Taxes, Spending, the Fiscal Cliff, and Austerity

[The Rabbi]

My two cents worth.

The notion that a higher CG rate can possibly be a positive for economic growth is nonsense.

It all depends on what behavior model you have for investors and their expectations. Right now a lot of commercial real estate deals are trying to close by the end of December under the assumption that capital gains rates will rise in 2013. To the extent that some of this real estate is underutilized now and will be more aggressively utilized by the buyers, the anticipation of future higher capital gains rates may be marginally promoting economic growth. But this is a temporary effect and in general it is hard to see how with very low rates of anticipated inflation and low real interest rates that raising capital gains rates is helpful to the economy.

.

That's the Obama model of economics. Cram future demand into the present and hope for the best. The umbers this year look better probably because a lot of people are taking gains and making use of Bush-era tax rates in anticipation of next year being worse. But that only robs from the future for today. It isn't sustainable at all.

 

[Foxfyre]

My two cents worth.

The notion that a higher CG rate can possibly be a positive for economic growth is nonsense.

It all depends on what behavior model you have for investors and their expectations. Right now a lot of commercial real estate deals are trying to close by the end of December under the assumption that capital gains rates will rise in 2013. To the extent that some of this real estate is underutilized now and will be more aggressively utilized by the buyers, the anticipation of future higher capital gains rates may be marginally promoting economic growth. But this is a temporary effect and in general it is hard to see how with very low rates of anticipated inflation and low real interest rates that raising capital gains rates is helpful to the economy.

.

That's the Obama model of economics. Cram future demand into the present and hope for the best. The umbers this year look better probably because a lot of people are taking gains and making use of Bush-era tax rates in anticipation of next year being worse. But that only robs from the future for today. It isn't sustainable at all.

More to the point, the Obama model is to apply the tax liability immediately, and agree to spending cuts that will kick in later and be spread over a decade or so. Which as we have already discussed, means they won't ever happen.

 

[Trajan]

My two cents worth.

The notion that a higher CG rate can possibly be a positive for economic growth is nonsense.

It all depends on what behavior model you have for investors and their expectations. Right now a lot of commercial real estate deals are trying to close by the end of December under the assumption that capital gains rates will rise in 2013. To the extent that some of this real estate is underutilized now and will be more aggressively utilized by the buyers, the anticipation of future higher capital gains rates may be marginally promoting economic growth. But this is a temporary effect and in general it is hard to see how with very low rates of anticipated inflation and low real interest rates that raising capital gains rates is helpful to the economy.

.

That's the Obama model of economics. Cram future demand into the present and hope for the best. The umbers this year look better probably because a lot of people are taking gains and making use of Bush-era tax rates in anticipation of next year being worse. But that only robs from the future for today. It isn't sustainable at all.

Costco is borrowing to provide a $7 dividend this calender year........yes you heard that right, whats that tell us?

And the CEO of Costco is an Obama fan, big time too.

 

[saveliberty]

American society is closer to breaking down than ever before.

Obama helps finish the job of addicting half of the US to government handouts. Then when the other half finally has enough, the handout crowd feels entitled to take from all the others. Stealing direcctly forces the working folks to stay at home and defend theor property. No one works and we have to start all over. THAT is the true cliff.

 

[Wiseacre]

My two cents worth.

The notion that a higher CG rate can possibly be a positive for economic growth is nonsense.

It all depends on what behavior model you have for investors and their expectations. Right now a lot of commercial real estate deals are trying to close by the end of December under the assumption that capital gains rates will rise in 2013. To the extent that some of this real estate is underutilized now and will be more aggressively utilized by the buyers, the anticipation of future higher capital gains rates may be marginally promoting economic growth. But this is a temporary effect and in general it is hard to see how with very low rates of anticipated inflation and low real interest rates that raising capital gains rates is helpful to the economy.

One wonders how aggressive buyers will be, especially in the short term. I wouldn't expect much investment to go forward with those commercial real estate properties until there is a perceived sustained uptick in demand. I might add that for every buyer getting in there is also a seller getting out; seems like a wash to me.

