Tax Cuts generate Jobs... I don't get it?

[Bonefish]

So, I hear this in defense of the tax cuts: if we raise taxes on the rich(who already pay like, what, 70% of the taxes in the country), we'll tank our economy, right? I don't exactly understand the logic there, and I'm just terribly confused.

I was under the impression that the bush years, when the tax cuts were pushed in, were not really very good in terms of economy. Where are the Jobs?

[UncleJoseph]

I wish I had more time to write about this...I've been thinking a lot about tax issues. Unfortunately, it's 4:42 a.m., and I'm heading out the door for training all week (out of town). If I am able to get internet access at my hotel, I'm interested in continuing this discussion sooner, rather than later.

But for now, I'd like to say that I'm so angry about the mismanagement of money by government at all levels that I barely know where to start.

[Crazy Elf]

The way I understand it, the only thing that truly generates jobs is supplying to demand. Governments can encourage businesses to grow by giving them tax breaks, but if you encourage something to grow that isn't supplying to demand it will die not matter how many breaks you give it.

[Bonefish]

In the same vein, we need spending cuts, right? But I've heard some folks explain that our Military Budget, Social Security and Medicare are the largest portions of our federal budget, and that as long as we leave them untouched, we're not really going to get anywhere.

[Ancient History]

[/edit]Post removed for blatant idiocy. Here is a relevant link instead.

[3278]

So, I hear this in defense of the tax cuts: if we raise taxes on the rich(who already pay like, what, 70% of the taxes in the country), we'll tank our economy, right? I don't exactly understand the logic there, and I'm just terribly confused.

Let's be clear off the top: I don't agree with the upper-class tax cut, and firmly believe a totally different tax structure is needed. I'm only explaining the theory behind what you're asking about.

The idea is that the more money the wealthy have, the more they'll invest in industry, directly and indirectly. They'll buy stuff. They'll put money into banks, which then gets invested in corporations. They'll invest directly in corporations by buying shares of those corporations. They'll spend more money on their own businesses. All of this means more money in businesses, which means more jobs, which people often equate with economic health, because it's the most direct personal indicator of economic conditions: the S&P being down for the last year means shit to people, but you take their jobs, and they tend to take notice.

That's the idea, anyway. It has some merit, as far as that goes, but it's like one of those almost-perpetual-motion devices you see on people's desks: they'll run for a long time, but there has to be an initial impetus that kicks them off. In the case of the economy, it's resources and demand: the stuff to make things out of, and a need or want for things. Now, if those things back off a while, the machine will keep coasting along for a while, but you need healthy doses of impetus if you want to keep things going on a long-term basis.

Elf's post on this is very well-put, so let me quote it, with a slight modification: "the only thing that truly generates [economic health]* is supplying to demand. Governments can encourage businesses to grow by giving them tax breaks, but if you encourage something to grow that isn't supplying to demand it will die not matter how many breaks you give it." This is the problem with government subsidy: it can provide impetus, but it can't invent demand or produce resources, so all it can do is hold money generated by those things and feed it into the economy. If there's no "prime mover," all subsidy can do is prolong the inevitable. There is no perpetual-motion economy we've yet discovered.

I was under the impression that the bush years, when the tax cuts were pushed in, were not really very good in terms of economy.

Post hoc ergo propter hoc. Simply because two things were happening at the same time doesn't mean one caused the other, or that changing one would change the other. That doesn't mean the tax cuts were good, it simply means the system is too complex to draw conclusions from only these two points of data.

*Again, "jobs" <> "economic health," but that doesn't stop the overall point from being true.

[FlameBlade]

Is it possible that raising taxes would actually create more jobs? I'm just wondering...

[Ancient History]

Maybe. It depends (natch) on which taxes, how they're structured, and what the guv'mint does with the money.

If you increases taxes, the taxed individuals have less money coming in because they need to give it to the government. Some people swallow this and continue on as normal, but others do not. To maintain - or increase - their profits they may fire people, shut down and sell companies, move their companies outside the US, etc. - that causes job loss.

