So how do tax shelters, off-shore accounts, and exempt inv turnovers consistute the most efficient use of money, for argument's sake?
Read my response to Major. The answer is there. Distortions to free market behavior do exist in the tax system. However, simply because a financial vehicle has a separate tax treatment from another, does not imply that it is not achieving its goal of channeling capital to its most efficient use. In fact the opposite is true, as there is more capital available, after taxes, to invest. These tax shelters are simply vehicles to either invest or park cash in, either way a bank somewhere is lending the money out. Taking your quote at face value, your idea of 'most efficient use' is taxing the money and putting it in the hands of the government. Makes sense, you're Canadian.
1) Those with an above 20% APL income use most of their EITC by saving or lowrisk/yield investment, NOT in econimically invigorating investment...and that's what remains after TS, OSAs and other means the very rich use to maintain that state. The assumption that excess wealth is econimic lubricant is premised on the faulty assumption that those who have shown themselves to be acquisitive by nature ( outside compt. tech. industry) will not see their acquisition as part of their capital base from that point forward. There is an inverse relationship between the maring rate banks use as reserve ( 10-20%) and that of private individuals. 2) I do not advocate govt. spending per se...Read my previous post. I was just pointing out the standard flawed assumption upon which that economic argumant is based...Same one Marxism makes; fails to account for human nature... 3) I'm also American, but I don't see the relevence. Are all men from Pirhaeus also men from Athens?
I have a BS in economics, and I don't consider myself a conservative or a liberal. I don't always like the way T_J presents his case, but... ...Trader_Jorge has his stuff down. The multiplier effect is something that really needs to be taken into consideration when the government spends/gives out money. This is something that is learned early on in any Economics degree program. You can agrue back and forth what the multiplier is, but there is no denying that it exists. I'm not always for giving corporations all these tax breaks, but when you look at the end results, it's hard to argue. T_J, what is your stance on Enron? When should the government step in? What can the government do to prevent other Enrons? B
What you are failing to grasp is that placing money in a savings account or a debt instrument (yield investment) *is* helping to create 'invigorating investment'. These deposits or investments are used to finance other projects, as banks lend money and as issuers of debt spend proceeds. I have spent years on Wall Street doing mergers and acquisitions and have absolutely no idea what you are talking about with your acquisition example. I doubt you do either.
1) I am not failing to grasp that...I am attributing it a different weit. Op.cost/ben.of any sum is inherant, as is the multiplier.The greatest negative economic factor is when money is taken out of the loop...And no one does this, via foreign investment, off shore protected accounts, etc. like the very rich. Second tied positive or neutral effects are on low yield 'safe' retrun investements...which, while the Delta multiplier pro-rates as a positive effect actually yields less when considering it's potential use in the hands of those who will merely spend it. As such, 2nd negative effect of having too much capital in too few hands. 2) Banks maintain a 20% standard reserve, so that money isn't a universal re-investment. But, as explained above, that is NOT the optimum usage, nor is it the bulk of the destination for most of the excess wealth. 3) What 'acquisition' example are you talking about? And save the pot shots this time, please.
Jorge, you're right the debate has already begun. I missed it. I think it has been a very good debate so far. My comments so far. You make a lot of statements that are sort of absolute. Capitalism leads to perfect allocation of capital, if you don't have tax distortions. You take this on faith and offer no proof. Corporations piggyback into this pefection. You know because you try to allocate cash to maximize returns at your job. How do you explain the enormous misallocation of capital of many of the dot coms or for that matter or the enormous waste of capital of such corporations as World Com or even Time Warner when it acquired AOL at such an exorbitant price. You argue that it is always better to put money in the hands of the rich because they put it in stocks or their companies or banks and you have a multiplier effect as they invest it perfectly also. Banks always allocate perfectly. What about the Great Depression or the S and L crisis? What about all the bad loans to Brazil etc. by MBA types who were trying to allocate the banks money in the optimal way? You are very positive that having the poor and middle class spend on health care or education or cars or computers or food is not efficient. (I'm sure you admit it is an exageration that they just spend it at the Circle K on Doritos and cigarettes.) Let's take the spending of the poor and middle class which you deride. If it is paid to a doctor for health care for example or even the wealthy Circle K corp, doesn't it also wind up in his bank account and then have a multiplier as they allocate it to perfection in your scenario? Why is it that this extra step of having the poor and middle class pass on the money to the wealthy and then to the banks that gums up the whole system in your theory? I submit that this is just propaganda developed by the wealthy to rationalize the usefulness of them having all the resources and that you have fallen for it. You don't like Microsoft hoarding cash. You must admit that the poor spend it all and don't hoard cash. It won't take more than a few days for that cash to enter the banking system.
