Tuesday, January 27, 2009

The Tax Cut Myth

I know this is going to be a hard sell.

Since time immemorial the tax collector has been universally despised. No one likes to see their hard earned money confiscated by the government for the common good. I know I take every deduction I am eligible for when I file. But we have been sold a bill of goods when it comes to lowering taxes.

We tried it in the 1920's. There was a boom, a bubble, and a bust. We tried it in the 1980's; another boom, bubble, and bust We have been trying it the last eight years, and you guessed it: boom, bubble, bust. Those who don't remember history are forever doomed to repeat it.

The theory is that if the rich can keep their money, they will invest in businesses that create jobs, more businesses, more tax revenue and greater wealth for the nation. It sounds like logic and common sense. But what really happens? Exactly the opposite!

Higher taxes create an incentive to reinvest profits into long-term growth.When taxes are relatively high, the only way to retain the bulk of the wealth created by a business is by reinvesting it in the business: factories, equipment, staff, research and development, new products.

During the Eisenhower administration, arguably one of our most productive periods, the corporate tax rate was in the 70% range. This meant that every dollar corporations posted as profit instantly turned into 30 cents. (Assuming they actually paid taxes on it)

Unless you really need the money for another yacht or mansion, you invest it the business and find ways to spend it that take it out of the taxable profit column but increase the value of the company.

When you plan for the long term; you need a happy, stable work force. It becomes worthwhile to pay good wages and offer decent benefits. Your employees, community and society prosper along with you.

The problem with low taxes is they change the business culture. Instead of responsible, sustainable investment, they encourage profit taking.

Suckers who run companies with steady, reliable profits became targets for takeovers by people who were willing to milk them for everything they are worth; leveraged buyouts, hostile takeovers, cut the work force, raid the pension fund, sell the assets, outsource production, issue junk bonds; who cares what happens in 10 years, you can make a bundle by screwing everyone else!

After they gutted American industry in the 80's, the rich folks had way too much money to play with, and they become greedy bastards. Investing in business is slow. You don't often get immediate returns on your capitol. Plus, it exposes you to the risks of the preceding paragraph.

This causes investors to look for the latest "hot" sector, where they can make a quick profit and move on. They find the area and flock to it. It heats up even more.

Joe Sixpack, who can’t afford to take the same risks the big boys can, sees people making tons of money quickly and easily, simply by buying and selling, and doesn’t want to miss out. He doesn't realize he already has by the time he gets on the bandwagon.

Sub-prime mortgages, derivatives, mortgage-backed securities, and other Ponzi schemes were all very profitable for a few people who got in early, but they do not create sustainable wealth. Just a boom, then a bubble….. Followed by a bust.

Tax cuts are the root of our economic distress. A responsible tax policy that creates long term investment in business growth is the rising tide that will lift all boats.


Bill said...

The thing about "trickle down" economics (also called "voodoo economics" by some) is that it was all bullshit. It was never meant to work as the Republicans presented it, it was just sold that way to try to get Americans to swallow the idea. Reaganomics was nothing more than a wealth-building scheme for the upper 2% of our population calculated to deprive the middle class of the fruits of their labors and shift the burden of paying for big government on to their shoulders. Considered from that perspective it was a huge success and worked exactly as Reagan et al. had planned.

The headlong rush by the Bush administration to relieve big business of all its tax, social, and environmental responsibilities is immoral, unconscionable, and obscene in its shortsightedness. It is my most fervent hope that the new administration will start prosecuting the corporate felons with a vengeance - and that especially includes the Wall Streeters, Citigroupers, AIG-ers, and the auto manufacturers.

The most vexing part of this situation is that you can't punish these people in any truly meaningful way. Shysters like Ken Lay, Bernie Madoff, Nicholas Cosmo, and Art Nadel who have ruined the lives of thousands of people may get fined and they might even get jail time. But so what?? Can the fines pay back the investors?? No. Can the jail time give the people who have lost their homes a roof over their heads?? No. Incarcerated criminals still have a roof over their heads, medical care, and three square meals a day - at our expense. Sorry, but I strongly believe that crimes of this magnitude deserve punishments of equal magnitude. People have killed themselves over these men and their criminal actions. From where I'm standing that's murder and the punishment should suit the crime.

They also need to go after insurers and make it impossible for them to cherry-pick and/or withdraw from markets where their ridiculous rate increases have been denied. State Farm just announced they're pulling out of FL because the legislature here turned down their 47% rate hike. Meanwhile, the reason they're giving for this rate hike is that we have bad hurricane losses.That doesn't quite stand up to scrutiny as we had one bad hurricane year in 2004 - after 25 good years (on our coast, at least) and 4 good years since.? I think a whole lot of money was made (and kept) by insurance companies in those 29 years.

