August 2, 2011
Red Rover, Red Rover, Send The Economic Recovery Back Over
"Federal Reserve policy makers may start weighing additional steps to prop up the recovery after growth fell below 1 percent in the first half of this year and economists began cutting second-half growth forecasts."
∙ Fed May Weigh More Stimulus on Slow Recovery [Bloomberg]
∙ Ben Drops The D Word (And Sets The Stage For More Stimulus) [SocketSite]
First Published: August 2, 2011 9:15 AM
Comments from "Plugged In" Readers
We need it, although I'm not sure the Fed is the right player for the type of help that is needed. Interest rates are at record lows and there is plenty of cash available. There is just slack demand. We need fiscal policies to help with the terrible unemployment problems. This is both a national problem and a local one - the July SF unemployment rate jumped back up to 9.0%, up from 8.4% in June. We're not going to get sustainable growth with unemployment rates this high, particularly long-term unemployment. But the gummint does not seem to care about this.
Posted by: A.T. at August 2, 2011 9:39 AM
the media sound bite of the day to protect the wealthy from tax hikes is that they are "the job creators". funny, but they aren't creating jobs now, and the system is set up entirely in their favor. but Dems appear to be too stupid, too impotent, or too disorganized to present a coherent sound bite alternative or response to the barrage of well organized Rep sound bites that their base eats up, even while they get eaten by their own party's policies.
down goes the markets today.... i guess we need QE3 to reinflate that bubble. nothing needed to inflate the gold bubble.... funny too - i'm staring at a Gold ad on SS as i write this. there's your next bubble - in full swing and by many accounts only getting started
Posted by: hangemhi at August 2, 2011 10:09 AM
Part of the issue is long-term and structural with no solution in sight.
Labor is still much cheaper overseas (though getting more expensive). And in CA only 70% of students graduate from high school. In these days when grad school is almost mandatory for a good job, what are these kids going to do? For hispanic and black the graduation rate is even lower - about 60%.
Posted by: anon at August 2, 2011 11:43 AM
The rewards of economic activity follow a power law distribution. In the past this was recognized and higher earners were taxed aggressively in order to pay for globally competitive support for growth in education, research, and infrastructure. Now in the name of economic liberalism taxes on the rich have been lowered and government support for research and infrastructure is stagnant at best. What is going on with the economy has nothing to do with global trade or high school drop outs, but with the way we have structured our economy to focus benefit on the most wealthy at the cost of letting not only the lower rungs of society, but the entire middle class slip through the cracks. If we returned to the tax rates of the 1960s then the deficit would disappear. We simply lack the empathy, political will, and motivation to make any kind of sacrifice in order to fix the economy.
Posted by: Mole Man at August 2, 2011 11:57 AM
I agree with all that, Mole Man. Now that the S&P is negative for the year, and it's not only the lower 80% who feel the hit, the Fed will certainly jump in to protect that top 20%. It is just sad that the rest can't make any headway due to lack of political and social will (and ignorance - willful ignorance - of basic economic principles).
Posted by: A.T. at August 2, 2011 2:43 PM
I'll gladly trade tax rates of the 1960s in exchange for the elimination of Medicare, Medicaid, and all Federal spending on education. While we're going back down memory lane, I'd like alsoto see social security taxes cut in half at least back to the old rates instituted in 1961, and it would be great if the vast majority of wage earners paid income tax instead of 50% not paying a dime in income tax like today. Cutting state taxes and spending back down to 1960s levels (roughly 50% of what they are today) would also be welcome. Problem solved!
Posted by: El Bombero at August 2, 2011 3:02 PM
I couldn't agree more with Mole Man's comment, and I have no interest in arguing politics, but the anti-tax zealots sure do seem to get a lot of votes from the lower rungs of society. Who lacks the will to sacrifice? The bottom 2 quintiles would hardly even feel an expiration of Bush's tax cuts. Yet they don't vote like it.
Posted by: rabbits at August 2, 2011 3:09 PM
yeah ElB - those wage earners making $10k per year and not paying taxes are really fleecing the poor millioniares that the Dem's want to tax.
i know a woman who is essentially unemployable, living on social security and saved by her rent controlled rent. she does any spare job anyone will pay her for and can still barely put food on the table. so i agree, let's cut her social security in half so she can just die from starvation and that will definitely save the economy
Posted by: hangemhi at August 2, 2011 3:21 PM
El-B makes an interesting point. With SS, Medicare, and other federal spending so low in the '60s, what the hell did people get for those high tax rates? Having the same rates today, with all the added federal benefits, would be a comparative bargain!