Actually, there is plenty of questioning of what the multiplier really is. http://www.mises.org/fullstory.asp?control=1118#_ftn1 Most economists are of the view that the current monetary system amplifies the initial monetary injections of the central bank. Thus, according to a popular view, if the Fed injects $1 billion into the economy and banks have to hold only 10% in reserves against their deposits, this will cause a first bank to lend 90% of this $1 billion. The $900 million in turn will end up with a second bank, which will lend 90% of the $900 million. The remaining $810 million will end up with a third bank, which in turn will lend out 90% of $810 million, and so on. Consequently the initial injection of $1 billion will become $10 billion, i.e., money supply will expand by a multiple of 10. Observe that in this example banks are responding to the injection of $1 billion of reserves by the Fed, which coupled with the legal reserve requirements of 10%, sets in motion monetary expansion of $10 billion. In other words, within this framework, banks are responding to the injection of reserves by the central bank. Recently some commentators have questioned this logic [1]. They argue that in the present US monetary system there is no such thing as a money multiplier since banks make loans first and worry about reserves later. Moreover, it is argued, within the present lagged reserve requirement framework it is pointless for the Fed to pump reserves, for these reserves cannot be used by the banks since required reserves are only calculated on the past 30 day's deposits. Consequently, if the Fed injects an extra $1 billion to the system, the banks won't respond at all—so it is argued. Is the objection raised valid? The main issue is not whether the current banking system is on a lagged or contemporaneous reserve requirements framework as such, but the fact that the present monetary system, which is supervised by the central bank, gives support to fractional reserve banking. It is this fact that gives rise to the so-called money multiplier. ...
This is a good point. A lot of people think savings is akin to taking money out of the economy. But it isn't. Savings is merely deferred spending- it increases demand in the future. Business will realize this and make products to be consumed at a later date. And considering that many businesses and people are in mounatainous debt, a good DECREASE in consumer and business spending is in order. It will hurt the economy short term but it will increase savings and investment.
I think the Fed and Wall street would have a heart attack if they heard that, consumer spending (and willingness to do so with cheap credit debt) has kept the economy from great depression style tanking over the past 2-3 years. Is long term debt problematic? Yes, but not anything that can be done about without drastically negative consequences. Savings is not the panacea you guys make it out to be. Ask Japan.
Couple of side points Giddyup. 1) there is a split in Republicans on fiscal policy. The budget hawks only want to lower taxes if there is correspondent spending cuts. That is why folks like McCain & Snowe & the Ohio Sen. got in the way of the 650 billion or whatever tax cut. Bob Dole was a budget hawk as well, as is Greenspan even if he has to dance around how he expresses it. These folks pretty much believe the most dangerous thing to our economy is out of control debt--and tax cuts w/o major cuts in spending (cuts in social security, Medicare, and military being probably the only federal programs big enough to have major impact if substantively reduced) thus becomes worse than no tax cut at all. The budget hawk folks are countered by current mainstream and radical republicans who believe any tax cut is a good tax cut. Some are probably supply siders who really believe cutting taxes increases eventual revenue, others probably don't have an economic clue but basically equate taxes as the devil. 2) trader-junior theories would work much better if there was actually competition in all or even most markets. Remember he comes from the Enron and New Economy (stock market can never fall) school of unrealistic expectations that repeats itself one way or the other every 10, 40 or 80 years.
I'm no idiot either. And I'm confused too. That's why I have long suspected that no one really know the answer (no offense intended to the serious economists). I think the notion that one party over the other, or one president over the other, causes the economy to boom or bust is overrated. That is not to say that there aren't some valid basic economic principles. But I think to claim that someone can know the outcome of millions of people doing milliions of things is pretty audacious.
