Categories

Pragmatic Capitalism

Capital for Living a More Practical Life

The Problem with Tax Cutting as Economic Policy

« Back to Previous Page
0
Marked as spam
Posted by MachineGhost
Posted on 04/29/2017 9:26 PM
146 views
Private answer

Most states have balanced budgets, so tax cuts in one part of their budget means spending cuts in the other. Cutting taxes for rich people in order to take away health insurance from workers or cutting school spending for kids is stupid. My home state GOP has actually raised taxes, especially the gas tax and other taxes on urban areas in order to pay for infrastructure funds and keep a rainy day fund.

Another problem on the federal level is that with very high inequality and a progressive tax structure, the low-income barely pay anything in federal taxes. So giving further tax cuts is pointless when your strategy for overall tax cuts is tax cuts across the board until the bottom 50% pays basically nothing in taxes. It’s just a math problem at this point.

I will say that I think the business tax cuts are a different story. Cutting corporate taxes to, say 20-25%, with further tax cuts for business investment combined with tax cuts for small businesses and an infrastructure bill would cause growth to surge. In an economy experiencing demand leakages, suffering from a lack of investment, and persistent current account deficits in a world of excess capacity with no demand; increasing incentives for business investment and infrastructure spending (both public and private) would do wonders. We could finance a federal infrastructure bank by raising capital in the largest banks (most assets in banking system are concentrated).

Marked as spam
Posted by Suvy Boyina
Answered on 04/30/2017 10:38 PM
    Private answer

    All data I am aware of shows that individual tax cuts have a multiplier less than 1. The data and standard economic theory agree quite well on this. Few individuals are making direct investments in new production. People who are clever enough to have created their own successful small business (the type that would be potentially financed by individual tax cuts) will expand jobs if there is demand, and unless there is a poorly functioning credit system, they will do this independent of tax cuts by borrowing. Individual tax cuts will increase the nominal value of existing financial assets, because most people with significant financial assets will not change their consumption, just an allocation to increased financial assets. Conceptually this could free up more assets for new ventures, but the data show the opposite. New IPO’s have continued to decline as asset values have increased over the past 8 years, and they are smaller (ca. 3x to 4x) in recent years than new debt financing for business.

    The world is awash with financial assets, yet growth has slowed. A scientist looking at these data would create a first order model that had growth negatively correlated with increased financial asset values. Interestingly the 5+ decades decline in US growth rate correlates well with the reduction in direct Federal consumption and investment.

    Marked as spam
    Posted by John Daschbach
    Answered on 05/01/2017 7:43 PM
      Private answer

      The point of cutting business taxes is to increase competitiveness of capital. In a world where capital is global, this is a very effective tool to generate growth. Y=C+I+NX. Increasing I creates growth. One way to do that? Cut corporate taxes and then provide further tax cuts for business investment will turn your country into a gigantic tax haven, but only for business investment. If it’s speculative capital, they they’d be taxed at the corporate rate.

      This would incentivize firms to onshore factories while drawing down on supply-chains. Thinking about it from a standpoint of multipliers and domestic demand totally misses the point.

      Marked as spam
      Posted by Suvy Boyina
      Answered on 05/01/2017 10:22 PM
        Private answer

        Not sure why the link didn’t come up but it should be: http://www.gradingstates.org/the-problem-with-tax-cutting-as-economic-policy/

        Marked as spam
        Posted by MachineGhost
        Answered on 05/02/2017 6:08 PM
          Private answer

          The failure to focus on the coupled differential equations for production and consumption leads to conceptual failures like the idea that cutting business taxes will drive growth. The essential problem in the developed world is almost entirely a lack of demand. How do we know this? Many ways. One is the valuations for extremely speculative new Silicon Valley type entities. Huge amounts of financial capital flow to highly speculative new businesses which are in the end only promising large future new demand. These flows completely dwarf any potential tax policy changes. Two, we currently see large capital investments in sectors and regions where there is demand. From third world countries to the SF Bay Area, the data is overwhelming. New production will arise regardless of the tax and regulatory structure (within bounds) when there is demand. The asymmetric derivatives of supply vs. demand distributions are dominated by the demand functional.

          Marked as spam
          Posted by John Daschbach
          Answered on 05/02/2017 10:37 PM
            Private answer

            Differential equations? You should really understand all of your assumptions before ever even citing a model like that. I’ve done tons of stuff in chaos theory and dynamical systems. They’re very useful in modeling and engineering, but useless in economics.

            What I said is obvious: that increasing I while holding everything else will increase growth. In a world of global capital, cutting corporate tax rates when your corporate tax rate is the highest in the OECD will drive investment.