Posted by: A.T. at August 2, 2011 3:30 PM
A.T., one thing, among many, that they were getting were more roads and effective maintenance of same. From the FT today, Obstacles to progress (I originally read this via another site, so if you run into their paywall, please use the search the headline technique):
Indeed, the US spends only 2.4 per cent of gross domestic product on infrastructure — less than half the average of 5 per cent that prevails in European countries — and half the level of 1960, according to the Treasury. In its latest infrastructure report card, the American Society of Civil Engineers awarded America a D. One in every five bridges is classified as “structurally deficient”, requiring significant maintenance, repair or replacement. This was the classification held by the I-35W bridge in Minneapolis before it collapsed in 2007, killing 13 and injuring 145.Emphasis added. Also, it must be noted, we certainly didn't have the deficit spending that we have today.
Posted by: Brahma (incensed renter) at August 2, 2011 4:58 PM
So finally the Mainstream media is catching on to what has been obvious for some time?
The technical recovery that we have seen based on QE1 and QE2 flowing into the big financial houses leading to an echo mini-bubble did not (and could not) lead to improvement in the "real" economy, no matter what the trickle down theorists may say. (they know it's a lie, but anything to get more welfare shoveled to the big banks will be said).
OBVIOUSLY the end of QE2 was going to have an impact.
embarassingly for the Fed, they can't even pretend that QE2 helped at all for the Average American... it just padded Bank CEO bonus packages and helped to push up commodity prices. it did of course help the top 10-20% because they hold stocks and commodities.
some people are finally seeing that our political leaders are all of a single mindset: austerity. Regardless if one believes in the austerity argument or not, asset valuations and employment ALWAYS fall during periods of forced austerity. Thus: future austerity will have severe negative effects on US GDP.
since Congress and our President are inept*, unintersted in appropriate monetary policy, and are intent on austeriry, that leaves the Fed and more Fiscal Policy.
But the Fed can't do QE3 until it has more cover. It certainly can't do it with sky high commodity prices and surging stock prices... thus the market must fall for a while to give the Fed breathing room. (obviously, QE3 will be stealth and also renamed/rebranded... but QE3 it will be).
Combine all this with the continued possible breakup of the Euro and it looks like a rehashing of the Great Depression. but if we're lucky we still might get the Japanese outcome.
I've said this for a long time, but balance sheet recessions/zombie banking crises take a very long time to resolve. often a decade or more. This will be no different.
(*actually, our leaders are not inept. They are winning a game where the average American is the Patsy who doesn't know he is being played. Both Ds and Rs want deep cuts to entitlement programs and continued huge welfare to Big Corps, and they are getting exactly what they want... but I digress)
Posted by: ex SF-er at August 2, 2011 5:04 PM
Both Ds and Rs want deep cuts to entitlement programs and continued huge welfare to Big Corps, and they are getting exactly what they want... but I digress
Actualy, you were close, here is what you really meant:
Big Corps want deep cuts to entitlement programs and continued huge welfare to Ds and Rs from Big Corps, and they are getting exactly what they want... but I digress
Posted by: polip at August 2, 2011 5:40 PM
All good points ex SF-er (except I don't think Bloomberg is all that mainstream). And there is no easy tried and true plan for addressing any of the things you mention. It is painful.
But we do know how to tackle the unemployment problem in circumstances like this - jobs program and fiscal policy. And we also know that growing the economy through such expenditures more than pays for itself. But we do nothing about it - and take measures that have the exact opposite effect.
I recall Satchel once remarking that the Great Depression was not all that terrible for those who did not lose their jobs. That's probably right. The sad thing is that the 80% of Americans who have managed to hold on to a job and are similarly doing "okay" seem not to place any higher priority on helping the other 20% get their footing than do our elected officials (I guess the two go hand in hand).
Posted by: A.T. at August 2, 2011 5:42 PM
Actually that was me.
I miss Satch.
Posted by: diemos at August 2, 2011 7:08 PM
Actually polip, I like my wording better. The big corps get more welfare than is comprehensible to the human mind. For a paltry few billion $$$ in donations they get trillions of dollars of welfare from their puppet politicians.
But you are right overall. It is the dems and Repubs and big corps vs the citizens.. But they have fooled people into thinking it is D vs R.