A lot of people think savings is akin to taking money out of the economy. But it isn't. Savings is merely deferred spending- it increases demand in the future. Business will realize this and make products to be consumed at a later date. If it all that simple how come the Japanese are in such big trouble because their people just save and save. Twenty years later and where is the pent up demand? I still don't have an answer to the questionable logic of why it is better to give tax breaks to the rich than the poor and middle class. 1) Jorge argues that you give the rich guy a tax break who since he is spending all he cares to already, puts the bucks in the bank, where we have the multiplier that supposedly so important. 2) you give the tax break to the poor guy who is excited and goes out and buys groceries, a used car or a computer a couple of days later as this is his bit score. The poor guy's vendor then puts the money in the bank where it then has the same wonderful mutiplier. The only difference is that the poor guy got to consume. I guess you could argue that what the vendor receives in payment doesn't all go into savings, but a lot goes to his vendors. Unless you can argue that the private businesses inherently don't allocate capital as well as banks it turns out to be the same thing. Certainly if the argument is economic stimulation, which is how Bush tries to push his tax break, which I'm sorry does go largely to the rich (a fact is a fact), it is more stimulative to give it to the poor guy who buys goods and services asap. I think we have had this argument recently, but until the recent desire to have a large tax cut it was widely agreed that supply side economics was largely bogus. Cetainly David Stockman, Reagan's Cheif Economic Advisor who pushed it later confessed that he considered it a gimmick to push tax cuts.
We are being sold the old "voodoo economics" as Bush Senior called it again. Supply side economics as it has been called. It is instructive to review what happened last time. Please note that just like last time our defense build up is so great that it is virtually impossible to actually reduce total government spending. ********************** Essay It took three years. By the summer of 1982, the conquest of inflation was in sight. In fact, inflation that year would fall below 4 percent. [The] singular achievement [of Federal Reserve Chairman, Paul Volcker] was to conquer inflation at a time when defeatism was rampant. He set the United States on a new economic course. The risks of not succeeding were often on his mind. So was history. Once confronted with the accusation that he was behaving like a German central banker, he replied, "I don't take that as criticism. That's a compliment. I'm in pretty good company there." Thanks to Volcker's efforts, monetary restraint was obtained quite early in the course of the Reagan administration. And Reagan's unwavering stance in the air traffic controllers' strike of 1981 helped change the tone of labor relations, indirectly contributing to the muting of inflationary psychology. But there was still fiscal policy to be dealt with -- the ways that government raised its revenues and the ways that it chose to spend them. The rise of welfare demands, entitlements, and obligations toward the middle class, the poor, and especially the elderly made spending politically necessary as a source of votes. The problem, of course, was how to finance the outlays. Ronald Reagan's advisors came to office with the intention of cutting both taxes and spending. But they soon found out that it was easier to achieve the first of these objectives than the second. The reason was simple: politics. It was popular to cut taxes. And taxes did come down substantially. The top marginal rate was reduced from 70 percent to 28 percent; the tax base was broadened; and many deductions and loopholes were eliminated. But it was unpopular to cut spending, and the Democratic Congress bridled at the extent of the cuts that the president proposed. Reagan did not take on middle-class entitlements. He also spared the Defense Department from the ax, and indeed initiated, over the course of his two terms, major increases in defense expenditures, including the "Star Wars" space defense program. Some in the Reagan camp were optimistic, despite the failure to cut total government spending. They were the advocates of what traditional Republican economist Herbert Stein -- echoing the music of the day -- called "punk" supply-side economics, which made sweeping assertions that reductions in tax revenues resulting from tax cuts would be more than made Up for by higher tax revenues generated by economic growth. It did not turn out that way. Because spending did not come down with taxes -- and indeed defense spending went up sharply -- and because the tax cuts did not feed back into the economy to the extent hoped, both the federal debt and the annual deficit ballooned; and in 1981-82, the economy was in a deep recession. In September 1982, in its first effort to repair the damage, the Reagan administration followed the "largest tax cut in history" with the "largest tax increase in history." But there was no catching up. By the end of Reagan's first term, the supply-side logic was discredited in