RE: tax cuts for small business owners-

According to economist Robert Frank from Cornell, the answer is a resounding no. Tax cuts to small business owners do not stimulate employment. Here’s the argument. Suppose that a potential hire will produce 10 units of output per hour for a firm and the output will sell for $2. The worker can be hired for $15 per hour. Should the firm hire the worker?

Yes, hiring this worker will generate a $5 profit per hour for the employer. Let the tax rate on the owner’s income be 20%. Then the take home pay for the owner is $4 per hour.

Now increase the tax rate to 50%. Is it profitable to hire the worker? Yes, the worker still generates $5 in profit for the firm, but now the owner’s take home pay is $2.50.

Now let the tax rate be 80%. Is it profitable to hire the worker? Yes, the worker still generates $5 in profit for the firm, but take home pay for the owner is only $1 now (assuming this is still above zero economic profit for the owner).

Notice how the condition determining whether the worker is hired, a comparison of the wage paid to the value of the output the worker produces (W compared to P*MP from your principles courses), does not depend upon the tax rate paid by the owner.

You're assuming all government spending is "pork", when earmarks are less than 1/10th of 1% of the overall federal budget.
Also, individual consumers will not allocate money based on what is best for the country, but what is best for them....that may, and often does, include putting the money in a piggy bank, paying off a credit card, or buying products that were manufactured in another country.

The union thing is hogwash. Unions vote democrat, period. The idea that government spending is less stimulative because union workers may do the job is ridiculous.

The private sector isn't going to build roads, bridges, tunnels, a new electricity grid, lay broadband lines in rural areas, etc....these are investments in the public interest that don't pay an immediate dividend to the investor.
Just like the interstate highways in the 1950's. There was no immediate return, no private entity could have made a profit by undertaking such a project, but the long term effects on our economy have been profound. (And there is also the short-term benefit of jobs for the people who build the roads, clear the land, etc)

This really made no sense. You're assuming the only reason someone would sell an investment is to pay off debt. You also assume that the bank will turn around and lend new money once an old debt is paid off.

Yet the banks have been given a shit pot full of new lend-able capital by the government, and that hasn't led to more lending. Also, my guess (and it's a reasonable one) is that the money someone would use to buy a stock, or a business, or whatever other type of investment, is currently sitting in a bank and not under a mattress, which means that it is already capital on a bank's balance sheet that can be lent if the bank so chooses.
Nobody has to sell a stock to pay off a debt so the bank can loan again. You really went off the reservation on that one gideon.

Banks not lending is a result of the trillions of dollars in toxic assets on their balance sheets. Cutting the capital gains tax so that someone will sell some stock isn't going to make that problem go away. (Especially considering that stocks have lost almost half their value in recent months, so almost anyone selling right now would be taking a loss and taxes wouldn't be a factor anyways)


The top economists in the country have told President Obama that for every $1 of government spending we'll get $1.50 in stimulus, for every $1 in tax cuts, we'll get 75 cents of stimulus. (Because the tax cut money may not be spent at all, or it could get invested overseas, etc)
The reason for the tax breaks to individuals is more a function of giving people a break during tough times than it is about stimulating the economy. (From Obama's point of view anyways)
Yet there are still all of these people screaming for across the board tax cuts, capital gain and dividend tax cuts, and whining about all of the "wasteful spending" in the stimulus plan.
We've tried the "republican way" for the past 8 years and now we're in the mess we're in, dontcha think it's time to try something different?

Most American don't carry debt? You do ralize that even before this economic crisis that amercians on average had a NEGATIVE savings rate. You can only do that by having debt.

That would be subject to capital gains taxes not income taxes. So if you lowered income taxes that doesn't mean shit to anyone selling an investment.

:Oh crap

I was talking about "falling off the cliff" debt like you described.

go back to school boy.. learn your economics 101.

There is soo much more to this, there just isn't enough time to get into it... but

The entire premise of the arguments in this thread assume that anyone who has an investment that qualifies as capital gains will sell it because the capital gains rates are low and then just hord that money away in their mattress. I am not sure where this thought process comes from, but personally I've never come across anyone with substantial money who sells off investments to move into cash.

