If the rate of return is higher than the rate of the cost… you make money!. — kavips

Controversial as it is, we MUST use government funds to reinvest in infrastructure, especially where there is too little a return to interest private investment….

As was previously mentioned, there is no such thing as spending pork in a “bailout bill”… The idea behind this package, must not be lost. … This bill’s sole purpose is to put money directly into the economy…. Whether that money goes to the arts, to schools, to refrigerators, or to Quakers and Presbyterians, it really doesn’t matter… We all benefit from it’s infusion. Anyone receiving some of this stimulus package’s income will use it to buy among other things: Soda, potato chips and gasoline… That is the key… As the economy picks up from all this spending, confidence returns, and we are on our way. This package is about S P E N D I N G….

In the previous chapter we made an allusion that this stimulus package was like WWII pulling us out of the Great Depression, just this time without a war… Whereas then we geared up to make guns by borrowing massive amounts and investing it in ships and steel, this time we are doing exactly the same thing, but buying butter… It worked quite well then. Heaven help us… It had better work again now…

Like all pieces of legislation, this bill includes a few bad parts that were required for the insurance of a smooth passage, making it palatable among several Republicans… Those “bad apples” of which I speak are the 30% of the portion of the bill dedicated to tax cuts… Most of us intuitively understand how increased spending will help our economy.. That does not need much discussion since even a tiny child can grasp the fact that if someone has money, and wants what you have, they will spend it… Today only a few of those in an ever shrinking pool, dare argue that government spending is bad… Us with common sense know better….

For the sake of argument when I imply that massive governmental spending is good, I am speaking only about the present, right now in 2009,… and not another 30 years down the road when we again will have to trim off government excesses… At some future point to be determined, the argument of pulling government spending out of the marketplace and thereby allowing more efficient private operations to occur, will again have some merit…. And if we can all cross our fingers, hopefully with the large infusion caused by today’s stimulus plan, we may reach to that point much sooner than the thirty years it took us the last time (1933-1963).

Right now, strictly because of our crises….spending is good… Tax cuts are not…

Since we all know that massive government spending is good during times when credit has dried up, we will instead focus first on why tax cuts are bad, and why tax cuts drag down the growing of our economy out from beneath its crises. For those who have read each of the chapters up to this one, this may be a little bit of a review…..

First, let’s begin with just what exactly is a tax cut… For starters, is it a mechanism that opens market activity by driving down prices for all? Or…. is it a shill being used to suck up more wealth from the bottom four/fifths of the population and placing it into the hands of the top percent? And if it does, is that good for our economy?

Let’s begin with the words by South Carolina’s Senator DeMint on This Week February 1:

“And all of us believe that the way to move our economy forward and protect jobs is to infuse more money so that consumers have more to spend, businesses have more to invest, buy capital equipment. But there are two ways to do that…. One is for the government to take it out of the private sector through taxes and then decide where it’s going to go through political manipulation, as they’ve done in the House. The other is just to leave more money in the private sector for consumers to spend”

That last line could sound convincing if only it were true….

The obvious reason for being cynical about that remark, is that it is the same argument that has been proffered since the year 2000 and for the past eight years worked rather poorly. Look at us today. How “booming” is our economy?

If that philosophy couldn’t work over the previous 8 years when we had a budget surplus, money to spend, and a capital rich economy,…. why would anyone think it would work today when we lack each and all of those necessary tools?

They added tax cuts, huh?

Ever wonder how many people pay taxes and how many don’t? Ever wonder how those totals correspond to income?

The answer to the first question: from the Tax Foundation

In 2004, a record 42.5 million tax returns – one-third of all returns filed – had no income tax liability because of the available credits and deductions in the tax code. This is a 42 percent increase in the number of zero-tax filers in just four years. In addition to these zero-tax filers are the 15 million individuals or households who do not earn enough to file a tax return. Overall, nearly 58 million taxable households are outside of the income tax system. These findings raise serious questions about the future of the U.S. income tax system. Are any future tax cuts, or even tax reforms, possible when the lion’s share of the tax burden is increasingly borne by a shrinking pool of taxpayers who – at least on paper – appear to be “upper-income”? And will the expanding pool of non-payers demand even higher income taxes?