However, it doesn't have to be that way. If you are selective in how you tax and try to close the "easy outs" like moving the factory to China or India, you can effectively give people an incentive to invest their money along other lines - lines that create jobs. For example, you might impose a stricter burden on certain types of long-term investments to encourage companies holding those to pour money into improving their infrastructure, either to off-set the new taxes or because with the new taxes the infrastructure is a better investment.

Also, with the new tax money the government can stimulate the economy - through business grants, educational grants and loans, federal money to state construction projects, Defense industry spending, etc. The $$$ they give out is split up among contractors, sub-contractors, and their employees, who go out and buy televisions and make house payments et al., and that little uptick in business might mean a company hires more people and the government gets taxes back on each transaction.

So yeah, if done smartly and with a bit of luck, raising taxes could theoretically create jobs - but the economy is so complicated, it is difficult to manage well and in a timely manner.

[3278]

[/edit]Post removed for blatant idiocy. Here is a relevant link instead.

For what it's worth, I thought your post a lot more cogent and a lot less fucking retarded than whatever that non-cogent, fucking retarded webcomic is. If I wanted to read a webcomic, I'd read a webcomic: your thoughts in your words are what's valuable to me.

That's right: tough love, baby. "You suck, because you rock!" Mmm.

[UncleJoseph]

Part of the problem with Trickle-Down Economoc (i.e. tax cuts for the rich equals more jobs for the less-rich), is that business growth and wealth doesn't always equal a larger, more people-filled organization, especially domestically. If company A receives a tax cut that doesn't come with any caveats, then they can do whatever they want with that money. If the tax cut isn't significant, said company may just post higher profits and give their execs a bigger bonus. In theory, the bigger bonuses are also supposed to trickle down, since the execs will be spending their personal fortunes on more stuff, and that stuff has to be created and manufactured by someone. That someone could be a new job. But again, unless those cuts are significant, the extra money flowing around isn't likely to make a large impact. Further, if company A decides that they have received enough of a tax break to expand, they may not expand in such a way that benefits the consumer or the company's employees.

The more I think abut the fairness of tax, the more I am in favor of a flat tax.

As an aside, I've been thinking about sales tax recently, with regard to internet purchasing. There are millions in lost revenue due to interstate commerce via the internet. I order hundreds, if not thousands, of dollars worth of goods over the internet, and rarely pay sales tax for it. I do pay the State of Michigan standard claim for sales tax on internet commerce every year, and I believe my standard claim is pretty accurate when compared to what my actual spending is. But a lot of people do not do this. I think that each state should charge sales tax on out-of-state orders, just like they would if an out of state person was standing in their store making the purchase. I don't like paying taxes any more than the next person, but a lot of interstate internet commerce is simply tax evasion. Some companies do charge sales tax, but typically it's only the ones that have business licenses in the state you live in. I suppose this is less problematic for countries other than the U.S.

[3278]

Something I don't understand about the argument that putting more wealth in the hands of the most wealthy is good for the economy is that I don't see what they're doing with that wealth that someone else wouldn't. If you take a million dollars from a billionaire's income and move it to a hundred-thousand-aire's income, isn't the "poor" guy going to do the same sorts of things with it? Invest in business, purchase goods, etc? Now, if you give it to a homeless guy, he's going to do different things with it - purchase basic survival needs, for one - but in terms of economic stimulus, aren't they going to be pretty similar?

I guess I just don't see why it's any better for the economy as a whole to put more money in the hands of the upper 1 percent, or 5 percent, specifically. I feel as if we could put that same money in the hands of the very poorest people and have a better effect on the economy, overall. [Until the "success" collapsed the nation through resource impoverishment, of course.] I like to think about limits on the maximum difference between the topmost earner in a company and the bottommost earner in that company. If the government's going to move income around, that's one deft way of going about it.

[Salvation122]

In theory, letting the rich retain more of their income is beneficial because they invest at a higher rate.

In practice, it doesn't matter whether or not they invest if there's a demand constraint (such as what happens when you're sitting at a cool 9.2% unemployment.) That you can now make better widgets is irrelevant because people don't have the money to buy them. Accordingly, in the current environment, the wealthy are overwhelmingly saving their money rather than spending it. (They do this all the time, because they have so much goddamn money that they cannot feasibly spend it all outside of commissioning solid gold yachts or whatever, but it's a higher proportion now than normal.)