People with money, move assets from one investment to the other -as they know sitting in cash does not grow their net worth. So lower capital gains rates stimulate capital investment as investors move money from one investment to the other. Some of that money then seeks higher risk, higher return investments (ie. venture capital) and thus stimulates economic expansion through new business development.

:2 cents:

it doesnt create jobs period.

At least this was a well thought out and reasonable explanation. Unlike the post above this one in which I was called a "boy" and told to go to school, by someone who doesn't know how to use capital letters. :helpme

The thing with what you're saying is that if capital gains taxes are low, then that encourages people to sell off profitable investments and make new ones. At the end of the day though, that's just shifting money from one place to the other so I don't see how that creates any sort of economic "expansion" that would create jobs.

You say that people with money know that sitting in cash doesn't grow their net worth, so then won't their money always be invested in the place they think will give them the highest return, regardless of what tax rates are?

It would seem to me, that lowering the tax rate only affects their behavior in one way. It makes them more likely to sell their investments while rates are low so they will save $$ in taxes, even if they just sell and then reinvest back into the exact same asset.
At the end of the day all this does is cost the treasury money in the long run, it doesn't positively affect investor behavior in a way that is conducive to economic growth.

people writing essays. for what. trying to figure out what they are doing. we're fucked plain and simple.

clueless. and sad

Or buy more computers or equipment or any other asset that will put more money in their pockets.

1. A lot of small business owners have S Corp's. They pass through all their earnings to their personal accounts at the end of the year. In effect there is little difference between their personal and their business fortunes. A cut in the capital gains tax leads to more money in the pockets of small business owners and in some cases under some conditions will lead to an expansion of business due to increased profits; the profits of the individual being little different than the profits of the business.

2. A capital gains cut leads to increased investing which bolsters the stock market. An increasing stock market leads to more IPOs and more investment in general - which of course can lead to hiring. IPOs = more business activity = hiring.

3. Increased savings in one period lead to increased spending in the next. You can see this in nearly any recession where savings increase during the recession and then decrease during the recovery. So in effect the reduction of capital gains can also lead to increased savings and help the eventual recovery. This is so because of the economics identity: Investment = Savings - government deficit - current account deficit which can be derived from the more obvious Investment = Private Savings + Government Savings + Foreign Savings

There is a lot of discussion right now even between professional economists as to what the spending multipliers are for various actions such as tax cuts, rebates, infrastructure spending and so on. The truth is there is no general agreement as where one gets the best multiplier and under what conditions. It would seem wise to adapt a variety of stimulus actions.

A few of my bookmarks. Here is a great article by Hussman on the accounting identity above: http://www.hussmanfunds.com/wmc/wmc041206.htm
Also his weekly commentaries are a good read.

Here's one of many blogs covering spending multipliers this week;
http://gregmankiw.blogspot.com/2008/...ltipliers.html

Here's a paper on the effectiveness of capital gains tax cuts
http://dreier.house.gov/pdf/IPI%20-%20CapGainsKey.pdf

Maybe someone could find a competing paper with the opposite conclusion so everyone can compare.

My personal opinion is that any tax cut or additional government spending of sufficient size will increase jobs but that the efficiency is unknown beforehand . Different fiscal and monetary stimuli under different conditions will have different economic results.

Thsi thread is full of opinions that aren't based in fact....

Study says most corporations pay no U.S. income taxes
Do the rich contribute the most to tax revenue? No.
http://www.ntu.org/main/page.php?PageID=6

LOL

do you people even realize california is broke. :1orglaugh

i'm sure cnn or fox hasn't said anything.

:1orglaugh:1orglaugh:1orglaugh

For those who are unable to understand that chart... 66.79% of tax revenue in 2005 (which reflects the current tax rate) was paid by people earning between $28,654 and $126,525.

Not always the case. Walmart let the line get longer and buy more cheap crap from China is closer.

Both have reported on it... I just saw a report on CNN yesterday where they said that California was so broke it couldn't pay tax refunds and were $15B in debt.

This was close to what I was going to say.

For 20 years I have watched countless Governments tell the voters they will cut taxes, deliver the same or more services and all this would be paid for by extra money coming into the system. Now we know how well it worked and they were either clueless or lying.

