The Effect of Tax Policy on Market Performance

[mississippichem]

iNow and myself were having a discussion about the effects of the Bush Tax Cuts inside a thread about modern American conservatism. Our discussion got outside the realm of the thread. We could have moved to the already existing Bush Tax Cuts thread, but I decided I would rather enjoy discussion about the broader topic of the effects of tax policy on general market performance, namely equities, derivatives, and complex financial instruments.

I conjecture that higher taxes propagate market uncertainty, reduce trade volume, and generally choke the efficiency and self-sustaining value system of the market. I will even "go out on a limb" and extrapolate that tax reduction, or sustaining of already existing cuts serves to actively reduce market uncertainty by increasing available venture capital and building confidence in investors.

Many will cite the fact that most tax cut recipients tend to hoard their money rather than spend it. I can't dispute that, the numbers are clear and concise. However, I will argue that money sitting in a bank account is not a passive observer to the market.

In the neighborhood of cooperate tax cuts (also a topic I wish to include under my umbrella), a higher value on the balance sheet quantitatively changes many of the financial indicators which in turn influences investors into increased activity.

In conclusion, my statement could be broadened even further to say that their is a correlation between tax increases and market inefficiency in general.

[iNow]

Just to be clear, I wasn't directly challenging your market focused discussion of the cuts. I agree that there are benefits on the larger economy from tax cuts, but that letting them expire has a greater benefit. You have already stipulated that tax cuts tend to benefit primarily the super rich, who will then stuff that cash under a mattress, or re-invest it (often in firms outside the US). That is a key point to consider. The Return on Investment for tax cuts is somewhat low, especially as measured relative to the return on fiscal and monetary expansion.

 

Further, using the market as a metric is problematic. The market is subject to a lot of volatility and huge swings based on the news of day to day changes... A potential car bomb in NYC changes how the market behaves, so it's ineffective to suggest (as you must with your suggestion) that tax cuts have such a clear impact on market performance and certainty. The effect of regular activities each day carry equal weight, and to do the analysis you suggest, those news events MUST be included and accounted for. As best I can tell, you have not done that.

 

A focus on GDP is the way to go, as it also allows us to normalize our data and adjust for inflation. When viewed in that manner, there is MUCH less bang for our buck with tax cuts than with federal spending. I further remind you that uncertainty in markets is ALWAYS present, and yet investment continues. There is no crystal ball, and blaming uncertainty on the expiration of the tax cuts hardly accounts for the changes in performance you (and others in various threads) suggest.

 

The assertion you are making simply does not scale properly, and the magnitude of the issues we see in the market cannot be accounted for by "uncertainty resulting from expiration of the tax cuts." What DOES scale with the performance we are seeing is the lack of demand for products, which in turn leads to the hoarding of cash and lack of capital investment, since businesses are MORE than capable of addressing the demand for their product with existing equipment and personnel levels. They will not invest in more equipment, tools, or people if what they have already meets the levels of demand being expressed for their products.

 

Now, I do sometimes argue passionately for these points, and part of that passion arises from the fact that I support my claims and assertions with evidence, numbers, and history... Whereas the vast majority of the time those disagreeing with me do not... Seemingly content to make assertions with no basis in reality and no empirical support in their favor.

 

With that said, here is yet more evidence in response to your OP. As I have mentioned previously, I have an abundance of sources in support of my point in the Bush Tax Cuts thread, as well. Cheers.

 

 

 

http://www.bloomberg.com/news/2010-09-13/rich-americans-save-money-from-tax-cuts-instead-of-spending-moody-s-says.html

 

Give the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.

 

Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.

 

<...>

 

The Moody’s research covering couples earning more than $210,000 found that spending by the wealthy is more likely to be influenced by the ups and downs of the stock market than changes in income-tax rates.

 

<...>

 

Federal Reserve Data

 

The Moody’s economists examined saving rates by income groups back to 1989. Their study uses statistics from the Federal Reserve’s quarterly Flow of Funds report, which gauges the net worth of households, and the Fed’s triennial Survey of Consumer Finances, a measure of balance sheets, pensions and incomes of U.S. families.

 

When tax legislation was signed by Clinton in 1993 -- raising the top tax rate to 39.6 percent from 31 percent -- the saving rate fell from 12.1 percent in the second quarter to 9.5 percent in the first quarter of 1994. The Standard & Poor’s 500 Index rose 1.9 percent from July through September, after little change the previous three months.