In the situation we're in now - businesses just sitting on record amounts of liquid cash, because there's no expectation of an uptick in aggregate demand - the best solution (assuming we want to remain deficit-neutral, which isn't strictly speaking necessary) is to increase taxes on the rich and use that money to pay a bunch of unemployed people to do shit we need done - road and bridge repair, rebuilding the power grid, maintenance on dams and such. Those people, being broke as hell, will turn around and immediately spend a higher proportion of it than the rich did, creating an uptick in aggregate demand that requires the private sector to higher on more people, and eventually you're back where you started.

As far as the math is concerned, it doesn't matter at all whether or not you just take that money and hand it out to people for nothing (the typical Econ 201 example is digging holes, then filling them in again), but as long as you're spending money anyway, you might as well spend it on something useful.

So the answer to your question is, "in practice, in terms of economic stimulus, you're a lot better off giving it to the poor."

[Nicephorus]

Is it possible that raising taxes would actually create more jobs? I'm just wondering...

Yea. Government jobs. Possibly improving infrasctucture. One thing overlooked is that many of the spending cuts would lay off thousands of government workers. How is that going to improve the economy more than increasing taxes on the rich?

The very rich are not going to change their behavior appreciably if they gain/lose 5% of their income.

[DrunkenMaster]

The trick about adding government jobs is they are about the least efficient way to go about things. They don't operate off of a profit motive and usually their budget is set by the amount of money they spent in the previous fiscal year instead by projecting demand, so the incentive is to use all of the budget and request more money instead of saving the government/taxpayers money and finding efficient ways to work. Coming in under budget or working more efficiently means you'll get less money next year, obviously you don't need it this year since you didn't use it last year.

I've never understood why most of the DMV can't be replaced by an ATM like kiosk. Or the universal hatred of all states DMVs. It is like a science experiment.

[Nicephorus]

Actually, here, most DMV actions can be performed online, through mail, or at the kiosks right inside the doors of the locations. IT's pretty much only when you're getting something new and you'd need to show documentation that you need to see a person. The government has listened to complaints and taken serious steps towards improvements. There are still delays though which saves costs; to ensure no delays would mean enough employees that they would have lots of spare time - a fast food place is ok with that because they want your business; a government monopoly knows you have no where else to turn so can look at the bottom line.

Government money doesn't necessarily government workers - I believe that most road workers are under a government contract but not directly employed by the government.

The idea that government is inefficient is the constant dogma of companies trying to take over government jobs but it's not necessarily true as there are several mitigating factors and the profit motive can be more of a hindrance than a help. Privatization benefits mainly through encouraging competition and the resulting economic Darwinism. For example, instead of having one garbage company where the workers can set the cost or strike and turn the city to crap, let people choose their garbage company and the market set the price what people are willing to earn to pick up gargabe. In situations where a company will have no competition, such as the award of an exclusive contract, the profit motive tells them to save money by doing a half assed job to pocket as much of the money as they possibly can. If the company is big enough, it's cheaper to bribe/lobby to keep the contract than to do a good job. A government entity with the same contract has no investors to appease and their salaries are set so they are more likely to spend all of the money doing the job. Take a look at all of the government money that went to private companies in Iraq for relatively little result - I bet the net efficiency is far below that the military.

The profit motive can serve to drive prices up as well as down. Stock holders push for incomes that far exceed the cost of the service -- an entity without a profit motive can set costs to exactly match prices.

The stereotype of bureacracies rushing to spend money so as not to lose it does happen but that often and it's typically a fraction of a percent of their budget. Government entities have oversight to control cost. The examples of cost inefficiencies that people typically list work almost the same way at large companies, where the typical employee is concerned about minimizing work while keeping their job and don't really care about the success of the company.

Another thing to consider is that government funding is that it doesn't always mean lack of competition. Take research as an example. Their are hundreds of public institutions competing for funds. Only a small percentage of proposals get funded (down to 10% or less in most fields now) and then the budgets are generally chopped 20% as a matter of course. Once someone gets a grant, they need to show output from it that will be judged as part of grant renewals.

