Why cut taxes?

[Jeff Lebowski]

Maybe they just didn't want all the attention that accompanies greatness as a rock and roll band?

Makes perfect sense.

"Hey, let's try to suck as a rock band so that we aren't so rich and famous."

Most Rush fans I know are total nerds.

[cowboy]

OK, a snoozer of a thread, but the proposed tax cuts are bothering me...

Anyway, given the skyrocketing debt/GDP ratio, tell me why cutting taxes is a good idea.

Hey, wake up!

This will be long and rambling. You've been warned.

The chart below from the St. Louis Federal Reserve shows that taxes as a proportion of GDP have ranged between 14-19 percent since WWII. It seems that tax rates have temporary impacts, but it's hard to tell because other factors affecting receipts muddy the water, and there aren't enough observations with changing tax rates to form a statistically valid correlation. The one thing that certainly affects tax receipts is economic growth and recession. Another important contributor is stock market appreciation and devaluation. In short, the more robust the economy, and the higher the stock market, the greater the tax receipts, no matter what the tax rates.

With the exception of periods of irrational exuberance, the stock market will reflect realistic expectations of GDP growth. In theory, a stock's value reflects the present value of its future dividends, and dividends consistently grow at the same rate as GDP. Thus we can surmise that government income will depend almost entirely on the size and growth rate of GDP. Framed in this manner, the tax issue becomes a question of what provides incentive for maximum economic growth.

The tax-cut school of thought supposes that money turns over more times in the private sector than the public sector, and thus money not paid in taxes will be spent on things that create more jobs than money if it were collected and spent by the government. There is really no way to prove or disprove this, but logically it makes some sense that people spending money in an effort to make more will spend it more effectively than politicians spending money in an effort to be re-elected.

Obviously, this reasoning has its limits, and only really makes sense when marginal tax rates are relatively high. For the 99.9% of Americans, I doubt tax rates are high enough for a tax cut to have a stimulating effect. In fact, the very wealthy that a tax hike usually targets pay a very low tax rate because most of their income is invested in tax-free assets like municipal bonds that fund schools, hospitals, etc. While changing tax rates seems to have little effect on collections, there are some exceptions, and here are some tax cuts (and hikes) that I think will make a difference.

1) Capital gains tax cut - Many conservatives point to capital gains tax cuts in the past, and the subsequent increase in capital gains tax revenue as a case for cutting capital gains. I don't advocate that theory, because it's clearly possible that the short term bump comes from sales of assets that would have taken place anyway, but were moved up to take advantage of a favorable tax change. I do favor a low capital gains rate, though, because it lowers a barrier that keeps people from liquidating one investment in favor of investing in another, and thus encourages a more efficient allocation of capital. An ancillary benefit is the movement of some capital away from municipal bonds and into taxable capital gain assets like stocks.

2) Eliminate estate tax – Estate tax income is a relative small portion of total tax receipts, imposes the greatest burden on families of small business owners, and is a waste of millions of dollars and immeasurable intellectual capital that could be spent stimulating the economy. The very rich rarely pay estate taxes because they have a team of lawyers and accountants setting up trusts and business structures that let them skate around it. The first or second generation business owners, on the other hand, get walloped with legal and accounting fees they can rarely afford because all of their cash is tied up in a growing business. There are few things that kill small, profitable businesses (especially farms) like the estate tax.

3) Make dividends tax deductible on the corporate level – This will reduce corporate taxes but encourage them to pay more in dividends, which will be taxed at the personal level, and likely re-invested in the market. This will have the effect of stimulating the market and also provide more income to retirees living on dividend-paying stocks.

4) Require everyone over the poverty level to pay 3% of their gross – As it stands, about 40% of the country pays no income taxes at all. This lends to the ‘make the other guy pay for it’ thinking that permeates our society and vilifies the rich. Everyone needs skin in the game, and paying something will make people pause before advocating new spending.

5) Address Social Security and Medicare with a 3-way approach – First, raise the retirement age 10 weeks a year until it reaches 70. Second, cut the cap on FICA to 50% rather than zero over a certain income level. Finally, raise the FICA tax to 9%. Social Security and Medicare are important programs and this is the only way I see them surviving.

