Stimulus - Why not Just Do It?

The Coffee Shop
1

Bear with me through this hypothetical.

I’ve always been critical of supply side economics. No, this doesn’t mean that I think the rich should be taxed at 60+% tax rates. I just don’t buy the idea of letting the rich keep more of their money as a way of growing the economy, creating more jobs, etc. You can write a tax code however you want, so instead of cutting their taxes and hope that they create jobs with it, why not cut their taxes for creating jobs? Make a job, get a tax cut. Make to jobs, get 2 tax cuts. etc.

Obviously this stimulus package doesn’t remotely resemble the above system, but I offer the same criticism. Lets say for this hypothetical that you must accept that the government is going to do something. IOW, small governement/libertarian ideologies don’t apply. Why not jack up the tax rates across the board for starters (bear with me). Then you start giving those taxes back as economic incentives. Housing market is in a slump? Give tax breaks to people buying houses. Auto industry is about to collapse–> tax breaks for buying a car. Stock market down? → tax breaks for investing your money in the market. Etc.

I know this is ballsy and socialist, but hell…given the option of one type of socialism over another, why not just go after the problem directly. Change the rules of the game and make it so that people will spend their money and get the economy rolling?

Flame away!

2

As a small business owner, I can not create jobs if there is no business. What many folks don’t understand is that in order to give people raises, pay bonuses at Christmas, provide health insurance, etc. a small business must have profit. The profit is erroded by taxes. We can not grow, purchase equipment, and invest in our business if we are being taxed up the wazoo.

Another thing is that many people in government and the public want to increase the taxes on small business owners. I take substantial risk, I spent 6 years in college to learn my profession, and I work 60-80 hours a week. If I am to be taxed for being successful, I will reduce my staff, work less and enjoy training more, thereby cutting jobs not creating them.

“Sharing the Wealth” through increased tax on small business will only serve to lose more jobs. Giving tax breaks for creating jobs is ass backwards. Give small business the tax break to stimulate business and the jobs will follow.

The current stimulus package should be renamed “THE LOBBIEST RE-EMPLOYMENT ACT OF 2009”. Unfortunastely, this is a prime example of what happens when govermnet leaves the realm of regulatory oversight and enters into the free market.

3

So your one of those evil business owners who provide jobs, how dare you…
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4

why not cut their taxes for creating jobs? Make a job, get a tax cut. Make to jobs, get 2 tax cuts. etc.

I’m glad you agree with supply side economics :-), because in essence this is exactly what is already in place and why it works.

If I create a job I incur costs with that job. Those cost are are deducted from my profits so I no longer have to pay taxes on them. Whether you give me a tax break and I then create the job, or I create the job and you give me the tax break, makes no difference.

Rather than trying to hold onto my money, which I (If I were rich) will be taxed on, it makes more sense to invest into my company by creating a job. This is what people do not understand about “the rich”. If I’m rich I’m not going to hoard money because my money does FAR more for me WORKING. I create jobs which has a far better return than the bank and at the same time offers a tax shelter.

So in essence whether you give a break for creating a job or because you want to stimulate the economy and “Hope” there is job creation I suspect there would be very little real world difference.

~Matt

5

To expand a bit on FungShuay’s post…

Businesses do not exist to provide jobs. They exist to provide value to the owners/shareholders. No businessman in his right mind is going to spend money to create a job unless he expects to see a positive return on that investment. Unless the taxcut bridges the gap between cost and return for each position, it won’t provide any incentive at all to create jobs.

BTW…I have to give you credit for acknowledging that a taxcut “allows people to keep more of their money”. I do take exception to the intimation that a taxcut only allows “the rich” to do so though.

6

Jobs are created when companies invest capital. A startup is formed when investors can earn a return that is greater than the after-tax cost of capital to fund the business. This spread must be commensurate with the risks involved. I have mentioned this basic example previously. If you lower taxes for businesses then the hurdle rate is also lowered, since after-tax returns are now higher. For projects that lie at the margin, that is, ones that might not quite meet the return requirements currently, a lowering of taxes might be enough to get the investor the desired risk-adjusted return they are seeking. The impact this has across the economy is to increase investment and job creation.