Posted by: ex SF-er at August 2, 2011 7:17 PM
diemos, my apologies! You do get the credit!
I was only an occasional SS lurker back then but did enjoy the discussions of the financial crisis. I did not believe we would still be in it three years later, but here we are. Only with a higher unemployment rate.
Posted by: A.T. at August 3, 2011 6:59 AM
But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.
- Ken Rogoff
As usual, this time is not different.
Posted by: polip at August 3, 2011 9:02 AM
It's from before my time on SocketSite, but diemos said some interesting stuff on that thread:
Soon to be back, now that Fannie and Freddie no longer have to pretend to be profit making enterprises. Now they can go back to what they were designed to be when they were first implemented in 1938. Conduits for government cash to prop up the housing market. They'll be making loans that are guaranteed to lose money that no sane, profit-seeking, private party would ever make.
My guess is that we'll see the return of 100% financing, 30-year fixed, full doc mortgages, but with greatly reduced underwriting requirements for income and appraisal.
I still think that these companies will used as a primary conduit to reflate the banking system.
We're close to some of that, if not already there. Providing no-risk profit to banksters is what they are doing now.
Posted by: sfrenegade at August 3, 2011 10:09 AM
Go ahead, keeping raising taxes on "the rich." Pretty soon China and India will have all your sorry @sses' jobs.
Posted by: Idiots at August 3, 2011 4:21 PM
Huh? Many wealthy American execs have already increased their wealth by outsourcing American jobs to low cost regions. I don't see how rolling back the tax cuts to the wealthy will accelerate that trend. Can you explain, Idiots?
Posted by: The Milkshake of Despair at August 3, 2011 4:30 PM
"Idiots" obviously hasn't been keeping up with current events, taxes on the rich were cut when W was President and those low rates were recently extended under the current administration. And what do we have to show for it? We had a credit bubble and now have high unemployment which wingers try to justify by describing it as "structural".
I'd say the neoclassical economics, supply-side approach has failed demonstrably. Unfortunately, we didn't learn that lesson so we're now going to try it again under the guise of austerity budgeting and contractionary fiscal policy.
Posted by: Brahma (incensed renter) at August 3, 2011 4:40 PM
the new talking point by republicans is that the rich are "job creators". as usual the zealots have bought into that hook like and sinker without any thought. but the true job creators from Gates and Dell to Zuckerberg and Yang would have started their companies regardless of the tax rate on the wealthy.
it's time for "idiots" to wake up
Posted by: hangemhi at August 3, 2011 5:17 PM
Wow, I like the universal sentiment here and also statements like "If we returned to the tax rates of the 1960s then the deficit would disappear" that are completely unfounded. Tax rates during the 60's changed dramatically from early to mid 1960's so what does that statement mean? They also aren't comparable to today for a variety of reasons including the fact that the tax brackets need to be adjusted for inflation and even comparing the 1980's tax rates to the 2000's is difficult because of the elimination of loopholes and restructuring of tax code.
People have views which is great. Blanket statements like that sound good-- it's funny even when I am on the same side of an argument to hear these bumper sticker comments that have no factual content.
Tax base is roughly the same now as it was in 2005 (the bush tax cuts were two events in '01 and '03). Meanwhile, govt spending during that time has increased by over a trillion dollars. These are facts.
Opinion: Raising tax rates on the rich alone will not solve the problem. And let's define what raising taxes on the rich means. . .
Also, we can say that cutting spending at all is tantamount to starving that poor old woman, but that implies that there are no other programs to cut and no inefficiency in the government (as was once argued here about the city of SF.)
On the other topics, yes this will take a long time. Yes, despite that Bernanke has denied the existence of "structural unemployment" even the San Francisco Fed has done a study showing that the extension of benefits to 99 weeks has increased unemployment by about .8%. Many others put structural employment much higher and thus NAIRU much higher. People beyond 27 weeks have a dramatically lower chance of becoming re-employed. This is a problem and I don't lack empathy here-- but I believe that education and retraining are necessary-- not extending benefits longer.
QE3-- my knock on the Bernanke Fed has always been how politically influenced he has been since Jackson Hole last year. But agree with ex-SFer that things have to get much worse to provide political cover, but more than anything inflation has to fall. 1.6% core may not sound like much but the Fed will not initiate QE3 at these levels. When they started QE2, core was .6% and they were worried about it falling more. They are stuck at the moment. Also more POMO buying will be less and less effective. For it to have an impact, I think the size has to be $1T and the risks are too great. And there is a lag time-- there is no direct correlation between the end of QE2 and things going into the tank.