 

When the first Bush tax cuts were signed into law in June 2001, pushing the top rate down to 35 percent, the wealthy boosted savings. The saving rate climbed to 2.8 percent in the first quarter of 2002 from minus 2 percent in the second quarter of 2001. The increased savings coincided with a 1.1 percent decline in the S&P 500 index.

 

Second Round

 

After the second round of Bush tax cuts in May 2003, the rich also increased their saving, with the rate climbing to 7.6 percent in the first quarter of 2004 from 2.2 percent in the second quarter of 2003, the Moody’s data show.

 

The analysis found some similarities across income levels in the 2001 and 2003 data. The wealthy and the remaining 95 percent of Americans both saved more of their incomes after the Bush tax cuts. The saving rate is defined as personal savings as a percentage of after-tax income.

 

 

 

http://www.factcheck.org/taxes/supply-side_spin.html

 

From the Congressional Budget Office’s 2007 Budget Outlook: “The expiration of tax provisions as scheduled has a substantial impact on CBO’s projections, especially beyond 2010 when a number of revenue-reducing tax provisions enacted in the past several years are slated to expire,” the report says. “Almost all of the expiring provisions reduce revenues.”

 

The Joint Committee on Taxation estimated that the 2001 tax legislation (the Economic Growth and Tax Relief Reconciliation Act) would cause government revenues to be 107.7 billion less than they would have been in the absence of the legislation in 2004, 107.4 billion less in 2005 and 135.2 billion less in 2006. The committee's estimates for the effect of the Jobs and Growth Tax Relief Reconciliation Act of 2003 were that it would reduce otherwise projected revenues by 148.7 billion in 2004, 82.2 billion in 2005 and 20.7 billion in 2006. The JCT makes its comparisons against the Congressional Budget Office's receipts baselines.

 

The projections were not off the mark. A look at the committee's estimates of total federal revenue including the effects of the 2003 tax legislation versus the actual federal receipts shows that the JCT's projections were higher than actual revenues in 2003 and 2004 and slightly lower than actual receipts in 2005.

 

<...>

 

It is clear [Tax Cuts] did not "increase revenues."

 

 

I'm sorry, but the data regarding the tax cuts simply doesn't match the rhetoric of those arguing in their favor.

 

Now, approaching this from a more practical standpoint, we know federal spending will continue. We always hear about "starving the beast" and how reducing revenues will "force us" to reduce federal spending. However, as history has shown time and time again... We still spend, we just borrow to do so. Now, that's a separate discussion, but for sure we are only shooting ourselves in the foot if we decide to extend tax cuts which have only minimal positive impact. My point is supported by nearly every major economist, including (but not limited to) Krugman and Greenspan (two men who hardly ever agree on anything).

 

 

I have much more data in support of my position already in the aforementioned Bush Tax Cuts thread. If anybody wishes to challenge one of my claims, please start there. I remain open to correction, but I simply will not allow my mind to be changed based on a bunch of handwaving and hollow meritless assertions.

[jackson33]

To the article;

 

Give the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.[/Quote]

 

By indicating "save vs. spend", the implication is the "demand side" of an economy. Obviously if the wealthy wish to buy something, they will buy that item and any additional money is simply that, additional money. The point in economics however, is that additional money will be invested in any number of ways, stocks, bonds, in a business or in a simple savings account, all of which will drive the market.

 

Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.[/Quote]

 

Yes, when as the Bush taxes decreased for all tax payers, available money to the individual increased and a portion according to each person wealth was saved. In turn those savings, even if in a checking account (less wealthy people) those funds supported financial institutions allowing increased investments. When Clinton or any Congress raised taxes, the money in the private sector decreases and the reverse will occur.

 

So I don't lose you here; The real underlying point is total taxes on the payer, Local, State and the Federal. Today where in some Cities/States/Federal these taxes are now at all time highs (without any tax increase from allowing the Bush Cuts to sunset), not to mention previously unfunded obligations that payments are now due. That is the tax bite on incomes are already higher today, than was in 2000.

 

Federal Reserve Data[/Quote]

 

While everything MAY be accurate, the results of those savings is explained in my rebuttal to the article, above. If you would like to argue the Federal Reserves involvement in the economical system, not only here in the US or worldwide, you might consider artificially low prime rates, maintained during a reasonably high rate of GDP growth during the Bush years.

 

iNow; I really don't have the time or desire to argue "real history" or the many times tax cuts were used to increase the public sectors investments. Your welcome to check out the different opinions for this increased activity and the results by differing economist, but these events happened in 1920-1946-1960-1980-1986 and 2001/3. Additional and aside from comparably low, other taxing authority rates, the principles involved many things other that were and are still important to what becomes an effect on the US economy. Foreign investments and economies, probably the most important factor, followed by the general health of the US Economy, tax base (employed) and DEBT.