A last thing to consider is that if economies of scale push strongly towards a monopoly where one entity will be more more cost effective than two, it can be better to have an entity overseen by the government than a private monopoly or a forced duopoly.

By the way, despite the strong neoliberal dogma, it's hard to find actual data that directly compares private vs public costs. There has been a bit coming out due to debates about private prisons, where it seems that state run prisons seem to come ou tthe same or cheaper for a given level of performance.

[Bethyaga]

Wow. Good thread. Thanks.

[DrunkenMaster]

Nicephorus: The idea that government is inefficient is the constant dogma of companies trying to take over government jobs but it's not necessarily true as there are several mitigating factors and the profit motive can be more of a hindrance than a help.

True, and I don't mean to imply that all government services should be privatized, though I am guilty of feeling that government solutions are usually the least efficient/most invasive way to manage things.

I'm more concerned with the incentives and deterrents which help guide the behavior of the person providing the good or service, whether government or private.

[3278]

In the situation we're in now - businesses just sitting on record amounts of liquid cash, because there's no expectation of an uptick in aggregate demand - the best solution (assuming we want to remain deficit-neutral, which isn't strictly speaking necessary) is to increase taxes on the rich and use that money to pay a bunch of unemployed people to do shit we need done - road and bridge repair, rebuilding the power grid, maintenance on dams and such. Those people, being broke as hell, will turn around and immediately spend a higher proportion of it than the rich did, creating an uptick in aggregate demand that requires the private sector to higher on more people, and eventually you're back where you started.

This is my read of our current situation, as well, but isn't this exactly what the stimulus act has been doing? Has it been working? Do we need more of it?

Begging caution regarding investment in infrastructure would be repeating myself, so I won't, but it does seem to me like we have an available surplus of capital that could be invested in a way that would bring greater overall benefit. I'm not sure I support using government that way, but as a hypothetical situation, it seems as if moving some of the money from the "haves" to the "have-nots" and the "have lesses" would have a greater economic benefit than it would economic cost.

Anyway, irrespective of hypothetical socialism, closing loopholes that give disproportionate advantage to the highly wealthy certainly seems common-sense, but seems as if closing all loopholes would be common sense. The problem is that common sense, and even collective welfare, aren't really the things driving legislation or enforcement.

As far as the math is concerned, it doesn't matter at all whether or not you just take that money and hand it out to people for nothing (the typical Econ 201 example is digging holes, then filling them in again), but as long as you're spending money anyway, you might as well spend it on something useful.

Well, we definitely want to spend it on something useful, or else there's a lot of cost wasted, killing one stone instead of two.

The trick is that we'd want to put the money into something sustainable [make money forever], something which would provide positive economic feedback [make more money the more money you make], and ideally something that wouldn't get done if the government didn't do it. The space and defense programs spring immediately to mind. And the interstate highway system. Superfund, depending on how you look at it. I'm sure there are others.* If these things have proven unsustainable in the long term, it's largely been because they've been co-opted, draining steam into other vessels, or because they've been superceded technologically.**

I don't know of other "sound investments" for the kind of money you could get by making super-rich people into just very rich people, but it seems like there's a lot of places you could put it where it would do more good than it's doing, if that's a road you want to go down.

*Modern telcom got done in many ways without the government, but it could have benefited from having been federally standardized.

**An argument can be made that welfare / TANF / Medicare / Medicaid programs would fit the bill, as well, being sustainable and providing positive economic feedback, but I've definitely seen evidence suggesting TANF, specifically, doesn't provide return on investment. Whether it's cheaper than letting some people starve to death is debatable. One program we know for certain does not qualify is Social Security, whose mathematical model for operation cannot guarantee sustainability. I think I'm correct in saying that virtually every developed nation that has a system that works mathematically like ours has already experienced a failure of it, because it cannot work when population decreases or lifespans increase without a proportionate increase in working years.

[AtemHutlrt]

The problem is that common sense, and even collective welfare, aren't really the things driving legislation or enforcement.

It's weird, because all I ask is that my government be rational, and make logically-tenable decisions under whatever paradigm it happens to operate, and it can't even come remotely close to that. I lean toward Libertarian ideals of self-sufficiency and small-government, but I honestly wouldn't mind very much if we lived in a well-designed Socialist state. It's like arguing religion: I don't care if we don't agree, as long as we're being intelligent about how we disagree, I'm pretty much satisfied.

