To add to my post yesterday about the GOP's desire to cut corporate taxes as a solution to our current crisisJapan GDP/ Economists: Secular Theologians with a lot of Numbers, and trying not to repeat my earlier comments, I thought that I would link a GAO report from 2008 that shows that more than one-half of U.S. corporations pay no tax. http://www.gao.gov/new.items/d08957.pdf I would also point out that the maximum rate was 50% in the 1950s and the economy did well. This is not say that the marginal tax rate has no importance but simply that many other factors come into play besides tax policy. Moreover, according to the OECD, the U.S. raises less taxes from corporations as a percentage of GDP than Ireland and most other developed countries, notwithstanding Ireland's lower corporate tax rate. Wonk Room
Ireland is the country most frequently mentioned by ideologues as the model for their U.S. corporate tax policy. The Washington Monthly The lower tax rate is not currently leading Ireland to prosperity, with negative growth in 2008 which is projected to be worse in 2009 with unemployment hitting 13 year highsHerald Tribune
Again, there are other factors at work besides marginal tax rates.
This is a table in pdf format showing the total tax revenue as a percentage of GDP for the U.S. and several other countries. http://www.oecd.org/dataoecd/48/27/41498733.pdf
Overall, the U.S. taxes as a percentage of GDP compare favorably to other nations.
I think that you could substantially change one of the main factors underlying a healthy economy and throw everything out of kilter. You could have low interest rates and inflation,a healthy banking system, and then a new government could impose say a 70% flat tax on all income with no deductions. Call it an Americanized version of Hugo Chavez with a California surfer mentality. To add insult to injury, this new party, being both politically correct and health conscious in deciding what is best for its citizens, would assess a tax on excess body weight, say a hundred dollars a year for each point in excess of your normal body mass index. Calculate your BMI - Standard BMI Calculator I just calculated my tax under that formula to be $500 a year. To encourage Americans to be more considerate of their environment, another tax could be levied on exceeding your assigned carbon footprint. On top of that there would be a social net financed with all of those taxes where it would make sense for everyone to be on the public dole rather than to work for a living. Those tax policies would obviously skew economic activity significantly into negative territory. But, a small change in rates, say from 28% to 33% might bring in more tax revenue and not hinder economic activity.
Since I was working hard in the late 70s and early 80s before Reagan lowered the marginal rates, I can say without a doubt that my marginal tax rate on earned income did not effect my productivity. I could see, however, how it impacted investment decisions made by those with more money than sense, who made investments that had no economic justification, such as real estate limited partnerships, because of the tax advantages. In effect, it paid for the general partners back then to overpay for property to increase the amount of accelerated depreciation for the limited partners that could be used to offset their other income. Then, with a change in the tax laws relating to deductibility of losses, and the new tax rules on active and passive income, the deals structured around the earlier tax provisions fell apart, crashing down into a heap of rubble and a pile of bankruptcies, and investors lost a great deal of money since many of these vehicles had no solid economic foundation other than tax avoidance. I never invested in one but I saw early in my adult life how tax policies could distort the market price. For individual labor, a 50% tax rate on earned income made me grumpy at times and a 70% rate would have led me to a less demanding and stressful line of work. Possibly, I would have taken Harvard up on their offer to attend graduate school in history, and just left the 70 hour work week grind. But I do remember asking myself back then (after acknowledging my eternal gratitude to Reagan for what he did for me personally and castigating all the Democrats for their tax policies), how could anyone measure the degree of impact due to that tax cut, as distinguished from the defeat of stagflation by the Federal Reserve and the substantial fall in interest rates and inflation due to actions of Paul Volcker's-not the GOP or the republicans, and even to massive deficit spending by the federal government which did in fact occur during the Reagan years (not to mention countless other factors). No one has successfully answered my query from the 1980s, at least to my satisfaction, on how all of these factors could be analyzed independently of each other as to their relative cause and effect on the economic growth. But I have heard over the past 30 years or so thousands, no tens of thousands of dogmatic assertions from ideologues stating without much if any equivocation, frequently uttered in the same absolute form as if it was some kind of religious doctrine, that the few years of growth in the 1980s were due to the Reagan tax cuts. I just read one blogger this morning who attributed all of the growth during the Clinton years to Reagan as well. Dogmatism will generally be found accompanied by ignorance and is further symptomatic of a desire to avoid complexity in exchange for simple explanations consistent with a pre-existing worldview. One favorite phrase of the dogmatists is that some position is demonstrably false because of some opinion by a qualified economist proved it to be, and the only qualified economist is one that confirmed a pre-existing opinion held by the one using the categorical phrases. The Reasoned Sceptic: Search results for reagan tax cuts For myself, trying to rid myself of pre-conceptions that color my perceptions of reality, where all information is viewed and distorted through an ideological prism, I believe that many factors are generally at work in a complex economy, inter-dependent with other complex economies around the world, and the most important factor in the 1980s for the U.S. was the defeat of stagflation by the Federal Reserve, though that is just an opinion. Actually, it is probably impossible to know for sure one way or another, since economists are still trying to figure out what caused the last Great Depression and why it lasted so long. I did enjoy receiving 14% yields on certificates of deposit during the inflationary period in the early 1980s and that is certain.
In the current economic crisis, tax policies have contributed to the severity of the credit meltdown. Many people are abandoning second homes for example. The Growing Foreclosure CrisisThe rules on deducting mortgage interest on a second home are complicated and are beyond the scope of this post. According to the linked article from Smart Money, a deal can be structured to deduct mortgage interest on the vacation home. Taxes on Vacation Homes at SmartMoney.com If there was no mortgage deduction whatsoever, there would have been far fewer people extending themselves in this fashion and fewer defaults and losses by the lenders. I could make the same point about buying a super sized first home, far more house than needed, possibly for show or some other personal emotional gratification, and financed to the hilt with a large mortgage beyond the means of the borrower.
