[SK in CV]

What is the motivation for this? So that your kids can’t get credit cards that you don’t know about? Minors can’t enter into legally binding contracts. I’m sure it happens all the time, but the lender will always be at high risk when they do. What is the problem that you’re trying to avoid with the freeze?

[SK in CV]

This has been a pretty interesting discussion today, but I have to take exception to this one.

[quote=harvey][quote=davelj]
Actually, we have been engaging in stimulus spending for the past 30 years – the Powers That Be just didn’t realize it or label it with that name.[/quote]

I agree that it can be argued that all deficits are “stimulus.”

[/quote]

First, I don’t think davelj said anything like all deficits are stimulus. Stimulus (at least in the keynesian sense) is an increase in overall and targeted spending, irrespective of the budget. Increasing of an annual budget deficit is NOT stimulative all by itself. (It can be solely the result of lower revenues, and nothing to do with increased spending.) There can be a shrinking deficit AND stimulus at the same time (though it’s unlikely that would fit into any Keynesian model).

And I would have to agree with davelj, with minor exception, spending has increased significantly almost every year for the last 30. Much of that increase has been stimulative. (Sorry, I have to repeat something here. Spending is NOT stimulative. Increases in spending are stimulative.)

[SK in CV]

[quote=AN]Anyways, like I told dumbrenter earlier, my anecdotal examples isn’t meant to prove that there’s a causation between increasing taxes and reducing wage, which would lead to decreasing demand and GDP. Maybe the majority of the businesses don’t do this. I don’t have data to prove one way or another. However, it’s meant to disprove SK’s statement that higher marginal tax is stimulative. There’s no data on the mass scale to prove that and I gave anecdotal example that disprove it. The data he did provide show no real clear correlation much less causation of increasing top rate is stimulative.[/quote]

Just to be clear, that wasn’t what I said. What I said was that higher top rates (>50%) on high income is stimulative for business. It doesn’t apply in those lower income brackets where your friend’s business fits. We’re talking about taxable income level of $250K. Thats total net business income of probably at least $280K a year, often more than $300K a year. That’s rarely the kind of business where the spouse will come in and pick up a few more work hours so that they can make ends meet.

[SK in CV]

[quote=AN]dumbrenter, to make it clear, my friends aren’t blaming anyone. You’re making an assumption and it’s completely wrong. I actually didn’t ask for their opinion. I just look at their actions over the last 4 years and extrapolate what would happen if their net income decrease further. When demand start decreasing a few years ago, they didn’t do anything, hoping their demand will come back. When it didn’t and it start to affect their net take home, they start to reduce their employee’s time. So, based on their action then, I would extrapolate that if their net income decrease due to higher taxes, they would decrease their employee’s time, so that their net take home would maintain at the same level. This is also common sense to me, because I would do the exactly the same thing. If you can offload the cost to someone else, you would. The employees will always get hit first before the employer. These businesses area already running at bare minimum and there’s no fat left to cut. These business owners have expenses to pay (life expenses), which they rather not cut. They can easily offset the increase taxes by cutting the cost of paying their employee and have the spouse who are currently working part time to work full time. Their net pay would maintain at similar level. This is also inline with what I was saying that during good times when demands are increasing, they would gladly take less growth due to higher taxes. However, during bad time, they will squeeze everyone else first before they squeeze themselves.[/quote]

The bolded part. If they’re already running at the bare miniumum, how can they cut if tax rates go up? I’m guessing this example really doesn’t apply since this business isn’t making anywhere near $250K a year.

AN, I spent the first 20+ years of my career with small business consulting being a big part of my practice. I worked with them on increasing profits, cost cutting, and saving taxes. Never once was I involved in a decision making process where there was such a thing as a “target profit”, where the owner would consider cutting employees in order to hit that target. We did operational projections and budgets, and taxes were a by-product, not a driver until after the projections were complete.

[SK in CV]

[quote=AN][quote=SK in CV]It’s the higher historical top tax rates (>50% marginal rate) that can be shown to have been stimulative, where tax savings actually provide a 50% or more subsidy for investment.[/quote]
Again, causation vs correlation.[/quote]

Absolutely. Both logical and high correlation over multiple periods.

[SK in CV]

[quote=CA renter]AN,

Think of it this way:

-You own a company and the tax rate goes up on taxable income over $250K.

-Your projected taxable income in 2012 is $300K.