After 2004 all the insurers either pulled out of the state completely or severely restricted their exposure by dropping policyholders for no good reason other than the fact they live in FL. Insurance is a risk-based business. Risk and loss come with the territory. By allowing these companies to eliminate the risk they're in essence giving them a license to print money. Having spent quite a few years in the insurance industry I know how they cook their books and how profitable they really are, even when catastrophic losses are encountered. State and Federal legislators are largely to blame for the inflationary spiral of insurance premiums because they only require the insurance companies to show their premium income, not any of their other revenue streams. Believe me, it's really easy to look unprofitable if you only consider the company's loss ratio.

It can't happen overnight, but I'm really hoping we can reintroduce some accountability into our system. Letting people get away with their crimes, either through pardons, "relocation", or other slap-on-the-wrist punishments cannot be allowed to continue. Stealing people's money is NOT a victimless crime and shouldn't be considered as such.

Anonymous said...

What a load of crap. Next, you'll be telling me that Tom Daschle and Timothy Geithner made HONEST mistakes on their taxes!

Three things brought down American business in the 80's: Crappy products at ridiculous prices, Unions, and the one-two punch in the gut by Carter and the EPA.

Change, change, change my ass. It's the same immoral idiots from the Clinton years pulling the same stunts. And the American public is so stupid that we'll go along with them again.

And people like you are STILL trying to blame Reagan!


Malibu Ken

cindymb said...

Our new president has called for a ceasation of partisan politics and an end to the blame game. Regardless of how we got here and whose fault it is, the crisis is here and we have to face it and solve it. Put politics aside and remember that the politicans serve at the pleasure of the people. We voted you in and we can vote you out.

Now more than ever we need more oversight not less, business and government need to be more receptive to the needs of the people and less on the bottom line or the size of their next bonus/salary increase.

We have all contributed to the problem, we must all suffer the consequences of cleaning it up.

AntiSocialism said...

This blog has been eerily quiet with all of the juicy news going on. Guess the "buyer's remorse" has started sinking in.

Grey Fedora said...

"Three things brought down American business in the 80's: Crappy products at ridiculous prices, Unions, and the one-two punch in the gut by Carter and the EPA."

I agree with the crappy products at ridiculous prices, except we now have crappy, dangerous products from China at ridiculous prices.

You also conveniently forget the LBO's and junk bonds of the 1980's.

Reagan began busting the unions chops as soon as he was elected. Remember the air traffic controllers? How about the legislation allowing employers to hire permanent replacement workers?

You can also thank Carter and the EPA that you have reasonably clean air and water today. The entire planet would have been poisoned if not for them.

Grey Fedora said...

"This blog has been eerily quiet with all of the juicy news going on. Guess the "buyer's remorse" has started sinking in."

We're watching the remnants of the neo-conmen make obstructionist fools out of themselves. Obama should go to the home stae of every Senator who is holding up the stimulous package, and show them how many jobs in that stae are affected.

Anonymous said...


Anonymous said...

Where did you study economics? Or history for that matter? Corporate tax rates never exceeded 52% during the Eisenhower Administration. Are you suggesting that there was economic prosperity during this time because corporate tax rates were high?

Were you fired by an insurance company? You have a little too much rage built up inside. You are quite the advocate for the proletarian masses although I am not sure I understand your proposed alternative to trickle down econ.

Grey Fedora said...

Anon; You are correct. Corporate tax rates were in the 50% range during the Eisenhower years. Adjust the math accordingly. The principle is still the same.

Yes, I am suggesting high taxes were one reason for prosperity during the 50's. Along with other factors, such as higher unionization rate in the labor force, and the rest of the world was in ruins after WW II, the US had the only industry left on the planet.

History? I've been alive since the Eisenhower Administration. I came of age during the Reagan recessions of the 1980's.
Economics? Google U. and school of Hardknocks. How bout you?

Anonymous said...

Your economic training is what I expected. Did that get that Google degree framed. Saying the higher corp. taxes of the 50's was the reason for economic expansion during that period is like saying that umbrellas are responsible for the rain. Glad that you were alive during the Eisenhower administration. I do not recall a recession that bears that name of RR. There was a recession that began in 1981 and ended in 1982. I would be glad to discuss the causes of this recession with you. Before you we do though, I suggest you head on over to the stacks at the Google U library and do a little research. I will give you a place to start: monetary policy and Paul Volcker.