Back in 2004, one person in three did not pay income taxes…

Let’s jump back one second to remember tax cuts. Here is a refresher on how tax cuts work. You work. Your employer withholds your taxes from your pay….You file your return. Through tax cuts you have enough deductions to get all of your withholding returned to you… You get a check. You go out and spend it …..

Now if you are in the one third that does not pay a penny of income tax…. and this year you bought a house, a car, got a $1000 middle class tax credit, from whose pocket will those stimulus tax cuts come? Can you file a negative total for your tax amount and get all your credits to come your way at Uncle Sam’s cost? If your tax owed is $4200 and all your credits add up to $8400, can you get all of your withholding and an additional $4200 back, on top of what you paid in?

No?

So who on earth will benefit from the stimulus package’s tax cuts?

The upper two thirds who are paying taxes: that’s who… And here is the problem that tax cuts cause… Since one third of Americans do not pay taxes, our budget is funded by those two third who are… America’s tax burden has been shifted to the wealthy who pay almost all of our taxes. Cutting their taxes, drastically brings less money into the treasury; less money that will be required to pay for the spending that this stimulus bill requires…

If we give the upper group additional tax breaks, what will those upper two thirds do with their extra money? The problem with receiving large amounts of money is that one can only spend so much… and then what… There is no other choice but to invest it… And as we can rightly see, investing in a domestic factory barely giving a margin of 3% is pointless when one can invest overseas and get a return over 25%, because over there, one does not bother with labor laws, environmental laws, and purchasing raw material is cheap…. As we saw by what happened these past 8 years, our wealth went off shore.

Those proposing tax cuts will bemoan the argument that “tax cuts benefit only the wealthy” , and argue instead that it should be those who bear the brunt of paying taxes, who ought to be the first in line to get the tax relief…. But when they bring up that point, the follow-up question to ask them is this: ok, then, …so which income levels do most of the buying that drives the economy?

Evidence shows that most of our economy is driven by the bottom three fifths.. The very ones who will NOT get much of a tax cut, for they are already paying little or no taxes.

Another problem with tax cuts: they cannot be targeted to a certain area to achieve a certain goal. Giving out tax cuts? So what can you do? Can you legislate how everyone will spend their tax check? All 117 million households?

Official Government Announcement: “This year we want all recipients of a tax rebate to invest in Ohio.”

Really?…… I mean…… really?

I hope that you are beginning to see the myriads of long-term problems that tax cuts create… I know tax cuts sound good… “Wow”… “money to spend”…” great”…. But a closer look at who does the spending and what happens to wealth as it accumulates upwards towards the top echelons, makes one understand exactly what went economically wrong over the past 8 years… Tax cuts simply transfer more wealth into the hands of the wealthy which continues a very unhealthy trend.

It is unhealthy because of this one facet: the wealth that lies increasing in the coffers of those who are well endowed, is being stolen away from the echelons of workers who are not. Over the past 8 years, the average income of the bottom fifth, second fifth, and third fifth, all declined... The fourth fifth’s income was steady, and the top fifth’s level soared… This is opposite from the Clinton years, where income level increased in each economic strata, all at the same time. Based on actual growth of income, most would argue the Clinton Plan is the better plan and should be included somewhere in our national goals. We must restructure the tax code so EVERY income level improves…. including the wealthy.

What? Have the rich get richer? That is no problem, as long as the poor get richer too….. which if I may remind you one more time… is exactly what happened during the last decade of the twentieth century…..

So who spends the government’s money? The first question to ask is this: what do we mean when we say someone has “received” government spending? In this report, any time you use a government service, the amount of money it costs the government to provide that service to you, is counted as part of the government spending you receive. For example, if you use Medicare to pay for a hospital trip, you “receive” the amount that trip cost the federal government. Similarly, if you enroll your children in public schools, you “receive” the amount it cost the government to educate your child. If you have two children enrolled, you receive twice that amount. And so on.

So when we shake out all costs, the bottom 3 quintilles or bottom 60% receive more spending than they pay out in taxes… The top 40% pay out more in taxes than they receive in benefits from any spending.