Because the growth in the economy that was going to pay for everything was an inflated growth on over valued commodities. Plus loans and debt. California in debt shows you how well these guys can manage an economy. But look at these people, which one of them is losing their homes? The bosses of the companies that got us into this shit have had their wages capped at $500,000. Tough life for them!!!!!

Even today they are all screaming no to protectionism. Too fucking scared China might ask for their money back. The only think that will get this mess cleared up is if we sell as much as we buy.

Creating jobs is good if those jobs lead to more jobs in the Country. Creating jobs that move the money out of the Country is exporting wealth. The guys who tell you it's the way forward are not the ones losing their jobs.

well of those three examples putting it an piggy bank/matress is not something someone who knows the value of investing is going to do.

paying of credit cards puts the money into the banking system to be lent out again (posititive)

and buying from another country when you have trade with and are therefore selling stuff to has a proportionately neutral effect (in the case of the US which has an over all trade surplus a positive effect).


And that makes sense when the public infrastructure investment happens as a PLANNED growth event. However when it is pushed out as a stimulus package that is not what happens. Projects that were planned to happen 3 years from now are pushed forward today. Which means 3 years of life expectancy is wasted to create short term jobs for your supporters.


no it is not i was responding to your sell stuff to pay off debt point. I know people will sell off stuff to move it into a higher yeilding investment (which translates into capital funding most profit maximizing companies = more jobs long term). I was trying to show you the beneficial effect of something you were discounting as not being of value.

Lower capital gains reduced the punishement from moving your money from one investment to another which causes money to flow from bad investments to good investments more quickly. That has a net positive effect to the economy which creates jobs.

The toxic assets is based on a lower than necessary asset reserves, which the infusion of capital was designed to resolve. The problem is when people pay off their credit card debts that is a LOST revenue stream from the banks. If they choose to recover it by investing that helps the economy. IF the best RIO comes from lending out that money that also helps the economy. WIN WIN either way.

which means it only has a cost allocation if it successfully stimulates the economy (back loaded cost) vs infrastructure investement which has to be spent first.

IF the physicological effect of reducing the punishement for moving your money from a bad investment to a good investment is eliminated. and it causes people to not just sit on their current stocks in the hopes it will go back up. The business that are first to turn around will get more capital. That will speed up recovery. And only when that happens does the cost of the tax cut actually kick in.

You just gave another reason why tax cuts are better than public works.


at least quote him properly
he said $1 will generate $1.50 in DIRECT stimulus.
There is a difference, because their is a massive multiplier effect from indirect (out of system stimulus).

Take the example of canadian auto industry, putting the stimlus into US auto industry caused the canadian government to do the same thing. The difference is the canadian plants BUY their parts for the car from the American Parts plants. The end result in the US gets a portion of our stimulus package (the value of the parts). Since the profits from the sale of the cars go back to the head office in the states you get a second part of our stimulus package.

When those net transfers the total value of a $1 going to business, is WAY more $1.5.

The U.S. has a trade surplus? So when we buy goods made in other countries it's proportionately neutral? (because they buy as much or more of our stuff as we buy of theirs?)

What the fuck are you smoking? Our trade deficit for Nov 2008 (the most recent month for which data is available) was over $40 billion.
http://www.census.gov/indicator/www/ustrade.html
40 billion deficit, for one month, and that's a typical month, and you think the U.S. has a trade surplus?

I didn't even bother reading the rest of what you wrote because this is so factually inaccurate and flat out stupid that if you believe it's true then nothing else you wrote is worth reading.

BTW, lower capital gains taxes don't encourage people to sell bad investments and move the money to good investments.
A bad investment would be one that lost money (or made very little), a good investment is one that makes alot of money...since the tax is only paid on the profit, selling a bad investment is not a taxable event, or in the case of a barely profitable investment, the tax is miniscule in relation to the amount of capital that will be freed by selling.

If anything, the low tax rate would encourage me to sell an asset (say a good stock) and then immediately reinvest all of the after tax proceeds into the same asset, thereby raising my cost basis for future taxes. (i.e. paying tax now at the lower rate on profits I've made so that if taxes go up later and I sell, the tax bill will be lower)
All this really does in the long run is cost the treasury money that it will have to make up for in another part of the economy.

GG has a habit of posting what he thinks will fit his version of the truth and building a case on that.