[3278]

That's exactly how I feel, as well. I've become increasingly convinced that the greatest political problem facing America today is our inability to pick a single direction in which to travel. Because of our polarized political system, everything is compromise, to the benefit of neither. I have solutions [50 nations would provide far more possible variation in political systems than 50 united states] but I don't think they're likely to be popular [nuke the 100 largest population centers].

[paladin2019]

They don't operate off of a profit motive

Because my job should be profit driven......

There are jobs and societal functions that shouldn't be profit motivated.

[Bonefish]

They don't operate off of a profit motive

Because my job should be profit driven......

There are jobs and societal functions that shouldn't be profit motivated.

Like Prisons.

[DrunkenMaster]

Paladin2019 wrote: Because my job should be profit driven......

There are jobs and societal functions that shouldn't be profit motivated.

All jobs and societal functions are profit motivated. The only real difference is the currency used to measure them, whether money or prestige or security or access to resources, etc.

Your job is to accomplish the mission while getting the greatest return on the resources you have under your control. The same as mine.

[paladin2019]

Now you're changing definitions. You said government jobs don't operate off a profit motive. Now you say all jobs do. Which is it?

[DrunkenMaster]

Paladin2019 said: Now you're changing definitions. You said government jobs don't operate off a profit motive. Now you say all jobs do. Which is it?

You're right, I've changed definitions and for that I apologize.

This:

They don't operate off of a profit motive and usually their budget is set by the amount of money they spent in the previous fiscal year instead by projecting demand, so the incentive is to use all of the budget and request more money instead of saving the government/taxpayers money and finding efficient ways to work.

is trying, poorly, to make the point that the incentive structure of government jobs is rarely ever geared towards efficiency. That doesn't mean that the job shouldn't be handled by the government. I used profit motive in that instance as a hand wave to illustrate that the incentive structure can run counter to the best practices of doing the job. I can make the same point highlighting public schools incentive structure: tying federal funding to teach to a standardized test instead of what is best for their students.

As I said before, I am more concerned with setting up the correct incentives and deterrents. I believe setting them up so that the profit motivation of the individual or institution naturally complies with them is a better problem to solve than whether a job is public or private.

[DrunkenMaster]

I've also gotten completely off track of the topic of this thread.

Reading 3278 and Atemhutlrt latest posts, I'm pretty much in agreement with them. Our current system doesn't seem to produce any type of solution. I think this is more and more evident

Whether we tax everyone to infinity or not is irrelevant considering that our political representation is more interested in assigning blame for the problems we have than finding workable solutions to fixing those problems.

We have some very important issues which we need to plan for and act on and our political discourse bares a striking resemblance to speaking in tongues.

[Nicephorus]

Whether we tax everyone to infinity or not is irrelevant considering that our political representation is more interested in assigning blame for the problems we have than finding workable solutions to fixing those problems.

Pretty much. With houses under control of different parties and the Senate filibuster rules, compromise is mandatory. Yet compromise is usually off the table. The dems want ot pander and keep most things the same. The gop largely plays the spoiled child, saying no to everything, hoping to ruin things to a point that the dems lose power - they don't fucking care if the economy is destroyed as they're all either insanely rich or insanely sure that apocalypse is near. The whole debt limit issue was a manufactured crisis to have little power plays and look tough while pushing the world closer to chaos.

Despite the fact that the constitution doesn't really recognize political parties, the two parties are so entrenched that one of them would have to suffer a total meltdown for any new parties to have even minimal power.

[DrunkenMaster]

Actually, I'm more hopeful that an independent party is more and more likely. Both the Democrats and Republicans are pandering more to their most hysterical edge and have moved away from their base. I believe the Tea Party was the first rumblings of a definite split, though they aren't really helping matters. It is hard to have a sustainable platform when your greatest contribution to the debate is "No!"