When all government spending is included, households in the lowest quintile received about $8.21 in spending for every dollar of taxes paid. Households in the middle quintile received $1.30, and households in the top quintile received $0.41 for every dollar of taxes paid.

This chart shows us how Americans spend their money… Through this chart one can see that the top percentile spends more than does the lowest or the middle in each category. But, the percentages spent are a much lower portion of their income….The bottom percentile spent $3193 dollars on food for a year… The top spent $10,243 dollars on food across the same time period… The food percentage of the lower groups income was 32%… The percentage of income devoted to food by the top echelon, was 6.8%….. In housing, 54% is spent by the lower quintile; 14.4% is spent by the top group…..

If you want to flood the chambers of the economy with a mixture of fuel and air, in order to jump start the economy as fast as possible, you have to get the money down to the bottom level as fast as possible… They are the ones who spend it.

Or put another way…. If you wanted $9 billion dollars to go towards helping jump start the food industry, giving out a $9 billion tax cut, which would go to those still paying taxes, would only jump it by 6.8% of that $9 billion: $612 million….. But if you target that same $9 billion as spending (EIC payments) and distributed it to the lowest fifth of income, then 32% of that amount, or almost 2.9 billion dollars hits the target that you wanted… Our food industry gets a $2.9 billion dollar boost graciously paid for by those in top group who are still paying taxes.

Let’s try housing….. The same amount, $9 billion dollars spending spent at 54% puts 4.9 billion into that market… As a tax cut, less than $1.3 billion dollars would reach the target….

It’s human nature… if one does not have enough money to survive, if one receives even a little, it gets spent almost immediately… But if one has plenty, and one is not pressed to buy something right away, one would wisely spend less now, pocket that money into some form of savings, and little or not “stimulus” would occur…

That is why “tax cuts” do not drive the economy… They drive investment, but that virtual world has its own set of rules, which does not create new growth nor improve efficiency among the growth we already have…. Tax cuts create large amounts of money with nowhere to go… In principal tax cuts could work to salvage the economy if those who received them just spent wildly as did their lower income neighbors… To do so, the top quintile would need to spend 34% of their average income or $50,987 dollars worth of food….. At an average household of 3.1 persons, each person would need to eat $16,447 dollars worth of food… Now how is that going to happen?

Another trivial fact that was rather surprising was listed under charitable contributions. The bottom quintile gives away 10.56% of their income to charity and the top quintile donates 4.6%. (It IS harder to go through the eye of a needle)…..

Bottom line is that IF the goal of a stimulus bill IS to stimulate the economy, it is better to spend the money on the lower three fifths, than it is to grant tax cuts to either of the upper two fifths. In the top echelon at least 31.4% of that amount is guaranteed to flow away from the areas needing a stimulus and get locked down into private pension payments or paying down one’s mortgage principal… neither of which generates further spending, unlike buying a pack of doughnuts…. This lack of continued investment into our economy means that 31.4% of the money given out through tax breaks has now met a dead end… It has been sucked out of the economy…..

However the lower quintile person who spends their entire check in one store, causes that store to buy, the factories to sell, the assembly lines to roll, the employees to get paid, who then spend their entire check all over again and the economic process begins to gear up steam….

Tax rebates cause money to get sucked out of the economy… If one seriously wants to get the economy moving again, it is better to continue taxing the top group and just hand that money to the lower group with no strings attached. The economy will be fixed in no time…

Today’s tax rebates are the largest amount of pork this nation has ever seen. They simply do not work to stimulate the economy, unless provisions are also instituted along with that tax break on how it must be spent… Since that is a political impossibility, it just makes more sense to collect the money, and then decided how to dispense the money to those who can be counted on to patriotically spend everything they get….

Even as one closely reads DeMint’s comment, one grasps that he knows this fact all to well and is just mouthing policy that has come to represent his party… “To leave more money in the private sector for consumers to spend..” We see from the chart, that the money is already there… The top echelon is simply choosing NOT to spend that amount on goods and services… Giving them more money will only make things worse….

The chart shows the impact of Federal spending on our lower quintile… The household consumption in the bottom fifth, is almost double what the household income turns out to be…. How can it be double? Their consumption is twice as much as they make… That is due to our federal infusion of money collected from the wealthy, and laid at the feet of the poor….