People might call for QE3 but they just want more action. All day today, other forms of "stimulus" went around the markets like capping yields on the 5y or 10y for a period of time. Earlier in the week, Hilsenrath suggested language changes to the "extended period" clause. Bill Gross already went on record suggesting capping 2y treasuries at .50% for two years as an example. None of it makes sense now when 2s are trading at all time low yields. The rest of the curve is not yet back to levels hit last year, but are at lower yields than the Fed would be likely to use if they considered a cap. It is somewhat reminiscent of Operation Twist in the early 60's though that targeted the long end.
Fits and starts, I think this could be a long slog . . .
Posted by: nanon at August 3, 2011 5:21 PM
Oh, I understand the talking point.
At the gym I work out at, there's this guy that comes in each morning and demands that the television sets in the cardio room devoted to news (that is, the ones that aren't on GMA, etc.) be tuned to Fox. So yes, I've been watching that turkey-necked fossil Mitch McConnell say "we need to restore confidence to our job creators" over and over again for the last two weeks straight.
Were I to grant them a lot more sincerity and intellectual honesty than they actually deserve, I could say that "the rich" folks these types are talking about aren't the actual creators such as Gates, Dell, Zuckerberg, Yang, Sergey Brin and Larry Page, etc., who I agree would have started their companies regardless of the tax rate on the wealthy, not that the folks pushing this line of thinking would accept that.
Again, assuming good faith, they're talking about the rich people with lots more idle money lying around than they know what to do with who then put those funds into the venture capital firms such as Kleiner Perkins Caufield & Byers or Sequoia Capital who in turn fund the Facebooks, Yahoos and Googles before they are ready for a public offering.
That said, if you think about it and don't have deep-seated ideological opposition to government or a religious devotion to neoclassical economics, you'll realize all those VC firms are doing is allocating capital to people/companies who'll use it, and in turn those people using it will hopefully hire some employees, reducing unemployment.
And the VC firms aren't infallible, either. Everybody reading socketsite now that lived through 2001 can probably name half a dozen dot com firms that went dot bomb for every Yahoo or eBay that became successful. A similar kind of thing is going on now at a lower level; absurd dot coms are getting funded that simply won't be around in four years.
So if the government hires a contractor to build or maintain or upgrade a road and the contractor hires some construction workers, from the macro increasing employment standpoint there's not a lot of analytical difference between that and having some VC firm fund a start up that develops and maintains yet another pointless web site. But the former gets derided on the news every morning as "out of control Washington spending" by idiots who willfully don't understand that countercyclical measures are exactly what you want the government to do when GDP is falling, the cost of government borrowing is at generational lows and the unemployment rate is inching up to 9.2 percent.
All of which is just to say that while we may "not [be] sure the Fed is the right player for the type of help that is needed", as A.T. rightly questions, that's all we're going to be able to get for the foreseeable future, because the capitulater-in-chief just signed into law an agreement that will make countercyclical fiscal policy impossible, so the only thing left that's possible will be monetary policy.
Posted by: Brahma (incensed renter) at August 3, 2011 9:54 PM
According to Obummer, "the rich" are those who make $200K+/yr.; that's the group he wants to raise taxes on; and that's your small business owners, the group that creates the majority of the jobs in this country. Duh. So who is the one(s) not up on their current events?
Remember when your "hope" for pocket "change" Messiah originally defined the rich as those making $250K+/yr.? Of course, you don't. Well, he has now dropped that by another $50K. Can't believe a damn thing this fraud says. There is no way the top 2% - 5% earners in this country could afford to feed/take care of the mass of freeloaders and lazy good-for-nothing parasites of this country. Go ahead, keep drinking your Kool-Aid and following the sheep.
Posted by: StupidIdiots at August 3, 2011 11:35 PM
Don't drink and watch Fox News good buddy. Or at least don't post afterwards.
Posted by: NoeValleyJim at August 4, 2011 12:13 AM
A few lies out there by our Fox News correspondents:
LIE #1 - keeping raising taxes on "the rich."
"keeping"? The tax rate on the rich has not stopped coming down for now 20 years. The "keeping" word maintains the illusion we are already punishing the rich, when we're not.
