Tax Cuts

[hoff944]

So we've had some fun with the war topic, but how about a topic that affects us more on a daily basis? I'm anxious to see some opinions on the tax cuts. $350 billion or $550 billion? Talk amongst yourselves.

[BlueSkyJaunte]

Republicans think they can spur the economy by reducing taxes (and those who pay the most get the biggest reduction).

Democrats think they can spur the economy by taking more taxes from the rich and less from the poor.

Both sides think they can spur the economy by lining their pockets with corporate contributions and giving companies free rein to screw Joe Public.

Sane people understand that there's nothing any politician (or group of politicians) can do to fix the economy.

[widebody911]

The Bush tax cut proposal is a means for he and his pals to get richer under the smoke screen of fixing the economy.

He may as well have thrown in the phrase "Think of the children!" or "In the interest of national security!" for good measure.

In either case, it will do about as much for the economy as the old 'pull my finger' gag.

[island911]

Yeah-yeah. . .bash Bush, ad nauseam. -briliant-

Taxes aren’t bad to have; they’re quite necessary, really. What is bad, however, is when you have a country that doesn’t manage it’s bureaucracy.

Paying for useless government projects, with money extracted forcefully from smart-working / hard-working people, generally results badly. The tax payer has some tolerance for "overhead cost," but there is a limit. . .which has likely long passed.

If tax cuts means some of these government slackers need to go find real jobs, producing something useful for society, I’m all for it.

If we consider California as the canary in the coal mine, the direction (smaller or larger) of the tax burden on the working/producing folks should be clear.

[jyl]

The proposed elimination of taxation on dividends is at best misguided and at worst deceptive, IMO.

The income benefits will go to a small group of high-net-worth people who are more likely to save than spend an incremental dollar. Think about it - suppose someone owns $1MM of dividend-paying stocks with an total dividend yield of 1.7% (which is the average for the S&P500). Eliminating taxation on $17K/yr of dividends gives that person an additional $6K/yr, roughly, of income. But the typical person who owns $1MM of dividend-paying stocks probably also owns >$1MM of other investments, >$1MM of real estate, makes >$0.5MM/yr in income, and so on. How much "whoopee!" does $6K extra bring him? Does he run out and spend all of that $6K? He isn't exactly hurting financially, probably hasn't been depriving himself too much, and he got wealthy in the first place by not blowing every spare penny - he probably pumps very little of that $6K into the economy through increased spending.

The "theoretical" lift to the stock market from eliminating the taxation of dividends is something like 5% to 10%, according to my reading. Well, the market goes up and down more than 10% every quarter anyway, so $500BN seems a pretty expensive way to buy a 5-10% move. That is even assuming that the theoretical boost to stock prices from zero taxation on dividend payouts is not offset by the theoretical drag on stock prices from the higher long-term interest rates that most academics believe will result from higher government deficits.

So what do we get for $500BN of dividend tax cuts? The answer is we get very little near-term fiscal stimulus to the economy. But we do get a HUGE Federal government budget deficit to deal with in the future - conveniently, after the current Administration will have left office.

The truth is that the dividend tax cut is not meant to be a fiscal stimulus to the weak economy. It is an ideological tax cut. The elements in the Republican Party who are currently in control of the Administration tend to ideologically believe in lower taxes, smaller government, and "trickle-down" supply-side economics. The idea is you cut taxes, starve government into shrinking, and - this is the important part - count on money to "trickle down" from the rich to the poor. It is politically difficult to cut top-bracket tax rates, or close rich people's tax shelters, or cut corporate tax rates - but it is easy to cut dividend taxes by promising a benefit to every stock-owning American. This is an ideological tax cut that is being misleadingly "sold" to Congress and voters as an economic stimulus.

Admittedly that's just my view. For the view of someone with just a little more credibility - he's merely one of the greatest investors of all time and one of the world's richest men - see these comments by Warren Buffett at http://www.washingtonpost.com/wp-dyn/articles/A13113-2003May19.html - Buffett calls the tax cut "voodoo economics" and concludes that "Supporters of making dividends tax-free like to paint critics as promoters of class warfare. The fact is, however, that their proposal promotes class welfare. For my class."

So, this has all been pretty abstract and big-picture. If you want to get specific about the benefits - to go from the abstract "we" to the particular "you" - then here is an exercise. Add up all the individual stocks and stock mutual funds that you own outside of a 401k (because dividends on stocks owned in a 401k are not taxed anyway). Add up the dividend yield (or use the S&P500 average of 1.69%). Multiply by your tax rate (or use a typical 35%). That's the benefit to you. For most of us, it's probably less than the cost of one Bilstein shock. So you can weigh the benefits of a shock, or maybe half a shock, today versus the future prospect of living in a country struggling with multi-trillion-dollar budget deficits.