[Crockett]

This will be long and rambling. You've been warned.

The chart below from the St. Louis Federal Reserve shows that taxes as a proportion of GDP have ranged between 14-19 percent since WWII. It seems that tax rates have temporary impacts, but it's hard to tell because other factors affecting receipts muddy the water, and there aren't enough observations with changing tax rates to form a statistically valid correlation. The one thing that certainly affects tax receipts is economic growth and recession. Another important contributor is stock market appreciation and devaluation. In short, the more robust the economy, and the higher the stock market, the greater the tax receipts, no matter what the tax rates.

With the exception of periods of irrational exuberance, the stock market will reflect realistic expectations of GDP growth. In theory, a stock's value reflects the present value of its future dividends, and dividends consistently grow at the same rate as GDP. Thus we can surmise that government income will depend almost entirely on the size and growth rate of GDP. Framed in this manner, the tax issue becomes a question of what provides incentive for maximum economic growth.

The tax-cut school of thought supposes that money turns over more times in the private sector than the public sector, and thus money not paid in taxes will be spent on things that create more jobs than money if it were collected and spent by the government. There is really no way to prove or disprove this, but logically it makes some sense that people spending money in an effort to make more will spend it more effectively than politicians spending money in an effort to be re-elected.

Obviously, this reasoning has its limits, and only really makes sense when marginal tax rates are relatively high. For the 99.9% of Americans, I doubt tax rates are high enough for a tax cut to have a stimulating effect. In fact, the very wealthy that a tax hike usually targets pay a very low tax rate because most of their income is invested in tax-free assets like municipal bonds that fund schools, hospitals, etc. While changing tax rates seems to have little effect on collections, there are some exceptions, and here are some tax cuts (and hikes) that I think will make a difference.

1) Capital gains tax cut - Many conservatives point to capital gains tax cuts in the past, and the subsequent increase in capital gains tax revenue as a case for cutting capital gains. I don't advocate that theory, because it's clearly possible that the short term bump comes from sales of assets that would have taken place anyway, but were moved up to take advantage of a favorable tax change. I do favor a low capital gains rate, though, because it lowers a barrier that keeps people from liquidating one investment in favor of investing in another, and thus encourages a more efficient allocation of capital. An ancillary benefit is the movement of some capital away from municipal bonds and into taxable capital gain assets like stocks.

2) Eliminate estate tax – Estate tax income is a relative small portion of total tax receipts, imposes the greatest burden on families of small business owners, and is a waste of millions of dollars and immeasurable intellectual capital that could be spent stimulating the economy. The very rich rarely pay estate taxes because they have a team of lawyers and accountants setting up trusts and business structures that let them skate around it. The first or second generation business owners, on the other hand, get walloped with legal and accounting fees they can rarely afford because all of their cash is tied up in a growing business. There are few things that kill small, profitable businesses (especially farms) like the estate tax.

3) Make dividends tax deductible on the corporate level – This will reduce corporate taxes but encourage them to pay more in dividends, which will be taxed at the personal level, and likely re-invested in the market. This will have the effect of stimulating the market and also provide more income to retirees living on dividend-paying stocks.

4) Require everyone over the poverty level to pay 3% of their gross – As it stands, about 40% of the country pays no income taxes at all. This lends to the ‘make the other guy pay for it’ thinking that permeates our society and vilifies the rich. Everyone needs skin in the game, and paying something will make people pause before advocating new spending.

5) Address Social Security and Medicare with a 3-way approach – First, raise the retirement age 10 weeks a year until it reaches 70. Second, cut the cap on FICA to 50% rather than zero over a certain income level. Finally, raise the FICA tax to 9%. Social Security and Medicare are important programs and this is the only way I see them surviving.

Great post. Agree wholeheartedly with almost everything.

Yes, on dividend reform. They are already double-taxed and your proposal removes one of those events.

ABSOLUTELY need everyone above the poverty level to "have some skin in the game" here. Right now the top 20% pay 95% of income taxes. That is not a healthy situation, and as you mentioned, this exacerbates an entitlement mentality and undermines a feeling of holding the govt accountable for its spending.