If the "West" had a neutral balance of payment with the "East" and some developing countries we would not have this crisis. We might even of ridden out the financial crisis created by financiers bankers.We would all be earning more and yes goods would be more expensive in the shops.

We have had over 20 years of importing cheap goods from countries that pay workers a fraction of what we earn, replaced the jobs with service, technology and financial industries. The result is clear to see.

A lot of the service, technology and financial industries are now based in the countries we had hoped would just be selling us cheap coffee percolators and shirts. And the system collapsed.

Under Chairman Mao Chine was a poor third world country where millions starved to death. With the new leadership and our leaders making them "favored trading partners" which in truth means they can sell us billions and buy little, look at the changes. If you want to know where your money went, you don't have to look very far.

The problem is those at the top profited from it, few of them lost their jobs, few of them took a pay cut and they still tell us protectionism is wrong. It is for them, not so good when your job and wages go East.

Nothing like a kick ass economic crisis to break the American DOllar down only to be replaced by the "Amero Dollar".

Trade between Canada, USA, Mexico and some Central American countires band together to all use the same currency system and the economies merged.

Sounds like we are definatly all in a state of Change.

It works with the completion of the transcontinental highway.
Its all part of the plan.

Please explain why you think this is the case because it looks like you are just trying to associate something everything agrees is bad, the current crisis, with something you feel is bad, the west buying too many cheap goods from the east.

You want me to explain why it's bad to import $100 worth of goods, services, etc. and export only $50 worth?

Are you joking?

No, I want you to explain how balanced trade would have prevented this crisis.

you are an idiot then because i quite clearly gave you an example of what i was talking about with the auto industry and canada.

Let me ask you a question to make that point
does the stats you are using document just the difference between inport and exports (cars and parts in my example) or does it include the transfer of profit back to the head office too.

Re read your data and you can see the difference you moron.

then go back and read what i am saying.

the last economic crisis was when bush sr lost to clinton. (it the economy stupid). The fact is there are virtually no stocks that have lost so much money in the last drop that it would wipe out all the gains that have happened since that last recovery. under that senerio give current average stockmart roi $200 is still worth $300 after the crash.
That a $100 i would have to pay tax on. Assuming that my current company was going to post a modest 5% growth and the capital tax rate was 50%. The act of switching would put 50 buck of profit into the new company. Which means it makes no sense to move my money unless the new company was making at least 10% (100 *5% - 50 *10%).
If that happens the country loses the extra 5% of economic growth that would have happened (and all the jobs that would lead too)

conversely if the tax rate was dropped to 25% then 75 bucks would go into the new company (100*5% < 75+10%) and the company which is growing faster has the capital it need to make that growth happen. Which results in an increase in the economy over all.


even if that were to happen that would put more money in the government coffers to pay for social services it need to pay for (unemployement, retraining) which still have a positive effect.

It a temporal diversion of tax revenue (getting more money now when the economy is bad, and getting less when the economy is good).

all without putting punitive on economic growth (higher taxes).

Because it would of kept more of the wealth we had in the West in the West and sent less to the developing world. The banks would of had more money, people would have more jobs creating wealth and over all more of the wealth we created would of stayed here.

By sucking in huge amounts of goods and services, cheap or otherwise you take money out of the system. And instead of a complete collapse we would of had a good old recession which hits every so often.

Recessions are not new, I have lived through at least 3 or 4. The system over inflates and then corrects itself by deflating. Because a lot of the wealth was still in the country we weathered it, yes people lost homes and jobs, but it was short term. This time the jobs are not there, they've been shipped out. Along with a lot of the wealth.

The only way we could fund the consumer society we had based on importing goods was with debt and to fund more consumer wealth we increased the debt. Then along comes a President who decides big business and Wall Street can do no wrong (sarcasm), a war that cost a fortune, a housing market about to collapse and you end up where you are today.

We would of had a recession, but it would of been something we could of managed.

It wouldn't have. Better regulation of the financial sector would have.

Paul went off on this free trade tangent because I was trying to explain to gideon that a tax rebate is less stimulative than direct government spending because consumers can use that money to buy goods produced elsewhere.