Obviously if they are instead investing in non-taxable avenues, that does our economy no good

I'm not sure I understand the reasoning here.
1. The only significant non-taxable investments are state and municipal obligations. Changes in income tax rates (but not necessarily capital gains rates) would increase the value of such bonds relative to securities generating taxable interest. I'll pass on the arguments over whether money raised by corporate bonds is better spent than money raised by state and municipal bonds.
2. Higher tax rates, including capital gains rates, increases the value of tax deferral, such as in annuities and unrealized capital gains. If such rates are expected to decrease in the future, investors will be even more likely to attempt to defer taking gains in the short term. Likewise at very low real interest rates the cost of deferring taxes is cheaper. To the extent people sit on underutilized investments, economic growth suffers.

What about gold? Or real estate or tax shelters of some kind? Instead of puting it to work in ways that would be better for economic growth, the rich guys pull back and resort to other avenues, whatever they may be. My basic point though, is that when you raise taxes on something you discourage it; whether or not there is a little reverse thing going on in a few cases is debateable, but for the most part a higher CG rate is going to reduce economic growth from what it might have been.

A lower corp tax rate would also be more attractive to investors, but why raise one and lower the other? Why not lower BOTH? Or leave the CG rate where it is and lower the corp tax rate?

A good point. Personally I would prefer to lower the corporate income tax rate to the current average rate and eliminate most corporate tax preferences. At first glance this is revenue neutral, but because of the distorting effects on the economy of the many credits and deductions intended to help specific industries and groups, I think efficiency and growth would be improved. Such a rate would settle down to around 16%.

100% agree, along with reducing or eliminating the subsidies that some industries get that others don't. Most of it goes to the biggest ones, which is probably not the original intention. And I do think it stinks that some big corps pay nothing at all in corp taxes, and even have credit built up for future taxes.

 

[Foxfyre]

My two cents worth.

The notion that a higher CG rate can possibly be a positive for economic growth is nonsense.

It all depends on what behavior model you have for investors and their expectations. Right now a lot of commercial real estate deals are trying to close by the end of December under the assumption that capital gains rates will rise in 2013. To the extent that some of this real estate is underutilized now and will be more aggressively utilized by the buyers, the anticipation of future higher capital gains rates may be marginally promoting economic growth. But this is a temporary effect and in general it is hard to see how with very low rates of anticipated inflation and low real interest rates that raising capital gains rates is helpful to the economy.

One wonders how aggressive buyers will be, especially in the short term. I wouldn't expect much investment to go forward with those commercial real estate properties until there is a perceived sustained uptick in demand. I might add that for every buyer getting in there is also a seller getting out; seems like a wash to me.



I'm not sure I understand the reasoning here.
1. The only significant non-taxable investments are state and municipal obligations. Changes in income tax rates (but not necessarily capital gains rates) would increase the value of such bonds relative to securities generating taxable interest. I'll pass on the arguments over whether money raised by corporate bonds is better spent than money raised by state and municipal bonds.
2. Higher tax rates, including capital gains rates, increases the value of tax deferral, such as in annuities and unrealized capital gains. If such rates are expected to decrease in the future, investors will be even more likely to attempt to defer taking gains in the short term. Likewise at very low real interest rates the cost of deferring taxes is cheaper. To the extent people sit on underutilized investments, economic growth suffers.

What about gold? Or real estate or tax shelters of some kind? Instead of puting it to work in ways that would be better for economic growth, the rich guys pull back and resort to other avenues, whatever they may be. My basic point though, is that when you raise taxes on something you discourage it; whether or not there is a little reverse thing going on in a few cases is debateable, but for the most part a higher CG rate is going to reduce economic growth from what it might have been.

A lower corp tax rate would also be more attractive to investors, but why raise one and lower the other? Why not lower BOTH? Or leave the CG rate where it is and lower the corp tax rate?

A good point. Personally I would prefer to lower the corporate income tax rate to the current average rate and eliminate most corporate tax preferences. At first glance this is revenue neutral, but because of the distorting effects on the economy of the many credits and deductions intended to help specific industries and groups, I think efficiency and growth would be improved. Such a rate would settle down to around 16%.

