On the small business thing, aren't most small business owners in the highest tax bracket? I have no idea if they are, just asking. Some are, some aren't. Many small businesses are just "mom and pop shops" that are just there to provide a decent lifestyle, rather than create a growth business. I don't know what income breaks down to the top 2%, but I'm guessing many small businesses aren't doing so hot right now, and thus don't have great incomes. I'd guess much of the top 2% right now are top executives of big companies who still make massive amounts of money even in bad times. Small business owners' incomes are more directly influenced by the success of the company, rather than say the executives of IBM. On the demand thing...don't companies need to invest in some products to create some new demand? If there's no demand for what's out there now, shouldn't businesses be concentrating on getting some new products out there? Depends ... I don't think the lack of demand is because people don't WANT to buy the stuff that's out there (if this were the case, I'd agree that a lack of innovation was the problem). I think the problem is more that people are losing jobs and/or are afraid of their future financial situation, preventing them from buying new stuff. People's confidence in the economy is at a 9 year low: http://www.gallup.com/poll/releases/pr030121.asp Expectations for the future are crap. That's not going to be solved by introducing new products. You have to get people believing in their future first - and the way to do that is to run economic policies that benefit them, not economic policies benefit the rich in the hopes that after a few years of investment, the rich might help everyone else.
Of course, some would argue that the second monkey is just some sort of lazy slob who gets a few nuts a week from the big scary lion, but many times, the monkey's disabled, under-educated, or has just had a string of bad luck. Of course, it makes sense to some that the second monkey would be better off getting half of his banana back rather than the first monkey getting eight of his back. Giddyup just doesn't care about the chimps.
Well, of course, but rimrocker's analogy had those who paid in less getting less... and just the opposite is true as you pointed out and as I already knew...
Ladies and Gentlemen, I present to you the Laffer curve! The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually if tax rates reached 100% (the far right of the curve), then all people would not work because everything they earned would go to the government. Sounds like Major thinks we're on the left side of the curve. To me, taxing our way out of budget deficits seems like a lousy way to make up the gap, especially when you take into account how much of the budget deficit depends on the overall economy.
Sounds like Major thinks we're on the left side of the curve. To me, taxing our way out of budget deficits seems like a lousy way to make up the gap, especially when you take into account how much of the budget deficit depends on the overall economy. Honestly, I don't know where on the Laffer Curve we are. Until we do, or there's an overbearing tax situation that overrides the need for fiscal responsibility (which I don't think we have), I don't think its wise to lower taxes. As a side note, I think the Laffer Curve is the dumbest invention ever to make someone famous. I mean, I think it's obvious that 0% taxes would have the lowest revenues, and 100% taxes wouldn't generate anything. It would have been something if he determined the value of T*, but all he said is that the ideal is somewhere in between 0 and 100%. NO ****, MR. LAFFER!
Businesses DO have a lack of capital. Many believe that the contraction of the capital markets actually started the recession (of course easy access to capital may have funded a false expansion, but that's another issue). I work in restructuring, and see on a daily basis that institutions aren't lending much, the environment is too risky for them right now. If lack of capital is an issue (which I wholeheartedly believe it is), then a business tax cut can be viewed as a new source of cash. Depending on the state the company is in, this new cash can be used to: 1) invest in new market opportunities or 2) delay layoffs and/or plant shutdowns until the market recovers. In case #1, new jobs are created, providing people with more disposable income, increasing GDP growth. In case #2, jobs are saved, preventing further deterioration in disposable income and the overall economy. Both a good thing. Now, I'm not sure that removing the tax on dividends is the right way to get money back to corporations, but I support a little more "corporate welfare".
The way it was explained was that since small businesses aren't incorporated, the owner gets all the profits as income, or something like that, which would put a lot of them in a high tax bracket, or so I assumed.
The way it was explained was that since small businesses aren't incorporated, the owner gets all the profits as income, or something like that, which would put a lot of them in a high tax bracket, or so I assumed. Freak, That is true -- but it assumes there is income to be had. I think small businesses tend to struggle the most during recessions, but I don't know if that's true in this particular recession / lack-of-expansion. If lack of capital is an issue (which I wholeheartedly believe it is), then a business tax cut can be viewed as a new source of cash. Depending on the state the company is in, this new cash can be used to: 1) invest in new market opportunities or 2) delay layoffs and/or plant shutdowns until the market recovers. TL, I disagree that lack-of-capital is a major issue -- at least in the sense that tax cuts will fix it. Why is there a lack of capital? In terms of investment activity -- plenty of people have available capital, but people are moving their holdings into safer investments. I don't think giving the rich more money will cause them to do anything different with it. The money is there -- people just don't believe investing in business is the thing to do right now. In that respect, I don't think there's an actual lack of capital; just a lack of the willingness on the part of investors to invest. On #2, in general, that's bad business. A company won't and shouldn't hold on to employees just because they have extra money. If it's still more fiscally responsible to lay people off, I think companies will do so. I don't think injecting businesses with money can spur growth unless the other side of the equation -- demand -- is injected with cash to spend.