-IF you had sufficient demand that you would really like to expand your capacity by hiring additional personnel and/or getting new equipment, etc. (all deductible expenses, subject to certain amortization rules on equipment), you could bring your taxable income under the $250K threshold, avoiding the higher rate on that income. I believe this is the stimulative effect (or effective subsidy) SK and Brian are referring to, as the tax saved on that $50K is essentially a subsidy for growing one’s business.

………

edit: It’s like when we hear peole claim that they will stop working so many hours, etc. in order to bring their taxable income under the $250K threshold; but instead of shrinking their business/gross income, they grow it.[/quote]

Not precisely the point I was making, but not far off. I don’t think it makes a lot of sense to bring income down to precisely where the bracket changes. (Same for the stupid claim that people will work less to avoid the higher bracket.) Nor do I think very many businesses operate with that kind of precision. I’m far from convinced that the current proposed small increases to the top marginal rate will be stimulative, but I’m more convinced that they won’t be inhibitive either. Not only is here any historical evidence to support it, there’s no logic.

It’s the higher historical top tax rates (>50% marginal rate) that can be shown to have been stimulative, where tax savings actually provide a 50% or more subsidy for investment.

[SK in CV]

[quote=AN]
Also, keep in mind that business owners can be in other brackets than just the top most bracket. So, if it is true that higher marginal rate stimulate business growth, then wouldn’t it make sense to increase rates for the lower tax brackets as well?[/quote]

No, and here’s why. The proposed changes (and the changes I’ve been discussing) are related to taxpayers with income over $250K a year. As we’ve discussed, this is a pretty decent income, and it allows for a nice, if not extravagant lifestyle. The further under that income level, the more likely most, if not all income will be spent and not saved.

Business growth is not free. It often requires new investment. New marketing, new employees, new equipment. When there is excess cash flow, over and above basic needs, the higher the tax rates, the higher the effective subsidy for that new investment. When that evaluation includes giving up basic needs (smaller house, no new car) the calculation is more complex.

As far as evidence for some of the things I’ve said, see the link below. The guys who write there are both academics and working economists. Some of it is pretty wonky, but they do some serious data crunching, with regression analyses (something I haven’t done for decades), that support their conclusions. Most of all, I like their stuff because they almost always show their work, and readily accept criticism.

http://www.angrybearblog.com/search?q=higher+tax+rates

[SK in CV]

[quote=AN]
Thanks for clarifying and I agree with these points except for the business taxes. What make you think business won’t just pick up and move to a lower taxed country. Most countries do have lower corporate tax rate than ours. Btw, how small is small. I know a few mom and pop businesses and they would just fire their one employees if their take home is less. I also know one business owner of a company with 150 employees and they haven’t given a raise in 3 years. If their net profit goes down, they’ll either lay off or just not give raise for a few more years until they get their desirable net profit. They can also fire their American employees, except for their sales force, and hire more employees for factory in lower cost countries.[/quote]

I would suggest that your friends with businesses don’t run their businesses as most are run. Most businesses are run for the highest net possible, and they don’t have employees that they don’t need. If their net income isn’t already significantly more than $250K a year, then this conversation is moot, since we’re discussing only the top tax rate. I’d love to see a very precise description of how a very small increase in the top tax rate would cause a company to drop an employee. With actual numbers. I’ve asked this question quite a few times in other circles, I’ve never got a response.

[SK in CV]

[quote=AN]
You cautioning me with my use of correlation vs causation? I’m NOT making any claim at all. I was just showing data and pointing out my observation of the data. You’re the one who make insinuations like top rate was 90% in the early 60s and we saw good economic growth. Then a sentence later, saying we should have higher tax rate because it’ll spur corporate spending. I didn’t make the claims that raising lower tax brackets would spur economic growth. I was just saying if we follow your insinuation about high top tax rate = economic growth, we should also look at what were the rest of the tax brackets were back then as well. You can’t pick and choose which variable you want to manipulate and expect us to believe we’ll see the same result.[/quote]

You misunderstood what I said. There is no evidence that higher top rates inhibit economic growth. Nor is there any particularly strong evidence that it stimulates growth either. I’m quite sure I never made that claim.

There is evidence, however, that the higher than current marginal rates on businesses (we’re talking small businesses here, NOT big corporations) are stimulutive, and I’ve outlined the reasons for that. That argument is very specific to businesses, not a claim that higher tax rates are always stimulative.