Gideon then tried explaining to me that American trade was balanced, based on whatever guerrila math he's using, so therefore the $40B trade deficit in November of 2008 wasn't really a deficit according to him. (Maybe it has something to do with time shifting?)

Trying to talk to gideon is kind of like trying to talk to that Joella girl from the biggest loser. His eyes are looking at you and his lips are moving, but he must be having a conversation with someone from a past life or someone on another planet because nothing he says makes any sense.

You're not just learning that now are you?

I learned that over a year ago, during the whole "unauthorized use of content by tube sites is not really stealing" argument he had going on.

Given enough rope he'll happily hang himself for weeks.

If there was better regulation of derivatives markets things would be nowhere near as bad as they are now. That is a big part of the problem. I've mentioned this in other posts. Putting the regulations we need in place would be relatively easy, but very painful for banks... Which is OK by me.

Macroeconomics 101... funny to see the sort of ramblings in a forum that is supposed to be formed by entrepreneurs :error:2 cents:

Whether it's theft, piracy, murder or high treason we are not going to do anything about it. Neither will anyone else. Dreaming we can close them because of the content is pointless. In fact it's worse than pointless because it stops us thinking of a solution.

Have the people who think tax cuts are a solution been on a desert island for the last 8 years?

We've tried that and it did not work. So let's cut taxes again and see if it works this time. :upsidedow

Reality.

Government needs $XYZ to run the country.
They will not get this from the expanding economy.
Most of that money should be spent in the country which provides jobs for workers. (OK GWB fucked that one with Iraq.)
Those workers earn money and pay taxes.

Giving tax cuts allows people to have more money in their pockets.
So they go to the malls and buy imported goods.
Employs a shop worker in the US and a factory worker in China.

OK in both instances there are variables, the Government does spend money overseas and they will buy Chinese computers or similar. But they are more likely to spend more of the money fueling the economy in the US than tax cuts will. The only way out of this short term is more investment inside the US, getting people to work. Long term better schools to train people and build the manufacturing base. Think about what you would spend an extra $100 a month on.

How much of it would be spent on something that will long term benefit the US and how much would be spent on imported goods?

We have had tax cuts for 8 years and look how great it worked.

To give tax cuts a Government has to have the money in surplus or cut services which means jobs or borrow the money from those who have it. Like the Chinese. Or print more.

Which one do you think is best so you can get an extra $100 each month in your wage packet?

Actually most people here are a long way from business men and the post you quoted proves it.

People have not been investing seriously in the US which is what got them into the mess they're in. They've been investing badly in stocks that crashed because they were GAMBLING or investing in a house which was over valued and they were mortgaged to the eye balls.

People seem to think that tax money is money lost. It's not. Next time you see a guy sweeping your street, a policeman, a road worker, social worker and a lot of other people you're seeing tax money being spent.

All those people are earning money supporting the world we live in and paying taxes to support the world we live in.

Next time you walk through a mall you see your tax cuts working for you. Employing a shop assistant to sell you goods you might not need made in a place a long way from the Mall.

It's more complex than that and both systems can be abused, GWB has shown how. But people have to realise there are no free meals or rides out of this.

All I can say about taxes is...the payroll tax has to be the most ingenius and sinister thing ever created.

If everybody in this country had to write a check to the govt. every quarter to pay their taxes we would have a revolt.

Instead they get it taken out of their pay before they ever see it. And they always take more than what is needed so the people are all happy when they get money from the govt. at the end of the year.

I'm always amused at guys rejoicing that they got 2 or 3 grand back from the govt and can't wait to buy those new tires for their pickup truck with that money. lol

Never realizing just how much the govt. just reached in and took and then KEPT for a full year without any interest owed.

Of course most of the real adult webmasters on here (not the surfers or guys who work for adult companies) that own their own business already know the truth. Last year I paid $19,000 in taxes every quarter. And if you don't think that hurt...

So yeah, I can definitely see where tax cuts would have helped me to hire someone. I just moved out here to Vegas in Oct. of 2008. And my first order of business was going to be to hire 2 more people to take some of the workload off of me.

But unfortunately the economy completely crumbled at the same time that I moved here.

Now if I could have had access to that $19,000 I paid the govt. in the 4th quarter, I still could have followed my plan and employed two more people. But as it stands now, I need every penny I've got.