We don't have a revenue problem (tax revenues are at all time highs), we have a spending problem. Entitlements, especially Social Security and Medicare, are out of control and unsustainable. More and more taxes will never be enough with current trends (living longer, smaller birthrates, etc.). Retirement age needs to gradually rise, but no more tax increases, including FICA. It's never enough and the appetite to take more and more seems insatiable.

You've got my vote, cowboy.

[Crockett]

My jaded opinion is that this is all about bases.

The Democrats tend to promise increases in services and benefits to get their followers rilled up.

The Republicans tend to promise tax cuts and a better economy.

Basically - both are promising to improve the financial situation of their primary supporters.

I get what you are saying, but the thing with tax cuts is that you are keeping more of YOUR MONEY. The Democrats are TAKING from one group to effectively BUY VOTES. This is wealth REDISTRIBUTION from one constituency to another.

Also, we think in terms of how much a political campaign costs (Hillary spent $1.2B in 2016), but the real campaign spending is the trillions spent on entitlement programs to secure the votes of a built-in constituency.

[Jeff Lebowski]

I get what you are saying, but the thing with tax cuts is that you are keeping more of YOUR MONEY. The Democrats are TAKING from one group to effectively BUY VOTES. This is wealth REDISTRIBUTION from one constituency to another.

Also, we think in terms of how much a political campaign costs (Hillary spent $1.2B in 2016), but the real campaign spending is the trillions spent on entitlement programs to secure the votes of a built-in constituency.

Oh boy. We got a live one.

[Bo Diddley]

Makes perfect sense.

"Hey, let's try to suck as a rock band so that we aren't so rich and famous."

Most Rush fans I know are total nerds.

Says the guy who runs an internet message board...

Of course I happen to be both typing on said message board and listening to Rush at the same time, so I probably prove your point.

[happyone]

good stuff cowboy, about the only differences I have is with capital gains and SS taxes. Philosophically I would treat all income as income. Make the decision to sell an asset an economic rather than a tax reasons. Also I would completely remove the cap on SS taxes.

[Crockett]

Oh boy. We got a live one.

Why the condescending attitude?

You appear to prefer a robust social welfare state. I prefer one that is more limited and stays within its means. I'm concerned about where we are at and the direction we are headed. Current, discretionary spending including defense spending total roughly 1/3 of our annual federal expenditures. The rest is entitlement spending. We keep kicking the can down the road, but something that can't last won't. We are heading for a grave financial crisis, sooner or later. When I add up my federal, state, and property taxes, it's more than a third of my income. I think that's too much. Excuse moi if I voice my concerns in this forum.

[Jeff Lebowski]

Says the guy who runs an internet message board...

Of course I happen to be both typing on said message board and listening to Rush at the same time, so I probably prove your point.

Oh I am definitely a nerd. But I don’t like rush.

[Jeff Lebowski]

Why the condescending attitude?

You appear to prefer a robust social welfare state. I prefer one that is more limited and stays within its means. I'm concerned about where we are at and the direction we are headed. Current, discretionary spending including defense spending total roughly 1/3 of our annual federal expenditures. The rest is entitlement spending. We keep kicking the can down the road, but something that can't last won't. We are heading for a grave financial crisis, sooner or later. When I add up my federal, state, and property taxes, it's more than a third of my income. I think that's too much. Excuse moi if I voice my concerns in this forum.

Knock yourself out, champ!

[old_gregg]

Knock yourself out, champ!

communist!

[smokymountainrain]

Oh I am definitely a nerd. But I don’t like rush.

you didn't answer the question.

[Jeff Lebowski]

you didn't answer the question.

What question?

[smokymountainrain]

What question?

I quoted the wrong post. sorry! meant to quote this one:

http://www.cougarstadium.com/showthr...=1#post1340383

[BlueK]

It's actually kind of comical seeing how utterly inept the GOP is at being the party in the majority. They have no idea how to do it. They need to just forget Trump and pass what they want and send it to his desk to sign. But they appear to keep looking over at him for the kind of leadership he is completely unable to provide since he contradicts himself and changes his mind every five minutes like a six year old. And a lot of them are going to find they're following him right into being voted out of office next year.