100% agree, along with reducing or eliminating the subsidies that some industries get that others don't. Most of it goes to the biggest ones, which is probably not the original intention. And I do think it stinks that some big corps pay nothing at all in corp taxes, and even have credit built up for future taxes.

Ah yes, those subsidies to big corporations. Like oil companies? But the dirty little secret is, no liberal is likely to vote to kill them.

Take big oil for instance that currently is receiving about $4.5 billion in subsidies.

$1+ billion of that is for the strategic petroleum reserve.
$1 or so billion is farm fuel credits tor highway taxes on the theory that most farm equipment doesn't use those highways.
A another big chunk goes for the low-income households fuel credits and most of the rest for green energy programs.
The Surprising Reason That Oil Subsidies Persist: Even Liberals Love Them - Forbes

Do you really think those with high powered environmental constituencies will vote to stop subsidizing the Chevy Volt?

Oil companies and every other large corporation enjoys handsome subsidies for keeping operations in the USA and not shipping jobs overseas.

All this is to say that almost every budget item is tied up inside some program or project with a noble sounding title, whether or not it actually accomplishes anything, and any attempt to kill it evokes howls from whoever's ox is being gored.

All of which gave us the wonderful invention of baseline budgeting to ensure that nobody has to ever sacrifice a sacred cow.

 

[Wiseacre]

My two cents worth.


It all depends on what behavior model you have for investors and their expectations. Right now a lot of commercial real estate deals are trying to close by the end of December under the assumption that capital gains rates will rise in 2013. To the extent that some of this real estate is underutilized now and will be more aggressively utilized by the buyers, the anticipation of future higher capital gains rates may be marginally promoting economic growth. But this is a temporary effect and in general it is hard to see how with very low rates of anticipated inflation and low real interest rates that raising capital gains rates is helpful to the economy.

One wonders how aggressive buyers will be, especially in the short term. I wouldn't expect much investment to go forward with those commercial real estate properties until there is a perceived sustained uptick in demand. I might add that for every buyer getting in there is also a seller getting out; seems like a wash to me.



I'm not sure I understand the reasoning here.
1. The only significant non-taxable investments are state and municipal obligations. Changes in income tax rates (but not necessarily capital gains rates) would increase the value of such bonds relative to securities generating taxable interest. I'll pass on the arguments over whether money raised by corporate bonds is better spent than money raised by state and municipal bonds.
2. Higher tax rates, including capital gains rates, increases the value of tax deferral, such as in annuities and unrealized capital gains. If such rates are expected to decrease in the future, investors will be even more likely to attempt to defer taking gains in the short term. Likewise at very low real interest rates the cost of deferring taxes is cheaper. To the extent people sit on underutilized investments, economic growth suffers.

What about gold? Or real estate or tax shelters of some kind? Instead of puting it to work in ways that would be better for economic growth, the rich guys pull back and resort to other avenues, whatever they may be. My basic point though, is that when you raise taxes on something you discourage it; whether or not there is a little reverse thing going on in a few cases is debateable, but for the most part a higher CG rate is going to reduce economic growth from what it might have been.


A good point. Personally I would prefer to lower the corporate income tax rate to the current average rate and eliminate most corporate tax preferences. At first glance this is revenue neutral, but because of the distorting effects on the economy of the many credits and deductions intended to help specific industries and groups, I think efficiency and growth would be improved. Such a rate would settle down to around 16%.

100% agree, along with reducing or eliminating the subsidies that some industries get that others don't. Most of it goes to the biggest ones, which is probably not the original intention. And I do think it stinks that some big corps pay nothing at all in corp taxes, and even have credit built up for future taxes.

Ah yes, those subsidies to big corporations. Like oil companies? But the dirty little secret is, no liberal is likely to vote to kill them.

Take big oil for instance that currently is receiving about $4.5 billion in subsidies.

$1+ billion of that is for the strategic petroleum reserve.
$1 or so billion is farm fuel credits tor highway taxes on the theory that most farm equipment doesn't use those highways.
A another big chunk goes for the low-income households fuel credits and most of the rest for green energy programs.
The Surprising Reason That Oil Subsidies Persist: Even Liberals Love Them - Forbes

Do you really think those with high powered environmental constituencies will vote to stop subsidizing the Chevy Volt?