For some numbers on the budget deficit, search Google "federal budget deficit" or see this article :

http://www.washingtonpost.com/wp-dyn/articles/A4599-2003May17.html

"The Congressional Budget Office forecasts a $300 billion deficit this fiscal year -- an all-time record -- while the investment firm Goldman Sachs says a more realistic number is $425 billion. That's edging close to a troublingly high percentage of the economy. But the real problem is not this year or next. Rather, it's the long-term cost, combined with the budgetary hit just around the corner, when the baby boomers start to retire and put new demands on Social Security and Medicare. The administration highlighted this problem in its own budget documents, describing "the real fiscal danger" as the $18 trillion shortfall -- yes, trillion with a "T" -- projected in those two programs, an amount equivalent to nearly half the household wealth in the United States last year."

[jyl]

By the way, island911, I am not against tax cuts. Personally, I would like a tax cut. My Porsche budget would like a tax cut. I would simply like to see cuts in taxes that would actually help me and the 95% of people who have to buy groceries from a paycheck. And who are likely to turn around and re-spend a good part of their tax cuts, thus stimulating the economy. So I, personally, would rather see a cut to the marginal income tax rate (which I'd feel as less payroll withholding). Now, someone who lives off dividends from their stock portfolio might feel differently. tabs?

[island911]

Whoa. . .back the money truck up a bit.

This is not about rasing the stockmarket prices to boost the economy. Equating stock performance to the condition of the economy is a rookie mistake.

This Republican Party may believe in lower tax rates, but smaller government? I don't think so. They see, a vibrant economy as a means to get more tax dollars. It's a "velocity of money" thing (econ101). . ."trickle down" was a Regan era thing which really proved the "velocity of money" power.

Warren Buffett works for his own benefit, and is quite good at it. Don't think for a second that what he says is said because he's trying to do us a favor.

BTW "half the household wealth" is what is taken in taxes as it is.

Someone said "there are those who make it happen, those who watch it happen, and those who wonder what happened."

If a government (or business) pushes out "those whom make it happen" then the rest are SCREWED!

[island911]

Sorry for the delay, John. . .was caught up in those links. From which:
"When you listen to tax-cut rhetoric, remember that giving one class of taxpayer a "break" requires -- now or down the line -- that an equivalent burden be imposed on other parties. In other words, if I get a break, someone else pays. Government can't deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch. And last week the Senate handed the bill to the wrong party."

you see it's arguments like this that play well with the average worker. (read: sucker) Mostly because the the average worker doesn't understand that "the rich" when faced with a government wanting to take a huge chunk under the guisse of "fair-share," they (the rich) have the resorses to move their money to other counties, and other investment opportunities.

Widebody (Tom) is concerned with all the work going off-shore. Just who is investing offshore ?. . ..and is it because investing in the US means the leaches will drain you dry?

[edit:] Example: Our local government and unions in the NW kept putting the screws to Boeing. Guess what, they're picking up and leaving. Boeing is leaving behind some awsome infrastructure just because too many were taking too much.[/edit]

Letting people keep more of their money will help the US economy.
How much it will help will really depend on a lot of things.

[BlueSkyJaunte]

Island, the tech industry (one of the driving forces of our previous bubble, and still a significant player in today's economy) is the one investing offshore. I have seen it personally. Call centers, tech support, and now software development and research are all moving outside of the US. Why? Because you can pay Joe India, Ph.D. 10% of what you pay Joe America, Ph.D. This is purely in the interest of short-term cost-savings to boost those all-important quarterly financial statements.

I have come to the conclusion that politicians are powerless to improve the economy but need only to snap their fingers to send unemployment rates skyrocketing.

[island911]

Yeah, I see what you're saying . . .the disparity is big. However, I do believe if you make balance-sheets on the true costs of going oveseas, you will see just how easily things like taxes can swing the balance.

There are a lot of hidden costs associated with hiring Joe India, Ph.D.