[Salvation122]

In the situation we're in now - businesses just sitting on record amounts of liquid cash, because there's no expectation of an uptick in aggregate demand - the best solution (assuming we want to remain deficit-neutral, which isn't strictly speaking necessary) is to increase taxes on the rich and use that money to pay a bunch of unemployed people to do shit we need done - road and bridge repair, rebuilding the power grid, maintenance on dams and such. Those people, being broke as hell, will turn around and immediately spend a higher proportion of it than the rich did, creating an uptick in aggregate demand that requires the private sector to higher on more people, and eventually you're back where you started.

This is my read of our current situation, as well, but isn't this exactly what the stimulus act has been doing? Has it been working? Do we need more of it?

The stimulus was about 60% tax cuts (across all income levels, but somewhat progressive as a lot of it was focused on payroll taxes.) The spending portion was somewhat anemic, mostly because at the time the true depth of the hole we're in wasn't known. A second round could do us a lot of good, but is impossible to pass with our current Congress.

Anyway, irrespective of hypothetical socialism, closing loopholes that give disproportionate advantage to the highly wealthy certainly seems common-sense, but seems as if closing all loopholes would be common sense. The problem is that common sense, and even collective welfare, aren't really the things driving legislation or enforcement.

"Closing loopholes" is sort of weird, since for the most part those loopholes are there by (shitty) design. So mostly you just want to hike taxes on businesses and rich people by removing deductions and credits, rather than hiking the marginal rates. Congratulations, you are in accord with policy wonks!

For the record, I'd make capital gains normal income (and make payroll tax apply to them,) remove the cap on FICA, and reform the mortgage deduction so that it only applies to a single residence (and then cap that at something reasonable/year - say, 10-15k.) That comes damn close to closing our current deficit, and would allow us to pay down debt once we return to full employment.

The trick is that we'd want to put the money into something sustainable [make money forever], something which would provide positive economic feedback [make more money the more money you make], and ideally something that wouldn't get done if the government didn't do it. The space and defense programs spring immediately to mind. And the interstate highway system. Superfund, depending on how you look at it. I'm sure there are others. If these things have proven unsustainable in the long term, it's largely been because they've been co-opted, draining steam into other vessels, or because they've been superceded technologically.

Positive economic feedback is (in most cases) endemic if AD increases.

Research, education, and infrastructure (where "infrastructure" means more than just "roads" - better public transport is also excellent, refurbing or new construction of power plants to make them more efficient, etc.) is useful for your other two qualifiers, although they're usually long-term investments.

**An argument can be made that welfare / TANF / Medicare / Medicaid programs would fit the bill, as well, being sustainable and providing positive economic feedback, but I've definitely seen evidence suggesting TANF, specifically, doesn't provide return on investment. Whether it's cheaper than letting some people starve to death is debatable. One program we know for certain does not qualify is Social Security, whose mathematical model for operation cannot guarantee sustainability. I think I'm correct in saying that virtually every developed nation that has a system that works mathematically like ours has already experienced a failure of it, because it cannot work when population decreases or lifespans increase without a proportionate increase in working years.

TANF, Medicaid, and other means-tested social welfare programs are what economists refer to as "automatic stabilizers" - they're output increases as average income decreases, by statute. So other than relaxing the requirements to be eligible for such programs, there's no need to throw extra money at them.

As for SS, I've seen numbers that indicate that the system is only really insolvent for a period of about fifteen years, as the boomers die off; after that, we return to trend. It'd be a really fucking shitty fifteen years, but not apocalyptic, especially if we means-tested it. They're an outlier. Now, personally, I'd give everyone a 401k (without match) and axe SS for anyone that isn't already or right on the cusp of receiving it, but that freaks a lot of people out (liberals because what do you do if the market crashes, and conservatives because that's sort of the very definition of socialism.)

[Nicephorus]

For the record, I'd make capital gains normal income (and make payroll tax apply to them,) remove the cap on FICA, and reform the mortgage deduction so that it only applies to a single residence (and then cap that at something reasonable/year - say, 10-15k.) That comes damn close to closing our current deficit, and would allow us to pay down debt once we return to full employment.

That's pretty much what I'd want. I remember playing with a calculator program - if you double the fica cap, it largely erases the problem of SS and much of medicare. Politicians would raise hell - I don't think it'll happen unless dems have 60 senators, house majority, and the white house. But they could proclaim that they save SS.