76%.  On the other hand, Connecticut paid more than 22.5% of its GSP in taxes, 3% more than it would have paid with a flat 19.5%, and while it’s share of GDP was 1.55%, it paid over 2% of all tax revenue.    See below for a list of all states (numbers in millions of $).

State

Gross collections

GSP

% of GDP

collection as % of GSP

Collection at 19.5%

California

$313,999

$1,801,762

13.14%

17.43%

$350,804

Texas

$225,391

$1,148,531

8.37%

19.62%

$223,619

New York

$244,673

$1,105,020

8.06%

22.14%

$215,148

Florida

$136,476

$741,861

5.41%

18.40%

$144,441

Illinois

$135,458

$617,409

4.50%

21.94%

$120,210

Pennsylvania

$112,368

$533,212

3.89%

21.07%

$103,817

Ohio

$105,773

$462,506

3.37%

22.87%

$90,050

New Jersey

$121,678

$461,295

3.36%

26.38%

$89,814

Georgia

$75,218

$391,241

2.85%

19.23%

$76,175

North Carolina

$75,904

$390,467

2.85%

19.44%

$76,024

Virginia

$61,990

$384,132

2.80%

16.14%

$74,791

Michigan

$69,924

$379,934

2.77%

18.40%

$73,973

Massachusetts

$74,782

$352,178

2.57%

21.23%

$68,569

Washington

$57,450

$310,279

2.26%

18.52%

$60,411

Maryland

$53,705

$264,426

1.93%

20.31%

$51,484

Minnesota

$78,697

$252,472

1.84%

31.17%

$49,156

Indiana

$42,668

$249,229

1.82%

17.12%

$48,525

Arizona

$35,485

$245,952

1.79%

14.43%

$47,887

Tennessee

$47,747

$245,162

1.79%

19.48%

$47,733

Colorado

$45,404

$235,848

1.72%

19.25%

$45,920

Wisconsin

$43,778

$233,406

1.70%

18.76%

$45,444

Missouri

$48,568

$229,027

1.67%

21.21%

$44,592

Connecticut

$54,236

$212,252

1.55%

25.55%

$41,326

Louisiana

$33,677

$207,407

1.51%

16.24%

$40,382

Alabama

$24,149

$164,524

1.20%

14.68%

$32,033

Oregon

$23,467

$158,268

1.15%

14.83%

$30,815

Kentucky

$23,151

$152,099

1.11%

15.22%

$29,614

South Carolina

$20,499

$151,703

1.11%

13.51%

$29,537

Oklahoma

$29,325

$136,374

0.99%

21.50%

$26,552

Iowa

$18,437

$129,911

0.95%

14.19%

$25,294

Nevada

$19,619

$129,314

0.94%

15.17%

$25,177

Kansas

$22,311

$116,986

0.85%

19.07%

$22,777

Utah

$15,064

$105,574

0.77%

14.27%

$20,555

Arkansas

$27,340

$95,116

0.69%

28.74%

$18,519

DC

$20,394

$92,516

0.67%

22.04%

$18,013

Mississippi

$10,869

$87,652

0.64%

12.40%

$17,066

Nebraska

$19,043

$80,360

0.59%

23.70%

$15,646

New Mexico

$8,346

$75,192

0.55%

11.10%

$14,640

Hawaii

$7,666

$62,019

0.45%

12.36%

$12,075

Delaware

$16,858

$61,545

0.45%

27.39%

$11,983

West Virginia

$6,522

$57,877

0.42%

11.27%

$11,269

New Hampshire

$9,304

$57,820

0.42%

16.09%

$11,258

Idaho

$9,025

$52,110

0.38%

17.32%

$10,146

Maine

$6,289

$48,021

0.35%

13.10%

$9,350

Rhode Island

$11,967

$46,699

0.34%

25.63%

$9,092

Alaska

$4,287

$44,887

0.33%

9.55%

$8,740

South Dakota

$4,766

$35,211

0.26%

13.53%

$6,856

Montana

$4,523

$34,266

0.25%

13.20%

$6,672

Wyoming

$4,725

$31,544

0.23%

14.98%

$6,142

North Dakota

$3,660

$28,518

0.21%

12.83%

$5,552

Vermont

$3,806

$24,627

0.18%

15.46%

$4,795

Then, just for fun, I decided to see what would happen if the Feds allocated a state’s share of the tax burden in the same way it currently allocates an individual’s share of the burden, ie progressively.  So, for example, since the share of taxes paid by the top 1% of income earners is 36.7%, I looked at what it would take to make the share of the top 1% of GSP states be an equivalent 36.7%.  And so on for the next 4% (22% share of taxes), 5-10% (11.8% share), 10-25% (16.8% share), 25-50% (10.4% share), and finally the bottom 50% (2.3% share).

It turns out that under a progressive tax on GSP, the top 10% of states are all paying less than their “fair share”, while the bottom 90% are all over paying more.  Far and away the most egregious under-payer is California which, being the top 1% in terms of GSP, should be paying more than 3 times what it is currently paying.  The biggest over-payer is Arkansas, which is paying almost 10 times what it would be paying under a “fairer”, progressive system.  See chart below for what all states would pay, and their share of all taxes paid.