Spending or tax cuts? Which has the bigger bang?

We discovered some literature about the Great Depression that sought to explain its exceptionally long length as proof that governmental spending projects did not work.. Our research showed the opposite.

The data that is available today, if I can put it briefly, shows that Roosevelt was hesitant towards going full steam towards the Keynesian plan until WWII forced his hand…. In local areas such as the Tennessee River Valley which did have an abundance of projects all close by in the same geographical area, the economy fared better than it did across the nation as a whole… The argument that tax cuts should have been instituted as soon as the market crashed, falls short as soon as one sees the highest marginal tax rate of the thirties was equally low as it is today though out the entire administration of Herbert Hoover during the three years after the crash of ’29 up to Roosevelt’s inauguration. After three years when it was obvious that tax cuts did not work, America threw out the Republicans in Congress, and the rate was jumped up from 25% to 68%. Some stalwarts still contend that not keeping that tax rate ridiculously low prolonged the Depression. Compared to us, they had a tax cut…. It did not work… Massive borrowing to have massive spending on the war…. did…

Those crying for more tax cuts are speechless when presented with this data. The highest punitive American tax rates ever (94%)…. occurred when the country’s economy was booming (1944-45) from massive spending for the war…. The second highest tax run, from 1950 – 1963, ran alongside some great economic years; their highest marginal tax rate was 91%!

I don’t know why this evidence is only coming to light now… The historical record sufficiently provides enough historical data to imply that in the real world, cutting tax rates is bad for the economy, and raising them as high as possible, causes the economy to rapidly expand….

The reason is simple.. If you as a business, had high tax rates (91%), you’d take back some money you had earmarked for profit and reinvest that back into your company… Doing so makes economic sense to you and your board of directors. For if you don’t, you lose 91% of what you made. Instead, you reinvest it… building up your net worth. That investment into oneself is what creates economic activity. Additional personnel must be hired, additional buildings must be built, and additional projects must be funded… The economy grows best ….. not when you reward people for taking money out of it… but when you provide them with a reward for putting their money back into it…

Taxes reward responsible behavior. They do it the “free market” way. Expanding one’s business under higher taxes is cheaper than reporting excessive profits.

So what is the net fallout in a Depression of increasing taxes?

Money does not get reported as income. Which would you rather have: an economy that was broke and not working, or one thriving in all aspects other than the amount of profit being reported to the IRS….

Raising corporate taxes in this case is being done in order to NOT suck money from out of businesses and NOT whisk it away somewhere into the government’s vacuum… No, just the opposite!…. Raising corporate taxes needs to be done so that business can keep its money inside that business, and NOT. send if off to the IRS!

The IRS loses nothing the first year… If the business went belly up, the IRS gets nothing… If the business invests all its profit back into itself, the IRS still gets nothing… The difference is that in the second scenario, we all have jobs and we are paying our taxes…

So if one wants to have fun, what I am actually saying to all of you, is that those economic benefits which we have always heard as one day coming to us from tax cuts… are actually achieved because the amount of taxes that are being collected, is now less…..and it was made so by imposing a rather prohibitive, punitive cost to the reporting of high income and excessive profits … So you see, I am for tax breaks!… Yes?… But they must be achieved in a manner that forces a company to reinvest what would have been profit, back into itself… The most effective method that we have found for accomplishing that, is to raise a corporations tax rate high enough so it makes sense to do just that….

The Stimulus package is about S P E N D I N G….. Due to the cyclic nature of our economy, there is no right or wrong area in which to have it spent…. All money enters the economy and quickly gets spread around where it needs to go…… It makes sense that if we are injecting money into our economy, that we inject it wisely in areas that continue to have improvement and contribute value to us and our progeny…. One can spend money digging holes and filling them up again… Yes, all those jobs will be done by real people who will spend their money…. and our economy will still get a big bang from it…

Or, ………….. we could spend that money on something worthwhile and long lasting, perhaps something like building cheap wind energy, and instead of having a series of refilled holes in the ground, we could have something that continues to save us tons of money every day that it runs….

Either path will lead us to what we need: having borrowed money jump start our economy… Far better to have something lasting to look at when it comes time to begin paying back our loans…….