Here is a recent example of why taxing businesses at a higher rate–or, signaling that this might be the case in the future–causes those business to react rationally. That is, they go somewhere else!!

http://uk.reuters.com/article/stocksNews/idUKLNE51201L20090203 Companies warm to Irish and Swiss tax regimes Tue Feb 3, 2009 11:15am GMT
By Nick Zieminski
NEW YORK (Reuters) - Bermuda’s business climate is getting chillier, so some multinational companies are seeking more hospitable locales – like wind-swept Ireland and snowy Switzerland.

In recent weeks, there has been an exodus of large companies incorporated in Bermuda and the Cayman Islands to Europe in search of more favourable tax treatment and other benefits. They’re looking to reincorporate ahead of U.S. legislation that could require companies based there to pay regular income tax.

Multinationals face higher taxes in the United States than in many other countries – a difference that some have argued hurts their competitiveness. By incorporating in low-tax jurisdictions, a company can narrow the difference with foreign-based peers.

Those heading across the pond include Tyco International Ltd (TYC.N) and Tyco Electronics Ltd (TEL.N), Weatherford International Ltd (WFT.N) and Foster Wheeler Ltd (FWLT.O), among others. Other moves are likely.

“They’re worried about legislation two or three years out,” said Marc Teitelbaum, who chairs the taxation practice at global law firm Sonnenschein Nath & Rosenthal LLP. “People are worried about proposals that Obama and (Senator) Carl Levin have made to try to take more vigorous action against entities formed in tax haven jurisdictions.”

So here is a clear cut example of efficient capital allocation in action. This is capitalism at its best–putting scarce resources to use in a manner that creates the most wealth for stakeholders. With a lower tax rate, projects that these companies have on the table face lower hurdle rates, this in turn, leads to more jobs being created and more wealth created for shareholders.

My solution woud be exactly opposite to your hypothetical–I would lower corporate tax rates acorss the board.

7

If I’m rich I’m not going to hoard money because my money does FAR more for me WORKING

Plus, it’s hard to sleep very well on a mattress that’s all lumpy from all that excess cash being stuffed under it! :wink:

8

I agree with the other posters…and want to add this…I don’t want govt picking the winners and losers by micro managing the tax code. I just don’t believe its efficient. Depending on who is in the whitehouse could greatly influence which businesses prosper. Right now, I think we should just eliminate corporate income taxes, its silly. Its only 350B, compared to the Trillions we are printing and all the new spending, why not?

9

I agree with the other posters…and want to add this…I don’t want govt picking the winners and losers by micro managing the tax code. I just don’t believe its efficient. Depending on who is in the whitehouse could greatly influence which businesses prosper. Right now, I think we should just eliminate corporate income taxes, its silly. Its only 350B, compared to the Trillions we are printing and all the new spending, why not?
Could you imagine? The number of companies busitng down the door to the US would be nuts at a 0% tax rate. Job growth would explode.

10

I prefer a coffee can in the backyard or politicians prefer the freezer…or so I’ve heard.

~Matt

11

I said a similar thing in another thread

Here is my plan, for starters:

Cut payroll tax for 2 years
$15,000 credit for a new home purchase
$3/sq ft. credit for commercial construction
Revive Investment Tax Credit
$300 billion to the SBA to be loaned out in year 1
Tax credit for hiring someone
$3000 rebate for buying a car made in America

12

It won’t work because nothing will have changed. Everyone is going on and on about stimulus when the fact is all we are doing is stimulating the same bad habits and bad business that got us here in the first place. Let it bust.

