Torn Over Taxes

I usually align myself with the conservative republican way of thinking; however, on the subject of extending the Bush tax cuts I am torn. Both sides of the debate make their arguments using “facts” and “polls” which contradict each other making me lose confidence in their respective arguments. In fact I find much of their remarks to be misleading. On this issue I could really use some sound input from Dr. Tufte, especially in regards to the tax cuts for higher income individuals. As far as the lower and middle income individuals I am sure that extending their tax cuts and increasing their discretionary income will translate into increased spending. This increased spending or sustained spending will benefit the economy and help struggling Americans feel more secure and less mad at the government in contrast to what they would feel if their taxes increased. The arguments get more jumbled when it comes to high income individuals, which is considered over $250,000 in their arguments. One side says these individuals represent in many cases owners of small businesses and by taxing them more they will hire less and may even downsize more which would kill the economy and increase the unemployment rate. The other side says that these individuals represent a small percentage of small business owners and in most cases are not owners at all. It is argued by Michael Ettlinger, Vice President for Economic Policy at the Center for American Progress, that these high income individuals don’t need the tax break which will increase the federal deficit with very little identifiable economic payoff. I would suggest a compromise which would allow high income individuals tax cuts to expire while offering specific tax breaks or incentives to small businesses, of arbitrarily say 100 individuals or less, for hiring new workers or making part time employees full time. In this way tax revenues would increase and the tax incentives that are provided would have a direct impact on employment which is the overarching issue of the current debate.


walla walla said...

I like your way of thinking and agree that your idea has merit; however theory is far easier than practice. For example, what about companies with more than 100 employees but fewer than 110? Will they fire 10 workers for tax reasons or will these organizations keep all their employees because they know they are “doing good for the economy” by providing jobs. Adam Smith provides the answer to the question, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” In other words, organizations, who seek their self-interest, will only keep their employees if they can make a greater profit (tax insensitive included) by retaining them; otherwise, they will downsize. If jobs are the argument, then it is safe to say that raising taxes (on any scale) will decrease profits and make “business as usual” costlier than before. As a result of lower profits, job creation will decrease as the marginal benefit of the next employee will be less than before.

Dave said...

Dr. Tufte here ... input provided.

And ... I've been writing these comments for years ... and this is the first time I've ever exceeded the character limit for comments ... so I broke it into 2 pieces.

I am torn about this one too, but for different reasons.

1) The Republicans are obsessive about taxes. They need another idea. And this comes from someone who also leans Republican.

2) Empirical evidence indicates that each marginal dollar of taxation leads to more than one marginal dollar of spending - so the Republicans have a point.

3) Government has more than one way to pay for things: taxation, issuing debt, printing money. Reducing taxation need not do anything to reduce spending.

4) Large amounts of the government are off-budget. Cutting visible sources of funding encourages this (under our current system of government accounting).

5) In (more advanced macroeconomics) we talk a lot about how the effects of policy will be different when the policy is permanent vs. transitory. The skinny is that there isn't too much evidence that policies that are known to be transitory do much at all. Since the "Bush" tax cuts were intentionally written to be transitory, a) it isn't clear that they should have or did have much effect, and b) it isn't clear that the presence or absence of an "Obama" extension would do much either. Basically, the transitory nature makes the whole thing overrated, while giving everyone more to bicker about.

Baden also discusses income taxes and income more generally. Here there are new issues:

1) Should we be taxing income at all? Your work is a positive externality for others - why discourage it? The alternative is taxing consumption, which is what really bugs people about the rich anyway. But, most of the voters' worry about taxing consumption appears to be that it will be proposed as a way to reduce income taxes, which then won't be reduced. This cynicism is pretty easy to support.

2) Why should we tax the rich at a different rate than the poor at all? Almost all of our taxes, everywhere, through all of history, have been flat. Chris Fawson at Utah State taught me that any time you see an asymmetric viewpoint, you should recognize that as a signal to dig further. In this case, no one who is in favor of taxing the rich differently on income is proposing that we should be moving towards taxing them differently on other stuff, like say, fishing licenses. Since they aren't, it appears that our income tax brackets don't really have much to do with the benefits of bracketing, per se. What are the other reasons? I may be cynical, but you'd have to put greed and envy near the top of any list.

3) Any sort of arbitrary cutoff - like $250k, or 100 employees - is begging to be exploited by clever accountants (really, they don't even have to be that clever to recognize a distinction that obvious). Government policy-makers put these in as a compromise, and then wonder why people act upon them. Duh! A better system - in a fairness sense - would be to have some sort of random cutoff that couldn't be gamed. But, you can imagine the controversy that this would create. Again, if a fairer system creates controversy, the symmetry is that an unfairer system should also create controversy. The fact that it creates less is a good sign that people are staying quiet because they've figured out a way to game the system.

Dave said...

Round 2 ...

On a wholly different note, I'm getting to the point where any time I see an argument about small business, I want to scream and run away. This issue is so overrated and misunderstood.

1) Most small businesses are lousy. Small can mean new and worthwhile ... but not always.
2) Absolutely no one talks about how small is relative to where you are. Small businesses in Cedar City are much more important than small businesses in Las Vegas.

Lastly, let me make a Swiftian modest proposal: why don't we tax businesses for being unsuccessful? Isn't that what we want - to encourage the good ones and discourage the bad ones? Think about that in terms of something like fast food - low margins, but usually profitable. If an owner screws up a sweet deal like that, don't you think they owe something to the society that made it possible for f***ing it up?

Be careful what you ask for Baden!