LIE #2 - people making 200K+ a year are job creators and taxing them would make them stop creating those jobs
Wrong. The trickle down principle has NOT worked when tax cuts were given to the rich. They're hoarding unproductive wealth like Gold or property with the extra money, as is proven by the very healthy prestigious property market. Whenever they created jobs, they did it where they would get more bangs for the bucks. In return, we saw our jobs outsourced by the "job creators".
Increasing taxes on the "Rich" would not hurt anyone in the US.
We need to rebuild infrastructure, focus on high tech, health care, education.
What the GOP wants is privatized schools, health care, retirement, which is proven to benefit fewer than the government option. They're for the OLD SOCIETY of insider dealings and Robber Barons.
And the Teabillies clap in unison while their way of life is sold away for a song.
Posted by: lol at August 4, 2011 7:32 AM
In addition to what I said. Something the bubble has proven is that jobs were created thanks to more cash in the hands of the middle and lower class. But people spent everything they made from the bubble and it created many (temporary) jobs.
It's a shame on 2 fronts:
1 - Most of this cash came from individual debt, which is a huge problem as folks cannot print their own money. They got irresponsible and are poorer as a result. We promoted bad behavior and pulled the rug from under them.
2 - This borrowed wealth was not used in the best of ways. On the consumer side, we have a lot of permagranisteel and McMansions but not much shoring of education funds or retirement accounts. Local governments got their cuts too and could spend freely, sometimes too freely. But not on what mattered. In CA schools kept being starved thanks to prop 13. Now they're on cold turkey and it really hurts as salaries don't come down easily.
Now if the government printed more money than is being engulfed by the current deflation, we could put it into what will bring produce something in the future. We need to compete on the global market. But we are shrinking our ambitions and our means with irrational budget cuts. for instance the tax cuts were supposed to expire. Now they're permanent and crippling the recovery as we try to pay for them by cutting essential things.
Posted by: lol at August 4, 2011 8:10 AM
"and that's your small business owners, the group that creates the majority of the jobs in this country."
Demand creates jobs, not small business owners.
Posted by: diemos at August 4, 2011 8:50 AM
^^^ Exactly. The people working on government-funded infrastructure would spend all their money. Then the infrastructure work would improve overall productivity, increasing competitiveness and therefore creating wealth in the private sector, creating jobs.
Teabillies got it all a$$-backwards. But that's the whole point of their lies. They saw with Bush that lies lead to policy and doesn't bring punishment. They understood that lies pay off. The bully that keeps being vindicated became a bigger bully.
Posted by: lol at August 4, 2011 9:10 AM
I should follow my own advice there and not drink and post :)
The Fed doesn't care much about the stock market, at least not directly. What The Fed does care about is the risk of a deflationary spiral. The stock market cares about this too though, so they often move in unison these days. I don't think we will see QE3 unless and until inflationary pressure dips.
The difference between 1% growth and official recession is pretty slight but I think we are more likely to continue on in the former state rather than the latter state.
I was pretty bummed about the debt deal recently passed as well until I remembered one important fact: the 112th Congress cannot pass binding legislation on future congresses. We have seen these kinds of arrangements time and time again, with spending caps and PayGo and other attempts by Congress to force fiscal discipline on future versions of itself. They always get changed to adapt to changing circumstances, which they should. I can only hope that the 113th Congress comes to its senses and decides to not pursue an austerity path, which would really bring about another deep and hard recession. You notice that the budget deal doesn't really cut any current spending or spending in 2012, it just promises that future Congresses will cut spending.
Posted by: NoeValleyJim at August 4, 2011 9:18 AM
And who are the "small business owners" making more than $200k/year? Investment bankers, law firm partners, Big 4 accounting firm partners, top actors and athletes, hedge fund guys, VCs, high-earning wage-earners with some tiny side business more like a hobby, etc. It ain't hardware store owners, small town farmers, and tax preparers.
Less than 2 percent of tax returns reporting "small business" income are filed by taxpayers making over $200k, so higher rates wouldn't affect 98+%. And most of the 2% aren't in "small businesses" in any sense that comes to most people's minds.
This is a right-wing shibboleth.
Posted by: A.T. at August 4, 2011 9:20 AM
Actually, as a small business owner myself, I can readily attest to the fact that tax policy punishes reinvesting in one's business. A reasonable compromise would be to raise individual tax rates, but lower corporate tax rates significantly (while simultaneously doing away with many corporate deductions).