13

I said a similar thing in another thread

Here is my plan, for starters:

Cut payroll tax for 2 years
$15,000 credit for a new home purchase
$3/sq ft. credit for commercial construction
Revive Investment Tax Credit
$300 billion to the SBA to be loaned out in year 1
Tax credit for hiring someone
$3000 rebate for buying a car made in America

 Not bad. I also suggest the ability to write off your home if you sell it and take a loss from what it's value was 2 years ago. Also a bank "holiday" where the fed takes over all the bad debt, implements new rules for lending INCLUDING the ability to get credit cards. And one more thing. Long jail terms for people that screw up. Life plus 100 works for me.
14

“You can write a tax code however you want, so instead of cutting their taxes and hope that they create jobs with it, why not cut their taxes for creating jobs? Make a job, get a tax cut. Make to jobs, get 2 tax cuts. etc.”

Several thoughts here. First, if the tax credit is proportional to the number of jobs, does a minimum-wage job count just as much as a high-paying one? Also, is a job that will only last for a year or two as valuable as a permanent position? It seems to me that what people really want isn’t a bunch of temporary burger-flipping positions, but an economy that can provide well-paying, sustainable jobs.

If you want workers not merely to be employed, but to be paid well, you should note that the pay earned by a worker in a market economy depends on his or her productivity, which depends in large part on how much capital and other resources he or she has to work with. (IOW, if the capital structure is insufficient, the workers won’t be as productive and they won’t earn as much.)

To sum up: In order to ensure well-paying, sustainable jobs, you want your tax credit system to encourage investment in capital, labor, and other resources. In other words, what you are really talking about is a tax cut on return from investment.

The ROI tax cut would also solve another major problem with your original proposal: How do you calculate how many jobs (or how much total worker pay) have been created by a taxpayer’s activities? That is a horrendously complex calculation, making everything the IRS makes us do look trivial. Fortunately, there exists a very sophisticated information system that enables us to determine how much value our investment is bringing to the economy: the return on that investment in the market.

“Why not jack up the tax rates across the board for starters (bear with me). Then you start giving those taxes back as economic incentives. Housing market is in a slump? Give tax breaks to people buying houses. Auto industry is about to collapse–> tax breaks for buying a car. Stock market down? → tax breaks for investing your money in the market. Etc.”

Why wait until some market has slumped, or until resources have already been malinvested? Why wait until there is a crisis when there is a known mechanism for anticipating crises and for investing resources as optimally as is possible within the limits of human knowledge of fallibility? Would you have everyone lurching from crisis to crisis just to avoid using a system that you reject as “ideology”?

15

Or just take a trillion and divide it equally with all Americans. For real it makes more since then anything else.

16

Seems to me you just have to keep in simple and prioritize things. The real estate market needs to be strengthened which will help the banking and financial situation. So you add incentives for people to buy houses, build buildings etc. BTW, that puts a lot of people back to work.

Next you need companies to invest in equipment, facilities, employees etc. Drop their tax rates, give the Investment Tax Credits for equipment expenditures, credits for hiring.

Next, you need people to start small businesses so you make ample affordable financing through the SBA.

Next, get the govt. out of the way and see what happens.

17

http://img.photobucket.com/albums/v667/irr7342/stimulus.jpg
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My solution woud be exactly opposite to your hypothetical–I would lower corporate tax rates acorss the board.

How is that the opposite of what I said?

19

Why wait until some market has slumped, or until resources have already been malinvested? Why wait until there is a crisis when there is a known mechanism for anticipating crises and for investing resources as optimally as is possible within the limits of human knowledge of fallibility? Would you have everyone lurching from crisis to crisis just to avoid using a system that you reject as “ideology”?

I hate to pick on you, Rob, but this has been a common theme in this thread. I asked for a comparsion of playing white versus black in a game of chess, and most people have answered that they’d rather play checkers.

I didn’t reject anything as an ideology. I gave a hypothetical in which the ideology was not allowed…and you broke the rules. Shame on you.

20

I said a similar thing in another thread

Here is my plan, for starters:

Cut payroll tax for 2 years
$15,000 credit for a new home purchase
$3/sq ft. credit for commercial construction
Revive Investment Tax Credit
$300 billion to the SBA to be loaned out in year 1
Tax credit for hiring someone
$3000 rebate for buying a car made in America

Yep, that was the kind of stuff I was talking about.