            BTW, I never said anything about speculative investment in Silicon Valley. Again John, you should really understand your assumptions first. Before doing some bullshit econ using fancy differential equations, you should first study graduate level chaos theory at a graduate level mathematics program. That’d be more useful cuz you’d actually understand the value of why you’re doing it. While at it, go ahead and take some sensitivity analysis and you’d see how the sensitivity of those models makes them basically useless in predicting economic systems with any degree of precision. If you want more accuracy, you’ll have to reduce your precision to something that’s effectively useless. In order to understand that, go ahead and take a class or two in numerical analysis.
            FTR: I did a full grad level sequence in chaos theory and numerical analysis with a class in sensitivity analysis while also doing research that involves all of those fields and knew this stuff better by 24 than you’ll know in your entire life. You’re spewing bullshit.

            BTW, if we want a renewable energy system, we’ll need capital investment. Renewables require smart grids that can shut on and off between different energy sources. That requires capital investment (my biggest holding is a company that is doing this all across the South and has seen growth from productive capital investment).

            Marked as spam
            Posted by Suvy Boyina
            Answered on 05/03/2017 12:33 PM
              Private answer

              It would be great if tax cuts to the wealthy and to businesses really did trickle down to fund growth and capital investment. But they didn’t and are unlikely to do so in the future. What we saw in the past is the money from tax cuts was hoarded or used to finance stock buy-backs. Tax cuts are correlated with widening of the income inequality gap. why is that?

              Money is always available for tax cuts for those who least need them. And then austerity for everyone else, because for some reason, we are in a budget crisis, apparently, after trillion dollar tax cuts, somehow we are now spending beyond our means!

              Marked as spam
              Posted by Lucas
              Answered on 05/08/2017 2:25 PM
                Private answer

                Lucas –

                I don’t have credible data on this issue, but I am in agreement that tax cuts to wealthy individuals/families are unlikely to “trickle down” to fund growth. The wealthy aren’t going to consume much (if any) more if their taxes are cut. They often already have enough “stuff”, like cars, boats, and houses. Some might actually invest in businesses – but as Cullen has pointed out, if all they do is buy more stocks and bonds, then those secondary market transactions are really just savings reallocations.

                Business tax cuts, on the other hand, might be more productive. I know that stock buy-backs have been popular since the great recession (and have often been popular at times in the past), but I wonder if part of the reason is that companies (in certain circumstances, like the low-growth economy we’ve had in recent years) don’t see enough demand for their products and/or services, so they choose to just buy back stock. It’s been argued that companies don’t pay taxes – their customers do. That’s perhaps a bit simplistic, but businesses do try to pass along costs – including taxes – in the price of their products and services. In competitive industries it seems more likely that if corporate tax rates were cut significantly, that some companies would lower their prices and try to take market share away from competitors. Those lower prices would “trickle down” to consumers, freeing up money for other spending (at least in theory). I think that there’s more potential for economic growth from helping the middle class than the wealthy because the middle class is more likely to spend a little more and borrow a little more (hopefully prudently) when they see their cash flow improve – and that’s why I think cutting corporate tax rates have more potential.

                Marked as spam
                Posted by Steve W
                Answered on 05/08/2017 4:26 PM
                  Private answer

                  A lot of this is just political quibbling over a false narrative.

                  Any tax cut “benefits the rich”, but so it does to everyone else to varying degrees. What is really meant by ideological Democrats and brain-dead Republicans is that marginal income tax rate cuts give more of a refund back to the rich than to the middle or lower classes in absolute dollar terms. That is not going to “trickle down” in any meaningful way unless there’s a lot of other things wrong with the economy that also get fixed at the same time. One would think that all of the endless tax increases lobbied onto the rich and businesses under Obamacare did not have such a deflationary impact that to roll them all back is suddenly “a giveaway to the rich”. Give me a break.

                  As far as the “Laffer Curve” goes… even though its ideological proponents like to use it as an example for cutting marginal income tax rates (or vice versa), they’re totally confused and in denial when it doesn’t work as it didn’t in Kansas. The proper metric under that theory is tax burdens aka effective income tax rate. We’re not quantified enough yet to know whether or not people’s effective tax rates are burdensome or not, but I can say this: tax revenues as a percentage of GDP stays flat around 20% over decades despite what marginal income tax rates are, 90% or 39%. So all the faux outrage over tax cuts or tax increases is just political theatre.

                  Cutting pass-thru taxes in Kansas didn’t result in anything but hoarding and tax sheltering. That could imply that tax burdens were not excessive so cutting marginal income tax rates did nothing useful. Tax cuts is like junk food… the easy and ineffective way out to “do something” as opposed to structural reforms that would actually be pro-growth and increase tax revenues. Why do we have such a problem implementing structural reforms? Because everyone is still hoodwinked by the “Laffer Curve” marginal income tax rates B.S..

                  Marked as spam
                  Posted by MachineGhost
                  Answered on 05/08/2017 5:07 PM
                    « Back to Previous Page