State

Gross collections

Collection at 19.5% of GSP

progressive share

Share of all taxes

California

$313,999

$350,804

$980,059

36.70%

Texas

$225,391

$223,619

$299,422

11.21%

New York

$244,673

$215,148

$288,079

10.79%

Florida

$136,476

$144,441

$171,983

6.44%

Illinois

$135,458

$120,210

$143,131

5.36%

Pennsylvania

$112,368

$103,817

$71,303

2.67%

Ohio

$105,773

$90,050

$61,848

2.32%

New Jersey

$121,678

$89,814

$61,686

2.31%

Georgia

$75,218

$76,175

$52,318

1.96%

North Carolina

$75,904

$76,024

$52,215

1.96%

Virginia

$61,990

$74,791

$51,367

1.92%

Michigan

$69,924

$73,973

$50,806

1.90%

Massachusetts

$74,782

$68,569

$47,094

1.76%

Washington

$57,450

$60,411

$30,236

1.13%

Maryland

$53,705

$51,484

$25,768

0.96%

Minnesota

$78,697

$49,156

$24,603

0.92%

Indiana

$42,668

$48,525

$24,287

0.91%

Arizona

$35,485

$47,887

$23,968

0.90%

Tennessee

$47,747

$47,733

$23,891

0.89%

Colorado

$45,404

$45,920

$22,983

0.86%

Wisconsin

$43,778

$45,444

$22,745

0.85%

Missouri

$48,568

$44,592

$22,318

0.84%

Connecticut

$54,236

$41,326

$20,684

0.77%

Louisiana

$33,677

$40,382

$20,212

0.76%

Alabama

$24,149

$32,033

$16,033

0.60%

Oregon

$23,467

$30,815

$4,637

0.17%

Kentucky

$23,151

$29,614

$4,457

0.17%

South Carolina

$20,499

$29,537

$4,445

0.17%

Oklahoma

$29,325

$26,552

$3,996

0.15%

Iowa

$18,437

$25,294

$3,806

0.14%

Nevada

$19,619

$25,177

$3,789

0.14%

Kansas

$22,311

$22,777

$3,428

0.13%

Utah

$15,064

$20,555

$3,093

0.12%

Arkansas

$27,340

$18,519

$2,787

0.10%

District of Columbia[1]

$20,394

$18,013

$2,711

0.10%

Mississippi

$10,869

$17,066

$2,568

0.10%

Nebraska

$19,043

$15,646

$2,355

0.09%

New Mexico

$8,346

$14,640

$2,203

0.08%

Hawaii

$7,666

$12,075

$1,817

0.07%

Delaware

$16,858

$11,983

$1,803

0.07%

West Virginia

$6,522

$11,269

$1,696

0.06%

New Hampshire

$9,304

$11,258

$1,694

0.06%

Idaho

$9,025

$10,146

$1,527

0.06%

Maine

$6,289

$9,350

$1,407

0.05%

Rhode Island

$11,967

$9,092

$1,368

0.05%

Alaska

$4,287

$8,740

$1,315

0.05%

South Dakota

$4,766

$6,856

$1,032

0.04%

Montana

$4,523

$6,672

$1,004

0.04%

Wyoming

$4,725

$6,142

$924

0.03%

North Dakota

$3,660

$5,552

$836

0.03%

Vermont

$3,806

$4,795

$722

0.03%

Come on California and Texas…start pulling your weight!!!!

Taxing the Job Creators

Or, I suppose I could title it “Crafting Tax Policy Around Creating Economic Growth”, but that seems a little presumptuous, give it’s just a small mish-mash of half-formed musings.

Michael Arrington Spreads The Wealth

Michael Arrington believes in “trickle up” theory. “Wealth rises,” he says. “In the form of smoke, from the $100 bills I use to light my cigars!”

It occurs to me that the job creators are those that start and run small to mid-size businesses, mostly. If that’s the issue, why isn’t there more discussion of tax cuts or advantageous changes in tax policy for small businesses? Small businesses in the process of expanding or hiring are always strapped for cash, and tax bills (both federal and local) obligate hard decisions as regards to capital expenditures and labor expansion. Almost always, money that goes to pay the tax man, if kept, would go towards expanding the business or employing more people.

Wealthy individuals with high incomes are less likely to act as job creators, so it seems less likely, to me, that increased taxation on the wealthy would be a significant drag on the economy. They may invest their cash, but it’s unclear how much that investment does in terms of funding new hiring or innovation in new businesses, versus providing already solvent companies with a solid market capitalization, from which they produce pleasing dividends.

They may hire cooks and maids and gardeners, but it seems such hires are likely very low impact on the economy, and perhaps not the first things to go when a wealthy fellow pays an additional 3%-5% in taxes. Finally, it has been demonstrated that taxes on luxury items radically curtail the purchase of luxury goods, so it could be speculated that additional taxes on the wealthy would negatively impact those companies that produce luxury items. This is a negative, as those employed producing luxury items are better employed in such production than unemployed, but it seems to me that the overall impact on the economy is probably insignificant.