Oil companies and every other large corporation enjoys handsome subsidies for keeping operations in the USA and not shipping jobs overseas.

All this is to say that almost every budget item is tied up inside some program or project with a noble sounding title, whether or not it actually accomplishes anything, and any attempt to kill it evokes howls from whoever's ox is being gored.

All of which gave us the wonderful invention of baseline budgeting to ensure that nobody has to ever sacrifice a sacred cow.

I was speaking about what I'd ideally like to see happen, which as you say has a very remote chance of coming true. There are polls out today or recently that suggest the public wants spending cuts about as much as they want tax hikes on the rich. Which is to say the majority of respondents. But it always comes down to cutting someone else's spending rather than your own. Can't say as I'm optimistic over real and significant cuts happening anytime soon.

 

[Foxfyre]

I appreciate that Wiseacre and I think we both know that trying to find the best solutions are not in the cards. They will do whatever they have to do that will piss the fewest number of people off. And while some realize that any budget solutions have to include entitlement reform, an amazing number of people want to continue entitlement funding as it is even if it means going trillions further into debt.

The fact is, America has become so dumbed down they don't know how much money a billion dollars is any more, let alone a trillion. These are numbers they can't wrap their minds around and they are therefore meaningless.

From a recent analysis of a NBC/WSJ poll, a majority of Republicans now want their congressional leaders to compromise. That is a major shift.

But. . . .

There’s danger for both parties in failing to reach a deal. The NBC News/WSJ poll found that 24% of respondents will blame congressional Repubicans if there is no compromise struck, and 19% will blame Obama and congressional Democrats. But a majority—56% will blame both sides equally.
Americans want compromise in 'fiscal cliff' talks - latimes.com

According to a Fox poll released yesterday:

Overall, 61 percent of voters say major spending cuts are necessary to reduce the deficit, while 33 percent think increasing taxes on high earners would be enough. Half of Democrats think taxing the rich is all that is needed. By contrast, majorities of Republicans (77 percent) and independents (62 percent) think cutting spending is also necessary.

Read more: Fox News poll: According to voters, spending cuts are a must | Fox News

But overwhelmingly Republicans are losing the PR war and approval ratings on this issue. Again, most Americans don't watch Fox News or listen to conservative talk radio, and most of the rest of the media is giving the Democrats the more favorable press. That is having an effect.

 

[Wiseacre]

Hard to believe that anybody can possibly believe that getting an additional $80 billion or so a year from the higher rates on the top 2% can fix a trillion dollar deficit. Also hard to believe that anybody really thinks Obama and the democrats actually intend to reduce the deficit either, they just want more money to spend.

 

[The Rabbi]

Hard to believe that anybody can possibly believe that getting an additional $80 billion or so a year from the higher rates on the top 2% can fix a trillion dollar deficit. Also hard to believe that anybody really thinks Obama and the democrats actually intend to reduce the deficit either, they just want more money to spend.

You are correct. It is all political theater on the Dem side. Because they are in permanent campaign mode. The actual details of governing are beyond them. Nor are they interested. Everything is a political issue. When they accuse the GOP of "politicizing" something, that is political too.
The Democrats are the Hamas of American politics.

 

[PaulS1950]

Can't understand or "wrap your head around" a trillion dollars then how about this:

If your income is $56000 and you borrow $28000 a year in order to spend $84000 each year and you never pay the money you borrow back but just pay interest on it; how long will it be before you can't pay the interest and go bankrupt?

For those who are mathmatically inclined and wish to calculate the answer; assume an interest rate of 2% on the loan and an increase in income of 3% per year with an increase in spending of 6% each year. (borrowing 9% more each year)
spending = S =1.06(X + Y + I)
annual income = X + .03X each year (X = 1.03X) compounded annually
debt = Y + .09Y each year (Y = 1.09Y) compounded annually
interest = I = .02Y (constant disregarding rising interest rates)

 

[catatomic]

Hi! I just wanted to inform people that 2 million people will be left to fend for themselves in 26 weeks after we would go off the fiscal cliff.