[SK in CV]

[quote=AN]
To your point (noticed I didn’t use the word whining) about capital gain being equal to ordinary income, can you point to a time when we had the same rate of capital gain as ordinary income?[/quote]

I can. From roughly 1987 through 1990, beginning with the TRA of ’86, and ending when top rates were increased in ’90. I don’t remember if that law took effect in ’90 or ’91. Top rate during that period was 28%. I don’t think that was the only period, but it was the first time in a very long time that all capital gains were treated the same as other income.

Additionally, I would caution your use of correlation as causation.

[SK in CV]

[quote=AN]So, while we all can agree 90% is too high, he said a 50-60% tax rate would help and higher top tax rates encourage businesses to spend money. That got me thinking about 1963 tax brackets. I find out that the minimum tax rate was 20%. If we had good economic growth in the early 60s because of higher top marginal tax rate, then one can say we had good economic growth in the early 60s because of higher minimum tax rate as well. BTW, the standard deduction back then was 10% of your AGI, not a fixed number, so EVERYONE pay taxes.[/quote]

First, the argument was not that higher top tax rates cause economic growth, but rather there is little evidence that it inhibits growth.

The correlation on the bottom rates would be just the opposite. People who don’t make very much money, tend to spend everything they make. As income (and rates) rise, more is saved. Spending (or in the case of businesses, investing and growing) is stimulative (or more specifically, increases in spending are stimulative) , whether the source is public or private. Higher rates on business with excess cash flow encourages spending/hiring because the higher the rate, the smaller the after tax cost. Lower rates lead to higher savings.

You’re right about the standard deduction being a % of AGI back then. But like now, there were personal exemptions. I think it was $600 per person. So the first $600 (per exemption) plus 10% of AGI was deducted from AGI before calculating the tax.

[SK in CV]

[quote=AN]
As you can see, people making $250k in today’s dollar didn’t pay 91% back then as well.

What’s also interesting in 1963, when you say was good period of growth, the lowest tax rate was 20% from the very first dollar you make. It also ramp up very fast where by the time you get to $112k, the tax rate was 50%.[/quote]

You’re absolutely right. A 90% tax rate is too high. I’m pretty sure nobody is advocating that today. Nor even a 50% marginal rate. Though there would be some benefits to it.

And the current tax schedule looks exactly the same, just with a lot fewer and different rates. Tax doesn’t begin at the first dollar of income now, and it didn’t then. The tax rate schedule applies to taxable income.

[SK in CV]

[quote=AN][quote=SK in CV]Interesting point. At the height of the cold war (from 1950 to 1963), when Joseph McCarthy was looking for a communist under every bed, the top tax rate WAS over 90%. Turns out it didn’t make everyone poor. It was a pretty good period of growth, particularly for the middle class.[/quote]
So, what you’re saying is war = good period of growth and 90% tax rate = good period of growth. How come we’re not seeing great period of growth since we have 2 wars? Is it because we don’t have 90% tax rate?[/quote]

No, thats nothing at all like what I said. The allusion was made to 90% top tax rate being related to communism. And I pointed out the irony of that observation, in that during the height of the red scare, we had rates like that.

Initiating wars does tend to improve the economy. Winding them down, which we’ve been doing for the last few years, has the opposite effect. That’s not a recommendation to start a new war, just an observation.

But I could make a pretty strong argument that increasing the top tax rate, particuarly on businesses, would be good for the economy, but not to 90%. Somewhere between 50 and 60% would help. Higher top tax rates encourage businesses to spend money when the government pays for half of it.

[SK in CV]

[quote=Brutus]We should tax the rich out of existence. That way we can all be poor together.
It’s the only fair solution, because we ALL can’t be rich, but we can all be poor.
90% tax rate on the rich: Anyone making over $150K a year.
That’ll fix ’em, eh, comrade?[/quote]

Interesting point. At the height of the cold war (from 1950 to 1963), when Joseph McCarthy was looking for a communist under every bed, the top tax rate WAS over 90%. Turns out it didn’t make everyone poor. It was a pretty good period of growth, particularly for the middle class.

[SK in CV]

[quote=mike92104]
I think you just made my point by immediately turning to the “fair share” BS. I also don’t think the lion’s share of the extra spending is on defense, unless Mr Obama really likes defense contractors. Now don’t get me wrong, the Reps did their share of the damage once they let the “Pay-Go” rule expire, but the unprecedented increase I was mentioning began with TARP, and that level of spending has continued year after year since.[/quote]

You do realize that TARP was passed and signed into law during the previous administration?

[Author]

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