the eyes of many, and the inability to bring taxes and spending down together stood in marked contrast to Volcker's victory over inflation. David Stockman, Reagan's first director of the Office of Management and Budget, left the administration dejected, disillusioned with supply-side economics, and chastened by the realities of the political process. Failure to achieve fiscal-policy change, he argued, was a clear vindication of the "triumph of politics" -- of entitlements over austerity, and of the enduring pork-barrel tradition of American legislation over any cold economic logic. "I joined the Reagan Revolution as a radical ideologue," he wrote. "I learned the traumatic lesson that no such revolution is possible." The triumph of politics and what Stockman called the "fiscal error" that went with it spawned a new monster, which would come to occupy center stage in policy debate: the deficit and the federal debt. Between the beginning and the end of the Reagan presidency, the annual deficit almost tripled. So did the gross national debt -- from $995 billion to $2.9 trillion. Or, as Reagan and Bush administration official Richard Darman put it, "In the Reagan years, more federal debt was added than in the entire prior history of the United States." There simply was no quick cure to the scale of spending. In the minds of some, however, there was another logic to tax cuts: Reduce taxes and government revenue, and eventually the pain and scale of deficits -- and the threat of national bankruptcy -- would force a retrenchment of government spending. That thought was not restricted to fervent supply-siders, and ultimately it would end up true. But not for some years, and certainly not during the Reagan years. When George Bush took office in 1989, the annual deficit stood at $152 billion. Taxes could not be raised substantially for devastatingly powerful political reasons -- as Bush found out when his retreat from his solemn "read my lips" campaign promise of "no new taxes" became his most damaging political liability. There was no choice but to contain spending. And luckily, international events afforded a good opportunity to start tackling the problem. The fall of the Berlin Wall and the crumbling of the Soviet empire made possible a tapering-off in defense spending. Still, this was not enough. Owing to the recession of the early 1990s, tax revenues fell, and in 1992, as Bush was ending his term, the deficit peaked at $290 billion. From Commanding Heights by Daniel Yergin and Joseph Stanislaw. Copyright © 1998 by Daniel A. Yergin and Joseph Stanislaw. Reprinted by permission of Simon & Schuster, Inc., N.Y. supply side history
Well the first round of Tax cuts from W. Bush were supposed to be a stimulus too. So far the economy keeps on dragging, and unemployment keeps on rising. So is his theory if it didn't work the first time, let's try it again?
Returning to the last time "supply side" economics was sold to us. We see the conclusion of David Stockman, Reagans' powerful chief of the OMB about "supply side". Yes, Stockman conceded, when one stripped away the new rhetoric emphasizing across-the-board cuts, the supply-side theory was really new clothes for the unpopular doctrine of the old Republican orthodoxy. "It's kind of hard to sell 'trickle down,'" he explained, "so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory." How is it possible to raise defense spending, cut income taxes, and balace the budget, all at the same time? Anderson had taunted Reagan with that question, again and again, and most conventional political thinkers, from orthodox Republican to Keynesian liberal, agreed with Anderson that it could not be done.
Sadly, I am jammed up at work today (and late yesterday) and am unable to devote the time needed to answer the repeated appeals to my intellectual vanity. I will return to this thread when time permits.
He cut taxes at least twice in Texas so he could run for President saying, "I cut taxes in Texas and I'll cut YOUR taxes if you elect me President"... like it was a great benefit for Texans. I haven't seen any benefit. State Comptroller Strayhorn (aka Rylander), a very conservative Republican, is saying the State deficit of $9.9 billion is likely to balloon, based on her projections, and now she's ready to raise the cigarette tax a dollar a pack and close loopholes in the State's franchise tax and raise other taxes so that the deficit doesn't balloon further. Perry and Craddick, of course, cling to their belief that a state that already faces it's biggest deficit in history and is already ranked at or near the bottom in almost every catagory of state provided services to the poor, the elderly and children, can "pass a balanced budjet without a tax increase". Right... if your willing to cut those services to hundreds of thousands and slice benefits of teachers and state employees who are woefully underpaid. Just so you can crank up the old PR machine when you run for re-election saying "I didn't raise taxes... ain't I grand??". Bush has ALREADY had a massive tax cut since being elected President. He had them when he was Governor of Texas. As long as people give him a pass when it doesn't work and all the credit if anything looks good, he'll get re-elected. And we'll be worse off, imo.