 

[Foxfyre]

I am now convinced that President Obama WANTS us to go off the fiscal cliff. Does anybody with a clue really think that the President of the United States would have been unable to cut some kind of deal with Congress to avoid that if he didn't want it? Do you think the Senate would continue to be as intransigent as they have been if the Senate Democrats didn't want it?

I think they want the 'disaster' to happen because they are confident that the Republicans will be blamed. And the GOP will then be in further disarray and will lose the House and more of the Senate in 2014.

 

[catatomic]

Hi! I just wanted to inform people that 2 million people will be left to fend for themselves in 26 weeks after we would go off the fiscal cliff.

...unless people take care of them (150 people would have to pay for one person)

 

[konradv]

Hard to believe that anybody can possibly believe that getting an additional $80 billion or so a year from the higher rates on the top 2% can fix a trillion dollar deficit. Also hard to believe that anybody really thinks Obama and the democrats actually intend to reduce the deficit either, they just want more money to spend.

Isn't the Republican House there to stop that from happening? How would that be possible, if they don't make a deal, get blamed for the result and get voted out?

The point of the extra taxation isn't to close the deficit by itself, but along with budget cuts, to show we're serious. If it looks like we're actually trying to do something, people feel better about the direction of the country. When people feel better, they spend more money. When people are spending more money, new jobs get created to fill the demand. When more people have jobs, even more money gets spent, more taxes are collected to further close the deficit and fewer social services are needed to help the unemployed, easing the strain on the budget. Win-win!

 

[Wiseacre]

Hard to believe that anybody can possibly believe that getting an additional $80 billion or so a year from the higher rates on the top 2% can fix a trillion dollar deficit. Also hard to believe that anybody really thinks Obama and the democrats actually intend to reduce the deficit either, they just want more money to spend.

Isn't the Republican House there to stop that from happening? How would that be possible, if they don't make a deal, get blamed for the result and get voted out?

The point of the extra taxation isn't to close the deficit by itself, but along with budget cuts, to show we're serious. If it looks like we're actually trying to do something, people feel better about the direction of the country. When people feel better, they spend more money. When people are spending more money, new jobs get created to fill the demand. When more people have jobs, even more money gets spent, more taxes are collected to further close the deficit and fewer social services are needed to help the unemployed, easing the strain on the budget. Win-win!

Higher tax rates does not show we're serious, only spending cuts will do that. It's like all this commotion about higher taxes gets you maybe $80 billion a year in more revenue but the deficit is over a trillion dollars. So we're making a big deal out of 8 cents on the dollar, and that ain't anywhere close to be serious.

Nice scenario you paint, let's hope it works out that way. But we don't need DC to be trying to do something, we need action on several fronts that will be constuctive to economic growth. Frankly, I ain't seeing it, I'm seeing a lot of new regulations coming down the road, and real soon. I'm seeing the president about to use the EPA to choke off fracking for natural gas, and implementing new auto guidelines for gasoline mileage that will make cars a few thousand dollars more expensive than they are now. I'm seeing new rules for ObamaCare and Dodd-Frank going into effect that raise the cost of compliance and cut into full time job creation. What I see are policies that impede economic growth rather than fostering it.

 

[PaulS1950]

The leading economists and the Wall Street Journal all seem to agree that the USA is headed for another, deeper, recession than we are in now that will hit in 2013.
I hope you are ready for it.
Stage 1. distraction
Stage 2. disruption
Stage 3. destruction
Stage 4. domination

 

[Foxfyre]

The leading economists and the Wall Street Journal all seem to agree that the USA is headed for another, deeper, recession than we are in now that will hit in 2013.
I hope you are ready for it.
Stage 1. distraction
Stage 2. disruption
Stage 3. destruction
Stage 4. domination

I honestly don't see how it can be avoided. I just posted a new thread (in Politics) re the 10 worst regulations of 2012, and there will be hundreds if not thousands of new ones going on the books for Obamacare alone. Every single one of them costs us something in some way.

Obama is quite confident that he'll come out of any economic collapse unscathed, despite the fact he has not been willing to negotiate in good faith and he and the Democrats have been unwilling to address any spending cuts of any kind in any serious way. He has the media in his corner who will be quite accommodating in keeping the impression alive that the only gridlock is the fault of the Republicans.