I think the whole reason for ending the tax on dividends is that it would be a windfall for the stock market. A bunch of people would put in a bunch of money into the stock market if their dividends started paying off tax free. A good stock market is not the ONLY thing that makes up an economy, but a strong stock market sure does help out. Its the wealth effect, if a bunch of people get or feel wealthy from a rising stock market, they spend more, the more they spend, the more businesses make, the more businesses make, the more they spend on new capital or employees, unemployment goes down, business to business spending goes up, the economy heats up. This dividend cut would ONLY do good for the economy as the whole. The amount of tax lost from dividends would more than be made up in the capital gains as the stock market rises, more people have jobs, and more money is spent. On CNN money, and analyst (forget who) who was one of the biggest doomsayers on the market said that this would be a windfall for the economy and everybody would win. Maybe only 2% of the population would get the big impact benfit at first, but a lot more than that would put money back into stocks to reap the reward of dividends and you'd see that number shoot up. Anyways, WAY more than 2% of people own dividends. As far as the consumer spending, its still pretty historically high. The whole recession has been caused by lack of business to business spending, and until that picks up the economy won't truly recover.
Thank you for the thoughtful responses to Major's misguided economic analysis. Especially the Laffer curve. I didn't want to get into it, but I just recieved my Masters in Economics from A&M. I know now the conversation is going to turn into Aggie bashing which is kind of sad. With regards to small businesses: Small businesses . . . represent more than 99% of all employers employ 51% of private-sector workers, 51% of workers on public assistance, and 38% of workers in high-tech jobs represent nearly all of the self-employed, which are 7.0% of the work force provide two-thirds to three-quarters of the net new jobs produce 51% of private-sector output represent 96% of all exporters of goods obtain 33.3% of federal prime and subcontract dollars are 53% home-based and 3% franchises Sources: U.S. Department of Commerce, Bureau of the Census; U.S. Department of Labor, Bureau of Labor Statistics; Advocacy-funded study by Joel Popkin & Company; U.S. Department of Commerce, International Trade Admininistation; SBA Office of Government Contracting. THE REASON THE LAFFER CURVE IS IMPORTANT The Laffer curve was apparently not so obvious before the early eighties. It was revealed by the Reagan administration that if Taxes were lowered, tax revenue could actually be increased. This idea was laughed at by most but when enacted, tax cuts caused a marked increase in tax revenues. Therefore it is not a stupid idea to be made famous for, it is a work of art. And no major, what I said about the wealthiest 2% hiring the rest of us is not a load of crap. Think about it sport. The definition of a small business, as defined by the government, is less than 500 employees. The average small business size is 120 employees. That means on average there is one owner for every 120 employees, and that is just for small businesses. And I don't even know what you think businesses would do with money saved from tax cuts if you don't think they would expand their businesses. What do you think? They are going to hoard it in their socks? They are going to pay other companies for materials, or they will pay employees for labor, or they will invest it in the economy. Any way you look at it, there will be economic stimulus. That is how you stimulate the economy Major, how do you propose to do it? I am curious what you think will stimulate the economy.