As it stands, small businesses get the worst of all worlds. If they are a C-Corp, they are taxed on their profits at a 35% federal rate each year even if the intent is to leave monies in the corporation to build the business. Of course, they can avoid this "penalty" by merely borrowing the sums needed to build the business but this creates a business beholden to the banking industry. In addition, small businesses generally don't have an army of tax accountants and offshore revenue to avoid paying taxes thereby putting them at a distinct disadvantage when compared to large, established companies.
Posted by: Guest666 at August 4, 2011 9:43 AM
I agree with NoeValleyJim that we're more likely to skirt another official recession in exchange for subpar "stall speed" "growth". Also, it's correct that the current debt deal won't bind the next Congress.
But what the takeaway for the masses has been, and is likely to continue to be, that the big-government, big-spending, "countercylical" Obama policy has failed. We're running a larger than 10% deficit and still it's not enough, with Krugman and others bleating on about how small the response has been to a public that has tuned out.
This economic backdrop should play nicely into a winning Rick Perry/Marco Rubio ticket in 2012, and even larger losses for Democrats in Congress, who may noty retain control of the senate. Will Obama play Jimmy Carter to the second coming of a Ronaldus Magnus?
Posted by: El Bombero at August 4, 2011 9:58 AM
What this has done is crystallize democrats against Teabillies and their crazy talk and obvious lies.
Return of Reagan? Nope. What the GOP has given us is presidents that are dumber and more ignorant than their GOP predecessors.
Nixon: realistic conservative
Reagan: good-for-show windbag
Bush Sr: wimpish conservative. Reagan without the charisma.
Bush Jr: illiterate conservative easy to manipulate. Wave a flag and he'll come along.
The next GOP candidate will be a religious idiotic illiterate dangerous lying zealot.
Anyone with an ounce of reason will vote no to the return to the 17th century of witch hunting.
Posted by: lol at August 4, 2011 10:16 AM
I feel like the Dems were already fiercely anti tea party. One good thing to come of this was the McCains and Boehners of the world acknowledging the serious governance flaws within the GOP because of its own wingnuts.
Posted by: [anon.ed] at August 4, 2011 10:26 AM
^^^ Yes, and knowing the utter gullibility of the core of GOP after 25 years of toxic Murdoch's Fox News (hello Iraq war? Trickle-down voodoo? Attacks on science because it doesn't fit Christian faith), there's a good chance the GOP will be taken over by the "Mad Haters" Tea Party.
They hate Dems to the bone and will follow the biggest haters. The budget Democratic debacle just proved that swinging for the extremes works when your opponent is a moderate and reasonable politician.
Posted by: lol at August 4, 2011 10:54 AM
funny how the completely ignorant Fox news loving commenters on this thread keep putting "idiots" in their own name.
every republican talking point i've heard is a lie - including that those who make over $200k per year are all small business owners. if you want to improve the tax code for small business owners - how about you propose that. but there are many high income earners who are regular employees.
The Dem's have plenty of faults, and there is no easy solution to this mess. but the Reps have made honest discussion impossible because "idiot" - the the real "sheep" - believe anything and everything they say.
Posted by: hangemhi at August 4, 2011 12:07 PM
lol's point about what the unproductive rich do with their money, due to what economists call a low marginal propensity to spend, is quite insightful.
The supply-side approach of cutting taxes for the rich in the (false) hope that they'll turn around and invest the money in job-creating enterprises has failed miserably, and the price of gold and the absurd fluctuations in the price of silver, etc. this year tell you exactly where the nonproductive wealthy have been putting a lot of their money.
I don't know what The Fed can do about that, though, other than magnify and worsen the effect by holding interest rates low.
Posted by: Brahma (incensed renter) at August 4, 2011 12:12 PM
One of the unfortunate implications of a welfare state run amok is that the "wealthy" need to have greater and greater incentives in order to build the wealth that is necessary for the confiscatory impulse of the redistributionist politicians. Brazilification is not something to be resisted or avoided by these politicians, but rather it is a necessary condition for the survival of their political class.
Posted by: El Bombero at August 4, 2011 12:47 PM
The greatest country with decent social protection is Germany and it's doing fine in terms of innovation, export, profits. This is the biggest and final nail in the coffin of the illusion that welfare states kill competitiveness.
Of course with the Euro, some countries went straight to the highest social protection standard without building the economy that should come with it. Like Greece or Portugal.
