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.

Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1344.3 -4.8 -0.36%
Eurostoxx Index 2486.5 -5.1 -0.20%
Oil (WTI) 101.08 0.2 0.17%
LIBOR 0.4976 -0.005 -0.99%
US Dollar Index (DXY) 79.279 0.144 0.18%
10 Year Govt Bond Yield 1.94% -0.03%

Markets are a touch weaker after a disappointing retail sales number. Advance retail sales for January were up .4% vs. expectations of .8%.  S&P futures sold off slightly on the number while bonds and mortgage backed securities rallied. For those who follow charts, the S&P is right up against resistance at the 1350 level.  If we break through, the next stop is 1600 or so.

European markets are flat in spite of Moody’s downgrades of Spain, Portugal, and Italy yesterday. The ratings agencies have been behind the curve for the whole crisis. European finance ministers are set to meet in Brussels tomorrow to approve a second Greek bailout.

Andrew Ross Sorkin has a good article on the Volcker Rule and the Costs of Good Intentions. At issue is where one draws the line between bona fide market making and proprietary trading. Bona Fide market making serves a purpose in that it keeps trading costs down and adds liquidity to the market. (FWIW, Paul Volcker doesn’t necessarily think this is a good thing). The crux of the issue is whether investment banks will be allowed to maintain an inventory of product. If they aren’t permitted to maintain any inventory of any size, then all trades will be agency trades.  In other words, if the bank can’t find the other side of your trade, you’re out of luck.

The CFPB has laid out a broad outline of some of the changes it expects to make for mortgage servicers. The initial steps will involve changes to billing statements – new rules to make it clearer when resets will occur, better contact information, and a statement from HUD.  An example of the new template is here.  The rules will also address forced-place insurance, where servicers can put a homeowner in a new, more expensive insurance plan if they fall behind in their payments.

Does anyone find it ironic that the rule which sets new tax rates on dividends is named after a guy who’s company doesn’t pay them?

"Republicans Criticize Tax on Millionaires Idea"

Well, gee, there’s a surprise. Paul Ryan on the Buffett Tax, “It adds further instability to our system, more uncertainty and it punishes job creation and those people who create jobs,” Ryan said on Fox News Sunday. “Class warfare may make for good politics but it makes for rotten economics.” And, of course, Mitch chimes in.

Instability? Uncertainty? Punishes job creation? I call BS on this. Righties here, are you on board with the Republican leadership line on Buffett Tax? If so, on what basis?

Republicans criticize tax on millionaires idea

Update: Edited for clarity at 3:06PM MST/

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