Why cut taxes?

[Lost Student]

I feel like I’m in some melange of Dr Kearl and Dr Pinegars classes, which is a good thing.


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Dr. Kearl's (is that really how you spell his name?) was one of my favorite undergrad classes.

[wuapinmon]

Probably way too much here for me to try to answer in a helpful way, but I will try do say something useful. Apple does hold onto a lot of cash. As you note, it's not really cash. I don't think it's primarily derivatives. I believe they end up investing a lot in corporate bonds with the money (I think primarily US corp bonds too). It's on odd equilibrium (as you note). On the hand, it is leading to investment; it's just not Apple directly investing in banana stands. They are buying the bonds of companies that want to invest in banana stands.

Could the corp tax cut (or more likely repatriation) change that? Yes, at least a little (maybe only a little); it should lead to more disbursement of money directly to claim holders. Would this have a big effect on overall investment in the economy? I think there could be some benefit, but I tend to think it's small. The marginal propensity to invest in real assets or the efficiency at which that happens could increase (apple's incentives are leading to distortions). That said, I tend to think it's a smallish effect because Apple is mostly already investing it back into the economy.



So lower corporate taxes should provide some incentive to increase investment. If you want to build a banana stand, you might not pull the trigger because your projected average rate of return is lower than the cost of capital (which is determined by the risk of project). In other words, the project is slightly negative NPV. Lower corp taxes will increase the average rate of return some. Future cash flows get bigger because less go to the government. That could shift your project from negative to positive NPV (but likely only for projects that were slightly negative NPV).

On the other hand, it's an expensive approach to get this incentive because you are also lowering taxes on current cash flows where real investments have already been made. It would be more bang for the tax cut buck to do a more targeted approach. For example, you can accelerate depreciation schedules (I believe the gop plan does this but the provision only lasts a few years). That gives you bigger tax shields earlier in the life of a project which helps given time value of money. It also wouldn't reward past investment.

Thanks for the quality, educational reply.

[pelagius]

You are right to bust me on this. I mean this as a compliment when I say your posts in this thread indicate that you clearly have more knowledge than you're drive-by posting style suggests. I would be interested in knowing the reasons behind your opinions more often.



Maybe old gregg is right and I am dumb. I read your post wrong, and should have spent more time reading and less time thinking. I was reading while driving across Oklahoma, saw you agreeing with og about the lack of empirical evidence that tax cuts help the economy, and then the last part about less debt being a stabilizing factor and assumed you were against tax cuts and instead in favor of eliminating deductions for mortgage interest as a way to encourage less borrowing. Doing that would seem to result in all betas being essentially unlevered, hence the risk discussion. I know, dumb. Please don't tell Hal Heaton.

But I will argue that all my points did not hinge on the cost of capital. My primary concerns were with money supply. It may not be relevant to the discussion, but that's never stopped us on this board so I'll ask my questions and maybe you can help me. First off, is a money supply question: If debt is reduced in the economy, would that decrease money supply and have a deflationary effect? I'm trying to wrap my brain around the interaction between capital allocation vs the multiplying effect that borrowing and lending the same dollar has on supply. Second is a debt market question: Given that the Fed uses interest rates to control money supply, if reducing leverage reduces the money supply is there any way that tax rates would impact aggregate debt without the Fed stepping in and making debt more attractive to maintain debt levels?

You deserve a better response but short on time (I'll try to come back to it). My very short answer is I agree with you that changes in the money multiplier represents a possible channel but I think it second order at best in the short run (and no effect in the long run). Additionally, I really wasn't suggesting the shift towards less debt by corps would be very big. Debt probably still remains tax advantaged overall, and it still helps mitigate some agency costs. Plus these changes only apply to corp debt.

[BlueK]

That makes no sense--stop giving them money so the democrats can win and raise their taxes?

Ok, or fund a primary challenge. Since most of them live in gerrymandered districts, that's really what they're scared of.

[Uncle Ted]

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[frank ryan]

Republicans can stop pretending they care about the deficit.

[Moliere]

Republicans can stop pretending they care about the deficit.

Yep. I agree with this.


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[Topper]

Yep. I agree with this.


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Republican legislators don't care. And this is always the problem with those campaigning on promises to limit government. First, it is harder to do than to promise. Second, your people want things from the goodie bad too.

[Uncle Ted]

Republicans can stop pretending they care about the deficit.

Yeah... and who cares if those companies move their HQ's out of the country? F them for not caring about the deficit as well!

Edit: Sh*t! When did Burger King move to Canada?!? I am never buying a burger from that hoser king again!

[BlueK]

Republicans can stop pretending they care about the deficit.

They care enough to give a tax increase to much of the middle class to lessen the effect of the huge tax break to the ultra rich. Stupidities like this are paving the way to a massive drubbing in 2018

[Maximus]

Now every grad student who gets a tuition waiver will have to pay tax on the tuition waived. Good idea!

[Applejack]

Now every grad student who gets a tuition waiver will have to pay tax on the tuition waived. Good idea!

"I love the poorly educated!"

[BlueK]

"I love the poorly educated!"

so let's try to have more of them! More votes...well, as long as they're white.

[PaloAltoCougar]

Now every grad student who gets a tuition waiver will have to pay tax on the tuition waived. Good idea!

Apparently Congress needs to do this to offset the ongoing carried interest benefit for fund managers. It bugs me that on the rare occasion when a Congressman is asked why they haven't eliminated the carried interest (this allows fund managers to have the millions they earn for their services, not invested capital, taxed at essentially half of ordinary income rates), they squirm and say that they had to make some compromises in order to get tax reform. So far as I am aware, no one has come forward to actually defend carried interest treatment, and yet it remains.

I'm aware of current and former fund managers who love(d) the carried interest feature, but who also thought it was wrong and should be eliminated. The only person I've ever heard defend it was the poster formerly known as Viking.

[BigPiney]

Now every grad student who gets a tuition waiver will have to pay tax on the tuition waived. Good idea!

That is just stupid.

Hopefully it won't pass the senate.