Higher earners in the US are not producing more or creating more wealth than Germany. They just keep more of it in their own pockets. They are wealthier, but the country is poorer as a result.
Posted by: lol at August 4, 2011 1:02 PM
"As it stands, small businesses get the worst of all worlds. If they are a C-Corp, they are taxed on their profits at a 35% federal rate each year even if the intent is to leave monies in the corporation to build the business."
What small businesses are C-Corps? How many have you run across? Please be specific. Where do people come up with this nonsense?
Posted by: sfrenegade at August 4, 2011 1:15 PM
I work with many, many small businesses (
Business owners are faced each year with a tax quandry as whether it makes sense to carry over profits/inventory, reinvest in the business or merely take the profits as wages/bonuses. The current tax policy does not reward the first two, but instead encourages the latter.
Posted by: Guest666 at August 4, 2011 2:51 PM
My comment was truncated...
I work with many small businesses that are C-Corps (the majority, in fact). However if you are thinking solely of very small business (
Posted by: Guest666 at August 4, 2011 3:07 PM
I concur with Guest666. One of the small (5 employees) C-corps I'm involved with rarely carries profit over. The CEO is keen to avoid excess tax.
Posted by: The Milkshake of Despair at August 4, 2011 3:44 PM
For some reason the posting software does not like my parentheses.
There are many small businesses that are C-Corps. Perhaps not truly small businesses with less than 5 employees since these tend to be LLCs or S-Corps. However, when you get into the 25+ ee world, the number of C-Corps rises dramatically. And these are also the companies that drive quite a bit of new employment.
Tax income on individuals whatever is appropriate, but why tax money that remains in a business that is designed to expand said business.
Posted by: Guest666 at August 4, 2011 4:52 PM
Okay, and what are we talking about for revenues of a "small business"? What types of businesses are these? What kind of profits are they making? (ranges, obviously -- looking for general discussion) What is their effective tax rate?
An overwhelming majority do not even enter the 33% or 35% brackets, even under the liberal definitions of a small business that have been given (e.g. up to 500 employees in some cases).
Posted by: sfrenegade at August 4, 2011 6:05 PM
Guest 666 please do not bother us with real world stories and first hand experience. It is much easier to vilify the evil parties responsible with sweeping generalizations without having to deal with anything factual. I prefer to go on my little political diatribes with ten cocktail party words on economics that I learned. Thank you and good night.
Posted by: unaware at August 4, 2011 9:59 PM
"500 employees in some cases" -- who's the liberal dumb@ass who defined small businesses as this? Oh, yeah . . . a freeloading liberal!
Yeah, Guest666, stop being so logical and providing factual information. We liberals can't stand to blindly argue against that, and you're taking all the fun out of us trying to milk "the rich," just because we deserve some of what they worked hard for. Yeah, let all us brain-dead morons just blame it on Fox News, because we are just so smart!
Posted by: omfg at August 4, 2011 10:29 PM
"Guest 666 please do not bother us with real world stories and first hand experience. "
Oh please, let's not pretend our devilish friend is the only person who deals with startups in San Francisco and the surrounding area. The vast majority of small businesses aren't affected by these provisions, and that can be empirically shown. Someone's anecdotal evidence is just an anecdote.
I have worked with many C-corps as well, but I can tell you that they don't pay anywhere near 35% in corporate tax.
Posted by: sfrenegade at August 5, 2011 11:58 AM
If the C-Corps you are working with are not paying anywhere near 35% in corporate tax, then they obviously are not very profitable. Taxable income over $100k is taxed at a federal rate of 39%, which then lowers to 34% for taxable income from $335k-$10M. Personal Service Corps pay a straight 35% rate on taxable income.
If you are hoping to encourage small companies to retain earnings and to expand, why would one want to tax monies left in the corporation? Instead our tax policy is designed to assist the banks and other lenders by creating a tax incentive/deduction to borrow and/or lease equipment to expand.
And many of the start-ups in the Bay Area are not faced with these challenges since they are funded with OPM.
Posted by: Guest666 at August 5, 2011 12:23 PM
By the way, if anyone wants to invoke political ideology and political party names, they are free to do so, but that's an ancillary issue and not relevant to my argument and I'm probably not going to address them because that's really a different argument and not very interesting to me (talking about "liberals" vs. "conservatives" is mostly nonsense -- most people using those terms don't know what they mean).