 

[midcan5]

It's hard to understand how ideas that are so counterintuitive given our history have gained such a following. Well, not really hard if you've read 'Invisible Hands' by Kim Phillips-Fein, few people question where their ideas come from and the mind once it accepts some pattern of thought usually stays there.

The idea that concentrated wealth creates jobs and opportunity makes no sense, demand creates jobs and jobs require work. How many who complain about the economy buy American made? Does anyone really believe that the rich gave lots of money to Romney because they wanted to create jobs and somehow or another Romney would help by concentrating more wealth in the hands of the few?

America's best years were when taxes were the highest and America was building the infrastructure and educational facilities that made the country the wealthiest on earth. The rich did not create that, FDR and Eisenhower among many others did. Wealth is not created in a vacuum and if you took any wealthy person and placed them on an empty island they'd be lucky if they survived. The worship of the rich and money is a misplaced value in America today.

But the myths continue and big money supported organizations like Cato are a major purveyor of the myths. Consider how many of these so called experts predicted the crash of 2008 as an example of how little they all know. A few educational links:

Oh and austerity programs are hurting Europe not helping. http://www.nytimes.com/2012/02/19/magazine/the-way-greeks-live-now.html


"There is no historical evidence that tax cuts spur economic growth. The highest period of growth in U.S. history (1933-1973) also saw its highest tax rates on the rich: 70 to 91 percent. During this period, the general tax rate climbed as well, but it reached a plateau in 1969, and growth slowed down five years later. Almost all rich nations have higher general taxes than the U.S., and they are growing faster as well." Tax cuts spur economic growth

The Idolatry of Ideology-Why Tax Cuts Hurt the Economy by Russ Beaton

Spending Cuts Vs. Tax Increases at the State Level, 10/30/01

The rich get rich because of their merit.

http://www.usmessageboard.com/education/126617-reagan-and-taxes.html

"The history of the twentieth century can be summarized--excessively briefly--in five propositions: First, that the history of the twentieth century was overwhelmingly economic history. Second, that the twentieth century saw the material wealth of humankind explode beyond all previous imagining. Third, that because of advances in technology, productivity, and organization--and the feelings of social dislocation and disquiet that these advances generated--the twentieth century’s tyrannies were the most brutal and barbaric in history. Fourth, that the twentieth century saw the relative economic gulf between different economies grow at a rapid pace. Fifth and last, that economic policy--the management of their economies by governments--in the twentieth century was at best inept. Little was known or learned about how to manage a market or a mixed economy." J. Bradford DeLong http://econ161.berkeley.edu/TCEH/2000/TCEH_1.html


"The top 1 percent of Americans now take in roughly one-fourth of America’s total income every year. In terms of wealth rather than income,... the top 1 percent now controls 40 percent of the total. This is new. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent." Joseph Stiglitz

 

[Wiseacre]

The Roaring 20s economy was good because two repub presidents cut the tax rates after Wilson left office. When the recession hit, Hoover raised taxes from 25% to 63%, and look what happened. Roosevelt raised taxes during his 2nd term and the depression deepened. The Clinton surpluses in his 2nd term didn't happen until the Gingrich-led repub Congress cut taxes in 1997. And the Bush tax cuts in 2003 ushered in a strong period of growth up until the recession came along. And of course my all-time fav, when Reagan cut taxes in his 1st term and fostered a 25 year period of economic boom.


The Left doesn't get it, or doesn't want to get it. You don't tax and spend your way to prosperity. Roosevelt tried that and so is Obama, and it don't work for the long term. Sustained prosperity requires a strong and vibrant private sector, and high tax rates are counter producive to that. The Left always points to the high tax rates from WWII to Reagan, as though that caused that period's growth. The effective tax rate that people paid was quite a bit lower than that, we saw the beginning of the loopholes, tax breaks, and deductions that permeate our tax code today. We had a huge rush of men coming home from the war, looking for work. Many started their own businesses, it was a heck of a lot easier to do that back then than it is now. The US economy was the only game in town, the rest of the developed world was in shambles, the cost of energy was very low and there wasn't an EPA and a ton of regulations to have to deal with.