Thus, if the interest is in growing the economy through tax policy, a compromise position that raises taxes on the individual income of those making $250k+ per year, while offering significant tax advantages to small businesses making under $1 million per year, or offering a permanent per-employee tax break that allows small companies that employee a large number of people to pay virtually no federal taxes, would be a better way to stimulate economic growth.

Myself, I don’t care for the rhetoric of class envy. Complaining that the rich “didn’t build it themselves”, or that the wealthy aren’t “doing their fair share” has no resonance with me. I have no moral objection to the rich getting richer, and getting to keep more of their money. The top 2% pay half of all taxes, and that’s a lot. Those folks, as super-rich as they are, are doing their part. Even if Warren Buffet pays less as a percentage rate than his secretary.

However, it seems that we will need to raise revenue in addition to cutting spending (which seems, at best, a pipe dream, and I suspect we will eventually follow the Greek model), and there are probably worse places to raise revenue than increasing taxes on the wealthy, either in terms of income taxes or increases in capital gains taxes over a certain amount (and excluding the sale of primary residences), or even a minor wealth tax for folks who have assets in their name over some arbitrary sum. It seems to me raising taxes on the middle class, or on small businesses, would be more likely to put a drag on the economy.

The reverse of that last sentiment also seems to be true to me: that tax cuts on small businesses, and the middle class, would be more likely to spur economic growth. Although many factors, of course, contribute to economic growth, and tax policy doesn’t make or break the economy, one way or the other, in a vacuum. Until top marginal rates start approach 90%, but then, of course, you suffer another problem as regards revenue: compliance.

It just seems to me that most of the arguments seem to be about abstract things. That is: “The rich can afford it!” – “The rich already pay 80% of all taxes!” – “People with seven homes don’t need another tax break!” – “It’s their money! They earned it!”- “Rich people are greedy and only want more money!” – “You’re just jealous! And a taker! And lazy! What ever happened to self-reliance?” Etc. There doesn’t seem to be much objective discussion of what is meant by taxing the “job creators”, who creates the most jobs (small businesses, or sole proprietorships?), which tax cuts on which groups increases money flowing into the economy, or even who benefits and how much when the economy prospers.

Reaganomics has always been (IMO) unfairly vilified by many on the left (don’t get me started on the constant mischaracterization of the Laffer Curve), when the fact is the fundamental precept of “trickle down” economics makes good sense: cutting taxes at every level puts more money into the economy, and that rising tide lifts all boats. It just lifts the richer boats higher, but if the alternative is that we all sink, I don’t think that’s such a bad deal.

At some level, the tide will have risen as much as it can: that is, if the wealthy pay an effective 18% rate on their income and their taxes are cut to an effective 10%, it has ceased to trickle down in a meaningful way (this is not an assertion, just a theoretical example, real numbers would likely be different, but I think the principle would prove true). There seems to be ample evidence for this, in that the richer are richer than ever, and their wealth has been increasing on a steady curve, with no demonstrable benefit to the overall economy. While I’m not sympathetic to complaints that 1% of Americans control 34.5% of America’s wealth, such wealth concentration indicates a solid increase, over the past few decades, of the fortunes of the very wealthy in this country. I.e., the wealthier are much richer, they have much more money with which to create jobs, and they just aren’t doing it. Not because they are bad people or are evil or greedy, it’s just that tax cuts for the rich don’t produce jobs or economic growth in any meaningful sense. At least, not past a certain level. And we are well past that level.

To repeat myself, it seems to me there is an obvious reason those tax cuts don’t produce jobs or significant economic growth. Those very wealthy individuals don’t have any additional businesses they wish to create, people they need to higher, or local investments they are wanting to make or expand with that additional money. At least, not to the degree that impacts the economy.

Yet, it seems to me there are areas where an increase in money would find it’s way into new paychecks and new capital investments: small businesses and, to a lesser extent, the middle class. These are the folks without a surplus of money, but with people they would hire, if they could, and equipment or appliances that need to be replaced, or businesses they would start, if only they had the money. Yet an excellent opportunity for one side or the other to argue for making the middle class tax cuts permanent, or introducing a new generous small business tax cut, has passed again and again, as the two sides take their largely inflexible position on the Bush tax cuts. It’s all about either increasing taxes on the rich to raise revenue, or preserving existing tax cuts so that the rich can stimulate the economy with the extra money (although there seems to be little evidence of this, and certainly no compelling reason to think that it’s the best stimulation tax policy can make possible).

Put in the bluntest terms, I think Republicans would do well to cave on the Bush tax cuts for those making over $250k+, and build a coalition around making middle class tax cuts permanent, and coming up with some fresh tax cuts for small businesses with more than 3 non-contract employees and less than $1 million (or $3 million, perhaps) in total revenues.

Just letting the Bush tax cuts lapse may increase revenues to the federal treasury, but it’s not going to grow the economy.

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