A bunch of people would put in a bunch of money into the stock market if their dividends started paying off tax free. Would they? Let's say your "average" person is in the 25% tax bracket, and companies pay maybe a 1% dividend. You're talking about an extra 0.25% return on your investment each year. If you could make 6.25% instead of 6%, would you suddenly go nuts putting all your money back in the stock market? This is an idea conceived on the idea of eliminating the dividend tax and somehow being justified into an economic stimulus. Just like Bush's Tax Cut #1 was originally "in good times, we have extra money so we should give it back to you" (1999, 2000) and suddenly morphed into an "economic stimulus" without changing one bit. Its seems ridiculous that for a short-term stimulus, you're counting on: (1) a dividend cut (2) followed by investment in the stock market (3) followed by investment by business (4) to eventually create new jobs That is a multi-year process, and by no definition a stimulus package. And I don't even know what you think businesses would do with money saved from tax cuts if you don't think they would expand their businesses. What do you think? If I wasn't selling the products I was already producing, I'd just keep it as extra profit. Besides which, for every $1 saved in tax dividends -- even if 100% of that went into new business investment, $1 more now has to be borrowed by the federal government from reduced revenues, taking exactly that amount OUT of the economy as people invest in safe treasury investments over business investments. To use an example I used earlier, if I have a basketball factory, and I'm only selling half of my basketballs, I'm not going to go out and build another plant if I have extra cash. I would just end up with even more basketballs that I couldn't sell. <B>That is how you stimulate the economy Major, how do you propose to do it? I am curious what you think will stimulate the economy.</B> You stimulate it on the demand-side. You get more cash in the hands of the middle-class. For starters, you take out the $3000 restriction on counting capital losses. That's a FREE way to dump potentially billions into the economy without costing the federal government one dime in the long-run. You also raise the Sec 179 deduction (as Bush has proposed) to allow quicker depreciation for businesses that are spending money. Again, this is essentially a free way to stimulate the economy. (these both have minor inflation costs) For the average middle class, you do one-time tax-rebates - maybe more substantive than the $300 from last year. One-time tax rebates are much better than long-term rate changes because they are much easier to control and predict, and they get money in the hands of people who truly need it (see RM95's monkey example). To put it in the example above, you give people money so they feel like they can buy that extra basketball, which is going to make me, the factory owner, more profits. Now, if I'm selling more basketballs, I will hire more people to produce more basketballs. Supply-side economics is nice, but it's primarily appropriate in good economies - late 80's, late 90's. There, you have strong business and inflationary pressures. That basketball factory is selling out of basketballs and is going to raise prices. Give me money then, and I'll build a new basketball factory which will create more supply and keep prices down - it fights inflation and helps extend an expansion. We saw that in the mid to late 90's with the federal budget surpluses - that freed capital for business investment since less money was tied up in treasury investments. It functions the same way as investor tax cuts to push money into economic investment.
You are right, a cut in dividends won't necessarily allow for business investment. I was actually speaking in favor of general overall corporate tax relief, not specifically dividends tax relief. Our current economic problems are primarily due to a lack of corporate spending/capital investment. COMPANIES need to be given an incentive/opportunity to spend more, not people. Corporate tax relief will help this, not eliminating dividend taxes. As for #2, I was only advocating holding on to employees in the case of a temporary downturn. Laying people off only to rehire them six months later when production ramps back up does more harm than good. If it is a long-term demand issue, I agree, you need to lay people off so their talents can be utilized elsewhere.
So what if its a multi-year process? If it works it works, and it will work. The stock market is a fickle thing, and ANY bit of good news right now would send it up. A cut in the fed rate? It shoots up. Stop talking about war with Iraq? It shoots up. End dividend tax? It shoots up. And lets just say it doesn't have an immediate impact, lets say it takes a few years to really pump up the economy...what's your argument against that? What is the argument against this tax cut? Your basically getting rid of what most economists, accountants, and business people feel is a stupid, and unlawful tax. It double taxes money made by corporations and their stock holders. By giving back this money to corps. and stockholders (which are made of millions of working and middle class Americans) the affect can ONLY be good. Most of the arguments against these cuts are childish...we all benefit, but that guy might benefit a little more (in pure dollars, not percent of income)...so I'm against it...I can't have anybody get a cut that pays most of the taxes for this country.
I almost exploded trying to respond to your post so I am going to take your points one at a time and take breaks in between. First off, you have no idea what you are talking about with regards to dividends. When you are talking about the stock market, you are talking about macroeconomics. You don't guage what you think one person will do, you go for the whole picture. That is why a quarter point change in the Fed Rate can change the economy so much. Therefore a quarter point change in dividends will also change the economy because you are talking about .25% of Billions and Billions of dollars. But aside from all of that, the funny part about your argument, is that people do not get paid dividends based on what tax bracket they are in! Where did you get that idea? Do you know what a dividend is? Also companies could decide to pay more dividends to investors if they knew there was less taxes on them because it would be a way to reward investors at a more efficient pace.
