Congress Should Address Capital Gains and Corporate Taxes Differently 14 comments
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Tax policy is going to be a hot debate in Congress once President-elect Obama's term begins in January. Although Obama won the tax debate with McCain in the voters' eyes (polls show voters preferred Obama's plan, despite McCain's continuous attacks on it), his administration will still have to work across party lines to pass tax reform next year.
Two areas getting a lot of attention are capital gains taxes and corporate income taxes. The argument for the former is that lower tax rates induce more investment capital into the system. For the latter it is that companies with extra cash flow will hire workers and buy new equipment. I actually don't think either one of those arguments is true to any significant degree.
For instance, I don't know anybody who has not invested in the stock market because of the 15% capital gains tax. The notion that if we lower that rate to 10% it would cause billions of dollars to rush into the market seems downright silly to me. Conversely, if Obama was to raise the rate to 20%, it should not result in excessive selling of financial assets because it is hard to argue 15% is fine but 20% is overkill given the small differential. Tax rates are simply not a core determinant of whether people invest or not, at least not when the rate changes we are talking about are so minimal (if tax rates were 50% and dropped to 10%, then my opinion might change).
On the corporate side, it is my belief that a tax cut alone does not directly result in additional hiring and capital expenditures. A corporate executive does not decide to hire more people or invest in new projects just because they have the money available to do so. There needs to be a business reason for the move, i.e. the demand for their products is growing, which makes the investment in new people and equipment worthwhile in return on the investment terms. I disagree with the idea that tax cuts cause job creation. Real increases in demand from a growing economy results in job creation because more people are needed to meet the demand.
All of that said, I think that given a choice between the two, a cut in the corporate tax rate would be far more beneficial than reducing the capital gains rate. Simply speaking, lower corporate taxes directly impact stock prices positively by increasing corporate earnings. Since a majority of Americans own stocks (I think the number is between 60 and 70 percent, I can't recall the exact figure), lower corporate tax rates would benefit most Americans.
Many people make the same argument for reducing the capital gains tax rate, but it ignores a very crucial fact. While it is true that 60 to 70 percent of Americans own stocks, the vast majority of those people hold their investments in IRA and/or 401(k) plans, which of course are not subject to capital gains taxes. More often than not, those who own stocks in taxable accounts to any significant degree are the wealthiest Americans (entrepreneurs who retained large ownership stakes in the companies they founded, or executives who were granted stock options as part of their compensation plans).
Since our country has seen an acceleration in the recent trend of the rich getting richer while the poor get poorer, I would much prefer to help the majority of Americans through a corporate tax reduction, versus helping the top 5 or 10 percent of the country, who would see most of the benefit from a reduction in the capital gains tax rate.
Now, one can certainly make the case that personal income tax rate reductions would have a more positive impact on the economy (boosting incomes will increase end demand for products that corporations sell to consumers, thereby boosting job creation and new capital projects), but given the budget deficit problems we are facing, a corporate tax cut would be far less costly. The U.S. gets the bulk of its revenue from personal income taxes, whereas corporate tax collections are a much smaller fraction of overall federal revenues.
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This article has 14 comments:
2. Reducing the effective tax rate would have the noted effect of raising corporate earnings. But, the market already knows EPS and NI are not the place to look if you're seeking to understand the economics of a business. Things like FCF and EBITDA are more significant. Not sure what it matters that EPS would go up.
3. I'm not sure I'll give you a pass on this statement:
While it is true that 60 to 70 percent of Americans own stocks, the vast majority of those people hold their investments in IRA and/or 401(k) plans, which of course are not subject to capital gains taxes. More often than not, those who own stocks in taxable accounts to any significant degree are the wealthiest Americans (entrepreneurs who retained large ownership stakes in the companies they founded, or executives who were granted stock options are part of their compensation plans).
Cite a source. That last sentence is particularly egregious.
4. Given the amount of corporate malfeasance these days, I don't think they deserve anything. Certainly not some sort of governmental charity.