There are always many other factors at work to impact an economies rate of growth. Productivity gains can occur through innovations produced by a limited number of people and in a manner beyond the capacity of most to even predict. This has occurred recently in my adult life with advancements in computer technology and the development of the internet. In 1982, it would have been impossible for me to foresee what I am doing now on my IMAC. The U.S. is frequently the center of this rapid change due to our culture and willingness to take risks, often literally throwing money at just about any new and promising idea that comes along. Many may fail for every one venture that succeeds but growth comes from the many successes and the failures are soon forgotten. I would generally expect to see far more innovation coming from the U.S. than the rest of the world combined. Other cultures are far more timid and risk adverse. So a lot of seeds for growth are constantly being sowed in the U.S. regardless of interest rates, taxes or any governmental activity due to our entrepreneurial culture. Government can play a role in this activity by funding, particularly in medical research and funding for education.
Early in the Reagan years, I became acquainted with a young company called Intel. Just think of the advancements made since 1982 in the speed of its chips and the beneficial changes that have flowed to economic development based on just those advancements. I am just amazed by the vast differences in 1995 and today but those advancements began to accelerate in the 1980s. Who remembers going through a grocery check out when the product contained a tag with a price, that had to be looked at and then punched into a cash register? So how much of the growth in the 1980s was due to accelerating technological change and innovation as distinguished from a change in the marginal tax rates? If the Silicon chip had not existed in the 1980s what would have been the impact on growth throughout the 1980s under the same tax and interest rate conditions, and who can say that the development of that technology was dependent on the Reagan tax changes?
I often think of a preacher when I listen to an economist on TV. Larry Kudlow reminds of Big Jim, the Church of Christ minister from my youth, and Larry's spiel reminds me of Big Jim's sermons. One difference would be Larry likes to point at people and Big Jim raised his fist in the generally accepted direction of heaven. Larry's spiel has more characteristics in common with religious dogma than an intelligent and complete analysis of historical events.
Some of the economists are just schilling for one interest group or another. One who favors a cut in the capital gains tax from 15% is probably schilling for rich people. Someone advocating a 15% tax rate for corporations with all of the deductions and loopholes, as the road to economic paradise for all citizens, is not promoting the interests of the American public. Frequently, when you are informed and have actually lived through the history being discussed, you know that the conclusions being drawn by the ideologue with a doctorate in Economics are not supported by all of the facts. Many events that you know about are discarded as inconsequential, or dismissed in an unconvincing manner, even though you know of their importance, because those events are either inconsistent with the dogma being propagated or renders dogmatic assertions being made far more problematic and questionable. When you know contrary facts are conveniently omitted and the complex has been reduced to simple cliches, then it becomes obvious that the economist is just another ideologue on a mission. I am not talking about the economists who toil away in obscurity writing papers that are read by other economists, but the ones that frequently appear on TV advocating a particular view. Lastly, maybe a perceptive psychologist would be more helpful in explaining the mass psychology that leads to mindless speculation rather than an economist. A psychologist might be more helpful explaining how we arrived in our current predicament.
I re-read John Kenneth Galbraith's book "The Great Crash, 1929" over the weekend. He made the point that bubbles and speculative frenzies do not form solely due to easy credit.
Excluding items, Wal Mart did beat the consensus forecast but both earnings and revenues were close to flat versus the year earlier quarter, earning $1.03 vs. $1.02 a year ago. Yahoo! Finance U.S. sales rose 6% but foreign sales declined 8.4% due primarily to the strength of the dollar. Wal-Mart Reports Financial Results for Fiscal Year and Fourth Quarter: Financial News - Yahoo! Finance There was a seven cent charge connected with a class action settlement.
Synta, a small speculative position of mine with 100 shares, received a 10 million dollar milestone payment from Glaxo for elesclomol. Yahoo! Finance
Medtronic, a small position, reported earnings one cent better than consensus. Yahoo! Finance Like other U.S. multinationals, results were negatively impacted by the strong dollar. Medtronic Reports Third Quarter Revenue of $3.5 Billion: Financial News - Yahoo! Finance
I own 50 shares of a cumulative preferred issue of Lexington Properties (LXP). This REIT announced that it had re-financed some loans coming due in 2009. Yahoo! Finance Re-financing in this tight credit for a REIT is a major concern.
Aegon released 4th quarter results early, reporting a worse than expected loss resulting from a decline in the value of its investments Reuters Yahoo! Finance Analysts do not expect that Aegon will need new capital. I reviewed this report this morning due to my ownership of its preferred issue, AEB. I am concerned about the financial health of Aegon after reading the press release. AEGON Publishes Preliminary Unaudited Fourth Quarter 2008 Results: Financial News - Yahoo! Finance I am not now so concerned about it that I would jettison AEB. But it is coming closer to a borderline situation for me.
One of the stocks that I am considering purchasing is Hospira (HSP), which reported okay earnings this morning. Reuters There was a decline in sales. Over time, a company is not going to be able to increase profit on declining sales.
This may be another day when the S & P 500 closes below 815 which will cause me to halt common stock purchases until there is a monthly close above 815. Looking at the pre-market action in the banking stocks, this looks like more people woke up this morning and said I have no confidence left in the American banking system.WSJ.com Gold is looking good today.
When I watched David Faber's House of Cards, I listened to hedge fund manager that successfully profited from the disaster to come.CNBC.com He pointed out something that we all already knew. There was no meaningful regulation of the mortgage origination market. There were no cops on the beat. CBS News