We had some interesting comments and a lot of readers on yesterday's post. Here are my responses.
I'm not happy with the federal government borrowing a few trillion. It is shocking but is there an alternative? Credit is still locked up. Look around in Miami and see what is happening: how much longer will we have the appearance of a functional economy when many businesses have simply stopped paying their rents, are contracting and laying off workers, and home values plummeting?
A participant at a Financial Times roundtable recently observed, "... by far the majority of economists think that stimulus packages are worth trying. No one thinks it's going to be a panacea or is the way to encourage long-term growth, but as a bandaid, where we have a particularly acute recession coming from a financial crisis, if governments are the only parties in the economy that can borrow and can actually raise capital, then it makes sense for them to do so in quite large measure." (Debating the Downturn, Financial Times, Jan 27, 2009)
One blog reader wrote: "Tax cuts and smaller government, in contrast, keeps money in the consumer's hands and eliminates the bureaucratic waste that is a necessary part of tax collection. Obama's stimulus package needs to fail."
What is a tax cut going to do for most people? Put another $500 or $1000 into people's pockets where it will stay, or, help reduce inventory on retailers' shelves that is not being replenished because managers are scared out of their wits? On the capital gains tax rate, mentioned by one reader, click here.
Forbes reports today, "The 400 highest-earning taxpayers in the U.S. reported a record $105 billion in total adjusted gross income in 2006, but they paid just $18 billion in tax, new Internal Revenue Service figures show. That works out to an average federal income tax bite of 17%--the lowest rate paid by the richest 400 during the 15-year period covered by the IRS statistics. The average federal tax bite on the top 400 was 30% in 1995 and 23% in 2002.
The new numbers are sure to add fuel to the debate over whether the Bush-era rate cuts for the wealthy, now set to expire Dec. 31, 2010, should be ended or extended.
The current top rate on long-term capital gains is 15%, and the top rate on ordinary income such as interest and salary is 35%. President Barack Obama and congressional Democrats favor moving those rates back to their Clinton-era levels of 20% and 39.6%, although the perilous state of the economy seems likely to delay any rate hike until 2010 or 2011.
The top 400 earners in 2006 reported an average adjusted gross income of $263 million, up 23% from $214 million in 2005. Even adjusted for inflation, the 2006 number set a new high. Calculated in 1990 dollars, it was $68 million, up from $25 million in 1996. In 2006, the minimum income needed to make the top 400 was $111 million, also a record in both nominal and inflation-adjusted dollars.
The IRS report demonstrates how valuable the low capital gains rate has been to the richest of the rich. In 2006, the top 400 realized $66 billion, or 63% of all their income, in net capital gains.
By contrast, Americans overall reported less than 10% of their adjusted gross income as coming from capital gains. The richest 400 reported 1.3% of all adjusted gross income but booked 8.5% of all net capital gains.
The result: the top 5% of earners--those with an adjusted gross income of $153,542 or more--now pay a higher effective tax rate than the top 400." ("Richest 400 Earn More, Pay Lower Tax Rate", Forbes, 1.29.09)
The idea of "smaller government" has floated at the surface of public consciousness in relation to GOP aspirations since the Reagan Revolution. But government hasn't gotten "smaller": its size only increased under GOP leadership.
At a time of the worst economic crisis since the Depression, government is the last stable institution. We have already a de facto nationalization of the financial sector, and other industries like the production homebuilders are clamoring for bailouts. How is it possible, under these economic circumstances, to make government smaller?
What I am most worried about, is fraud and corruption at a massive scale because regulators are either not in place or controls not clearly establish that prevent bankers from taking down million dollar bonuses while their banks receive billions in handouts.
Another reader joked, "I loved the Carter years. 20 percent interest, great for my cash."
The only thing worse than deflation with low inflation is stagnation with high inflation. If that is the case, what is around the corner is even worse than we have today. And how, then, would the GOP profit from that?
2 comments:
Your analysis of the top 400 earner's income is interesting. However, lower taxes should not be the purview of the wealthy.
The federal government should lower tax rates and simplify the tax code for ALL tax payers.
Why would you poo-poo putting a tax savings of "$500 or $1000 into people's pockets"? For many, many tax payers, those amounts are very significant.
Also, an individual who puts money into a savings account, pays off bills or reduces store inventories, is doing exactly what the economy needs.
We need more money to be available for responsible lending, which money traditionally comes from savings.
Paying off bills helps whoever is getting paid off. If one of my customers pays his bill, that helps my small business pay its bills.
Reducing store inventories is stimulative by definition.
These steps can occur immediately if the individual rates are lowered because withholding can then be lowered.
Obama is taking in the money and putting it into the hands of wasteful federal, state and local governments. (By the way, I admire your rantings about our local governments.)
"Obama is taking in the money and putting it into the hands of wasteful federal, state and local governments."
As oppose to Bush taking in the money and putting it into the hands of wasteful Homeland Security at the International (ie - military, State (TSA) and Local (police and fire's new under the radar divisions) Iraq was a stimulus package too. Just not for the little guys.
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