5. If Income taxes account for 66% of government revenue, and corporate tax accounts for 33%, then couldn't the government simply lower income taxes less than they would the corporate tax rate to effect the same reduction in tax revenue but spread over a larger revenue base? Nowhere is it written that a tax reduction has to be the same on a percentage basis regardless of which revenue pool it gets applied to.
Almost every point you make is logically flawed. Hate to break it to you.
What looks like a small increase may be huge when figure on a real basis. The establishment is well versed in this sort of trickery, and most people are not smart enough to see through their shell game.
Decreasing YOUR taxes may increase YOUR consumption, but it does not change total comsumption. Apart from the creation of new money, only an increase in the velocity of money can do that, and I think most would agree that almost no one spends money faster than the government.
Download the .pdf file here:
mises.org/humanaction/...
For a somewhat shorter read that may outline the subject matter read Henry Hazlitt's Economics on One Lesson
(No .pdf link available, you'll have to buy the book)
Either one of these added to a dose of critical thinking will make you realize that your Keynesian "boost spending" answer is what caused our problems in the first place. Adding fuel to the fire isn't going to fix things.
Rothbard points out that ALL government spending is consumption so if money is left to the taxpayer he might invest at least SOME of it.
Rothbard points out that ALL government spending is consumption so if money is left to the taxpayer he might invest at least SOME of it. - moonbat
One other thing to remember that the consumer probably got the money by contributing to society via labor or profitable businesses before the money is spent. The gub'mint merely steals from the productive citizens or prints money before spending.
The former case contributes to the well-being of society, the latter doesn't.
Yes, you make it clear that those who are capable of earning money besides being rightfully entitled to it are the most competent to decide how much of it and where it should be invested. I would not be surprised to learn that this is NECESSARILY so and not just an intuition or judgement.
Competence is not a factor in "good" spending, only in "good" providing.
Even the strongest back/weakest mind supplies labor and provides demand for the necessities of life regardless of competence. These contribute to the aggregate economic signals and play a part in setting prices for things.
If a laborer's wages exceed his necessary purchases, his personal choices on discretionary purchasing will add to the demands of the economy as a whole. The only thing he need be competent at is knowing what things he wants to buy with the extra money he earns. Everyone can do that, pretty much by definition.
Those with great amounts of excess earnings impact the supply and demand situation in larger proportion, but again they need not be competent. They may have inherited their wealth and choose to squander it.
The market will find the overly competent producers (whether by design or by luck) and reward them with larger profits for best meeting the aggregate demands of the spenders. If the competent producer cannot pay for his production out of his own funds, the market will find a way to divert savings to his venture in return for interest or capital participation.
I suppose what motivates many workers are the things they can buy with their money. So the more money he can accumulate, the more motivated he will be. His savings should be a source of investment funds for which he would receive interest so that in time he could afford the fruits of the investment. However, the government and banking cartel collude to steal his purchasing power and deny him the interest rate his savings would normally obtain. The government supposedly spends on his behalf while the banking system supposedly invests on his behalf in that the worker should benefit from increased employment opportunities and new and/or cheaper goods and services. But since the worker's purchasing power is stolen from him for the investments and used interest free, what guarantee is there that he will be able to afford the new goods and services when they come on line? And the new investments may fail simply because the money was stolen from the potential consumers.
Whether to spend or save is another decision which also impacts the economic signals presented to the market (assuming an 'honest' market without gub'mint distortions - which of course mess everything up).
On Nov 20 12:32 PM Benedict@Large wrote:
> I'm always amused by those who suggest that decreasing taxes will
> increase consumption. Since when is the government not also a comsumer?
>
>
> Decreasing YOUR taxes may increase YOUR consumption, but it does
> not change total comsumption. Apart from the creation of new money,
> only an increase in the velocity of money can do that, and I think
> most would agree that almost no one spends money faster than the
> government.
fairtax.org