Personal Service Corps pay a straight 35% rate on taxable income.
Why are those personal service corporations C-corps? We are talking about law firms, architecture firms, director's offices, consultants, and accountants here. Many of those are partnerships, and in some cases LLCs or S-corps, in some cases with a more complicated structure than simply a single C-corp. Personal service corps are largely irrelevant to this discussion -- most of them are not C-corps except when they are in a complex arrangement (in which case, that simple fact defeats Guest666's argument that these types of small businesses cannot afford the complex arrangements that companies like GE make).
Let's talk some facts here: StupidIdiots was the first person to invoke "small business" as a problem with respect to the proposal to increase tax rates on married filing jointly taxpayers making $250K or more in AGI and single taxpayers making $200K or more in AGI.
A very small percentage of small businesses (look at the definitions very carefully) would be given a tax increase by any of the tax reforms that have been proposed, because only about 2% would be affected by that specific proposal. There is tons of data on this: http://www.cbpp.org/cms/?fa=view&id=630
What can we draw from this:
1) people give different definitions of small businesses -- look at the SBA and Treasury to see what they count before you speak -- some of these so-called small businesses are not truly small business taxpayers
2) small businesses are not largely affected by any proposals in federal income tax
What Guest666 is talking about is an entirely different issue. For "small businesses" (again, definition please) who are C-corps (not many) and who actually pay 35% on a vast percentage of income, Guest666's specific criticism is that small C-corps are discouraged from reinvestment in their own businesses because of how double-taxation works.
Guest666's point may be valid independently, but it has absolutely no bearing on StupidIdiots' original point whatosever. What Guest666 is talking about is unique to small business C-corporations, which are again an exceedingly small percentage of the entire universe of C-corporations. And in fact, the recent tax changes have in fact had provisions to encourage reinvestment (for example, Section 179, which allows small business to expense things that would have been capital investments, or changes to depreciation rules allowing faster depreciation).
As hangemhi said, if there is some specific issue about a particular type of small business that the tax system makes uniquely uncompetitive, let's address that. I'm happy to do so, although I will posit that Guest666 has not identified what types of businesses these truly are and what percentage of the overall landscape of small businesses they are.
Again with respect to the original point by StupidIdiots that spurred the discussion, my overall point is that talking about "small business" with respect to federal income tax is largely a red herring.
Posted by: sfrenegade at August 5, 2011 1:04 PM
^ correction, it should say "What Guest666 is talking about is unique to small business C-corporations, which are again an exceedingly small percentage of the entire universe of *small businesses*."
Posted by: sfrenegade at August 5, 2011 1:07 PM
It is clear we are talking about two different types of small business. You are deeming small business to include every sole-prop including the significant (majority?) that have no employees or little income.
On the other hand, I tend to think of a small business as one that is anywhere from 5-500 employees. Given that definitions of small business seem to be driven by the political bent of the party defining the term, I will agree to differ on our definition.
I have no problems with taxing individuals (including income received as pass-through income from LLCs or Sub-Ss) who choose to remove monies from the organization. However, tax policy designed to encourage reinvestment would take into consideration the negative implications inherent in taxing profits annually when many small businesses are merely reinvesting in the business. Yes, the increased Sec 179 deductions have helped, but building up a nest egg to expand is discouraged under the current system.
Of course, if annual profits were not taxed, then it would be prudent to increase the capital gains and dividend rates (of which I am in favor) to avoid tax arbitrage.
Posted by: Guest666 at August 5, 2011 3:23 PM
"but building up a nest egg to expand is discouraged under the current system."
"Of course, if annual profits were not taxed, then it would be prudent to increase the capital gains and dividend rates (of which I am in favor) to avoid tax arbitrage."
Yes, that would make sense if we made a policy decision like that -- capital gains/dividend rates would have to go up. I think we're on the same page now.
This is largely a symptom of everything else in recent tax policy -- the people who really benefit from low capital gains/dividend rates are the ultra-rich because a larger percentage of their income is derived from these sources. The definition of "small business" commonly used counts every millionaire and billionaire who has certain types of income as a "small business" taxpayer, when in reality they are just investors and are not involved in managing the business.
Without raising capital gains and dividend rates, what you're suggesting wouldn't work, since people could leave the money in the corporation one year and distribute it the next year. That's why it's based on actual spending in our current incarnation of tax policy.
Posted by: sfrenegade at August 8, 2011 12:23 PM