So what if its a multi-year process? If it works it works, and it will work. The stock market is a fickle thing, and ANY bit of good news right now would send it up. Then we go back to my original question ... how do you justify it as a stimulus package? I'm not opposed to a dividend tax elimination - it's just badly timed. We have much higher priorities right now for the $300 billion that it will cost. A cut in the fed rate? It shoots up. Stop talking about war with Iraq? It shoots up. End dividend tax? It shoots up. And yet the market is lower than it has been in 3 months. One day jumps are worthless, and its silly to justify policy based on them. What is the argument against this tax cut? The argument is that in a recessionary economy, in the near-term it hurts us by creating more pressures on investment dollars due to rising deficits. The argument is that you could get a bigger "boost" from it by doing in a period of a strong economy. The argument it is that is being justified as a stimulus when its not. The argument is that, for that $300 billion, you could create a REAL short-term stimulus and then do a dividend cut at a more appropriate time, ultimately making you far better off than you would be otherwise. There are plenty of arguments against this tax cut at this time.
First off, you have no idea what you are talking about with regards to dividends. When you are talking about the stock market, you are talking about macroeconomics. You don't guage what you think one person will do, you go for the whole picture. That is why a quarter point change in the Fed Rate can change the economy so much. Therefore a quarter point change in dividends will also change the economy because you are talking about .25% of Billions and Billions of dollars. How it changes an individual's investment patterns -- which is what was being discussed -- does depend on how it affects a single individual. Supermac's argument was that people will start investing in mass in the markets, and that's simply not true. People are not investing in stocks because they don't have confidence in the likely increased valuation of stocks. An extra 0.25% isn't going to change that significantly for an individual, and the market as a whole is simply a conglomeration of the individuals. But aside from all of that, the funny part about your argument, is that people do not get paid dividends based on what tax bracket they are in! Where did you get that idea? Do you know what a dividend is? For tax purposes, Ordinary Dividends are recorded as short-term gains and added to your gross income. Thus, if you're in the 25% tax bracket, you save 25% of whatever your dividend income was. If you have $10,000 invested, and get $100 in dividend income, you save $25 in taxes. If your investment itself also went up by ~5%, your return went from ~5.75% to ~6%. I thought that was pretty obvious... Do you know how the tax system works? Also companies could decide to pay more dividends to investors if they knew there was less taxes on them because it would be a way to reward investors at a more efficient pace. I think the average company pays well below 1% dividends right now. That 1% figure was estimated to include an increase already. By the way, on a side note, this would go against the whole "put money into business investment" concept. If companies have extra cash, they don't need tax cuts to get investment capital. If they don't have extra cash, they aren't going to pay dividends.
http://www.thestreet.com/_yahoo/markets/aarontaskfree/10058215.html Fun quotes: <I> Few argue with such analysis, but even some ardent supporters of dividend-tax reform believe the broader market impact will be modest, as will changes to investor and corporate behavior. ... A reduction or elimination of the taxes individuals pay on dividends "will probably benefit those companies that already pay dividends," agreed Richard Bernstein, chief U.S. strategist at Merrill Lynch. But "the removal of double-taxation could have a smaller, or more drawn-out, impact on equity valuations than is generally expected." ... In a report this week, Bernstein argued that companies will be slow to alter their dividend policies, suggesting it will take "quarters and years" for nondividend-paying companies to change. ... "Corporations may have used the double taxation of dividends as an excuse to maintain control of their cash flow," he mused, expressing doubts tax-law reform would rapidly alter such behaviors and attitudes. Furthermore, paying dividends is anathema for many firms, especially in technology. ... Claus stressed that's a perception among tech executives and he believes "management is too optimistic." But the antidividend culture persists in Silicon Valley, as was recently displayed when shareholders of Cisco (CSCO:Nasdaq - news - commentary - research - analysis) voted nearly 10 to 1 against a proposal for the firm to use some of its $21 billion in cash to pay a quarterly dividend. ... Paying dividends is viewed by many firms as a tacit acknowledgement that their investment options and/or industry growth potential is limited, James Cusser, a portfolio manager at Waddell & Reed, recently told TheStreet.com's Beverly Goodman, who examined the issue last month. "It's a game of perception." ... The notion corporations can simultaneously increase dividend payouts and investment spending, a crucial element of the economy's health going forward, is highly dubious, Bernstein wrote. ... Finally, and perhaps most important, he disputed the presumption that eliminating double taxation of dividends will "quickly and substantially" raise equity returns. ... Assuming no taxation of dividends, the dividend yield of the S&P 500 would be 1.74% vs. the current rate of 1.13%, assuming a 35% tax rate, he continued, doubting 60 basis points of additional yield is sufficient to materially change investor behavior. However, the idea that companies and/or investors will significantly change their behavior because of dividend-tax policy revisions "might be misguided," he concluded, something all those with a (literal) vested interest in the debate need to at least contemplate. </I> This isn't some slam dunk way to boost the economy or the markets by any stretch of the imagination.