[hoff944]

I hear people talking about how a tax cut will only benefit the rich and this boggles me. Only about 50%of the income earners pay 96% of federal income taxes. In 2001 39% of all income taxes were payed by the top 1%. They aren't earning 39% of the income either. Its more like 18%. Why should people with higher incomes be expected to pay more on an income tax. Where is the rewards for hard work? Its about time the income taxes should be cut. We've already had income taxes for 57 years to long. Richard Gephardt was on CNN this morning talking about how Bush’s tax cuts benefit a "favored few." This is the same " favored few" that have to pay federal income taxes! When the "average person" pays no income taxes, the "average person" shouldn’t expect to see more money in his pocket when taxes are cut! Of course Gephardt is on his give the people a check for $300 married couples get $600 and call it a “tax cut” scheme again. Isn't it typical of a democrat to give people a check for $300 or $600 and call it a tax cut when they don't even pay taxes to begin with?

[BlueSkyJaunte]

Originally posted by island911
There are a lot of hidden costs associated with hiring Joe India, Ph.D.

That is true, but those hidden costs will manifest over the course of years, not quarters. Today's CEOs are too short-sighted to realize this. Or rather, too focused on that quarterly report.

My wife used to work for AlliedSignal (back in the pre-Honeywell days). The site here used to lay off people just in time for the financial reports and then re-hire them after the numbers had been published. Ridiculous.

[island911]

Good point, blue.
I do hope that because this quarterly report game is obvious to a guy like me, that most investors see it to.

I suppose the idea of peoples money being wisely used is at the crux of this tax issue too.
When the average person spend more on tax, than on food, housing and recreation, (combined) we ought to be seeing a lot more damn good services out of the various government branches. Instead, they start complaining about not enough money for fire, police & schools. (and people btch about big business cooking the books - sheesh)

Maybe if liberals started looking at "investing" in government program with the same critical attention they give to investing in business, we would all benefit. Unfortunately, though, the left will quickly accept the word (excuses) when they come from “well intentioned” govt spenders, and throw more (of other peoples) good money after bad.

[BlueSkyJaunte]

Originally posted by island911
Good point, blue.
I do hope that because this quarterly report game is obvious to a guy like me, that most investors see it to.

Unfortunately, not everyone can see past the end of their nose...just watch the market when the numbers come out. More dips than a Six Flags roller coaster.

Originally posted by island911

I suppose the idea of peoples money being wisely used is at the crux of this tax issue too.
When the average person spend more on tax, than on food, housing and recreation, (combined) we ought to be seeing a lot more damn good services out of the various government branches. Instead, they start complaining about not enough money for fire, police & schools. (and people btch about big business cooking the books - sheesh)

You said it...out here in the desert the Native American funding gets a lot of attention...you'd be shocked to hear about how badly the feds have bungled the management of that money. It's outright THEFT. It happened under the Clinton reign as well as the Bushes. They're all criminals, IMHO.

Originally posted by island911

Maybe if liberals started looking at "investing" in government program with the same critical attention they give to investing in business...

...or car lifts...


Man, when the tax revolt comes, there'll be some fireworks. Which, by the way, is why our founding fathers put that little item in the Constitution about bearing arms.

[widebody911]

Originally posted by SoCal911SC
Do you REALLY think that is what Bush is thinking?

That his primary concern is making HIMSELF rich (as though he is not rich already) through tax cuts? Or that he is intentionally trying to implement policies that he thinks will hurt the economy ("smoke screen") to benefit himself personally or his friends???

Watch out for those black helicopters!

And if you think he's gone thru all that trouble to get into office, and the expense and effort he'll have to go thru to stay in office, as some sort of altruistic endeavor, I've got a bridge to sell you. It will go really nice with your tye-dyed help dashiki, birkenstocks, and tamborine.

[widebody911]

Originally posted by SoCal911SC
It seems to me that most people that are in higher level national politics are already rich - several future generations worth of riches in most cases. Bush certainly is. If making themselves more rich was their goal, I'd think they'd stay in private enterprise, rather than go through the trouble of being elected president so they can try to put some tax breaks in place.

What better way to make yourself richer than to be the one who gets to make the rules? On top of that, you get to ride around in cool planes and stuff. And don't even mention the other priveleges - like interns!

Someone's desire to hold public office should immediately disqualify them. (THHGTTG)

[BlueSkyJaunte]

Originally posted by widebody911
Someone's desire to hold public office should immediately disqualify them. (THHGTTG)

Very, very true.

[widebody911]

Originally posted by hoff944
So we've had some fun with the war topic, but how about a topic that affects us more on a daily basis? I'm anxious to see some opinions on the tax cuts. $350 billion or $550 billion? Talk amongst yourselves.

I'm gettin' vaklempt...

[hoff944]

The tax cut is niether a tax nor a cut. DISCUSS! .....and I didn't think anyone would catch that.