Tuesday, August 3, 2010

Tax cuts & economic stimulus

This will likely be a fairly tedious and not-particularly-well researched post.

Key message: Businesses are currently sitting on tons of cash, none of it going to generate jobs. Given this fact, it is amazingly difficult to argue that retaining current low tax-rates on corporations & high-income households is stimulative, or that raising these rates would further crater the economy.

... It is in fact far easier to argue that if increased government revenue were used for DIRECT stimulus - job-creation, food-stamps, aid to states - then the increased tax-burden would in fact BENEFIT corporations with increased demand and lead to private-sector job creation.

Note: This argument applies only to tax-rates on upper-income households (95th%-ile) and corporations.
YES – in current economy, raising tax-rates on the rest of us – the lower 95% - would be counter-productive!
The U.S. economy is driven by consumers – 70% of GDP is consumer-based! – If we – the vast majority of households – have extra money, we SPEND it!
… this is in stark contrast to the upper 5% and corporations, who have the luxury of keeping their excess $$$ set aside for better times.

Okay... now I'll try to build a case.
Disclaimer: What I know about economics can be written in big block letters on a postage stamp!

Here goes:
Corporate Tax Rate Cut Likely To Be Ineffective As Stimulus
By Chye-Ching Huang
January 23, 2009
Numerous government and independent studies agree that corporate tax rate cuts provide relatively little “bang-for-the-buck” as stimulus. The Congressional Budget Office (CBO), for example, has concluded that a corporate rate cut “is not a particularly cost-effective method of stimulating business spending.”[1] The Congressional Research Service (CRS) has found that in terms of stimulating aggregate demand, the “effect of corporate rate cuts is likely small.[2] And Mark Zandi, chief economist of Moody’s Economy.com, has rated a corporate tax rate cut as one of the least effective of all tax and spending options in stimulating the economy, estimating that it would generate only 30 cents in economic demand for every dollar spent on the tax cut.[3]
Everybody got that? Tax cuts aren't stimulative!

First off, from the demi-god Alan Greenspan: “Tax cuts do not pay for themselves.”

A gentle reminder:
private consumption
+ gross investment
+ government spending
+ (exports − imports)
Just in case you weren’t paying attention: CONSUMERS (that’s you and me) aren’t spending. LOTS of us are unemployed. We have no discretionary income to spend!

Biz investment? From recent Bloomberg article:
Non-financial industries are hoarding cash while laying off workers.
Industry has more cash-on-hand now than at any time since WWII.
Are they creating jobs with this $$$? NO!
Are they making capital investments with this $$$? NO!
The argument that taxing profits at a slightly higher rate would kill biz investment is just silly.

Balance of trade? Surprisingly, the U.S. Dollar is fairly strong right now… which means it’s EXPENSIVE for Europeans and Chinese to Buy American, but cheap for us to buy foreign goods.
These purchases of foreign goods do NOT contribute to GDP.

What’s left?
Government spending!

Government spending – DIRECT government spending – on jobs, federal aid to the states, and such mundane programs as Food Stamps – DIRECTLY increases CONSUMER DEMAND – that 70% of GDP.

Okay – Government spending can, in fact, increase the deficit – which for reasons I don’t understand is suddenly everyone’s top concern. (… just forget about two unfunded wars, which have cost upwards of $1Tn – that’s $1,000,000,000,000 – to date.)
How to offset increased government spending?...
… hmmm… Yes – you, Johnny, there in the back corner!:
“Increase revenue?”
Yes, Johnny! Very good. You get an “A”!

Yes – increase revenue.
… and just what constitutes government revenue?
Again – I do NOT advocate increasing taxes on the bottom 95% of U.S. households, but ONLY on the top 5%, and on corporations.

Ah, “But increasing taxes on corporations will forestall job creation!”
… WAIT A MINUTE: American corporations are currently SWIMMING IN CASH - sitting on more cash than they have in the past 60 years! – BUT… they’re not creating jobs!!!... in fact, they’re laying off folks!

How ‘bout we take the increased tax revenue and SPEND IT – on jobs!

Both Congressional Budget Office & Congressional Research Service confirm:
Every one dollar spent on tax cuts buys 30 CENTS of stimulus.
Every one dollar spent on food stamps buys $1.35 of stimulus.
Hmm… which is the better deal?

Krugman – that evil, socialist, Nobel-Prize winning economist – is fast to point out that Japan’s response to economic collapse in the 1990s led to “the lost decade”.
Just what was Japan’s response to economic collapse? – Slashing government spending!

… He is ALSO fast to point out that our current Fed leadership, in citing all that cash being hoarded by corporations as ‘proof’ that Fed policy to increase employment is not necessary – ignore the fact that Japan was awash in cash during the lost decade… and, much as U.S. corporations today, Japanese industry simply held onto the cash, WITHOUT creating jobs and demand.

The economic crisis that faces us today is DEMAND-DRIVEN!
… and for as long as just ordinary folks – you and me – don’t have $$$ to spend, this crisis will be with us for the foreseeable future.

Can we do anything?
We can INCREASE Government spending – without ballooning the deficit – by increasing taxes on the wealthiest 5% of households and on corporations…
… with NO deleterious consequences!

Stop the madness!

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