 

However, I will argue that money sitting in a bank account is not a passive observer to the market.[/Quote]

 

mississippi; While I'm not sure if your talking about the Economy (Free market) or Stock Markets in general, iNow led me that direction, the more money saved, the more that is available for investment and the driver of any free market economy, your correct it's not a passive principle.

[iNow]

By indicating "save vs. spend", the implication is the "demand side" of an economy. Obviously if the wealthy wish to buy something, they will buy that item and any additional money is simply that, additional money. The point in economics however, is that additional money will be invested in any number of ways, stocks, bonds, in a business or in a simple savings account, all of which will drive the market.

And, as the article to which you are responding clearly points out, supported by the deeper economic analysis conducted by Moody's, the majority of extra money obtained from tax cuts goes toward savings, not market investments, thus negating the point that tax cuts drive improvements in market performance (more so than something like fiscal and monetary expansion).

 

The question of this thread is what impact tax cuts have on market performance. The data shows there is some gains to be had from tax cuts, but those gains can't even come close to the gains achieved by fiscal and monetary expansion. More here.

 

 

So I don't lose you here; The real underlying point is total taxes on the payer, Local, State and the Federal. Today where in some Cities/States/Federal these taxes are now at all time highs (without any tax increase from allowing the Bush Cuts to sunset), not to mention previously unfunded obligations that payments are now due. That is the tax bite on incomes are already higher today, than was in 2000.

That's false on it's face. Here, let me show you why you're wrong:

 

http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#History_of_federal_income_tax

 

Top U.S. Federal marginal income tax rate from 1913 to 2009.

 

 

You can't just make things up, Jackson. I hope you know that. That was yet another meritless assertion which is contradicted by reality.

 

 

 

 

While everything MAY be accurate, the results of those savings is explained in my rebuttal to the article, above.

Two points.

One - Your rebuttal to that article has been shown to be fallacious.

Two - That one article is hardly the only support for my position I've put forth.

 

 

 

iNow; I really don't have the time or desire to argue "real history" or the many times tax cuts were used to increase the public sectors investments.

Perhaps part of your lack of desire is the fact that I've owned you every single time you've tried? That your arguments have proven to be ineffective and fallacious?

 

 

 

mississippi; While I'm not sure if your talking about the Economy (Free market) or Stock Markets in general, iNow led me that direction, the more money saved, the more that is available for investment and the driver of any free market economy, your correct it's not a passive principle.

Except money saved is not equivalent to money invested. Your comment is non-sequitur. If the money is saved, it's not invested. If it's invested, it's not saved. These are two different categories, so stop conflating them.

[Marat]

The natural tendency of capitalism is to concentrate wealth among the richest people at the top. This creates a huge surplus of capital which has to be invested in productive enterprises or depreciate in value. Part of this excess goes into speculative 'bets on bets,' that is, unproductive, purely paper investments in the form of exotic financial instruments. Since these bets are not really supported by anything tangible, they increase the volatility of the market and the risk of a collapse. But most of the need to find sources of investment for this concentration of excess capital among the wealthy by the tax cuts goes to investment in production, which then generates a huge amount of commodities which have to be bought by the poor and the middle class, who now have less disposable income, both because a strengthened capitalist system has more power to depress wages, and because the redistributive effects of government programs supported by taxation of the rich have been diminished. Because there is now a surplus of goods produced by excess capitalist investment wealth confronting a deficiency of buying power resulting from less wealth being redistributed to consumers by the tax system, you have a crash such as the world saw in 1848, 1877, 1929, and 2008. So the tax cuts not only operate cruelly on people who need government programs to have their basic welfare needs covered, but they also ultimately hurt the economy.

[Pangloss]

Economists seem to disagree on the outcome of preserving the tax cuts only for the middle class and allowing them to expire on the wealthy. A couple of weeks ago 300 economists got together and released a statement summarized in this article:

 

The letter was meant, in part, to counter a statement President Obama made earlier this month during a press conference. He said economists believe extending the Bush-era tax cuts for wealthy Americans “is probably the worst way to stimulate the economy.” The president only favors extending Bush-era tax cuts for families making under $250,000.

 

The economists who signed the letter disagree, saying that not extending the tax cuts to wealthier Americans would have “deleterious effects” since “households earning more than $210,000 account for one of every three dollars in consumer outlays.”

 

“Furthermore,” the letter reads, “businesses directly impacted by upper-bracket tax increases would slow their activities, thereby diminishing economic opportunities for their subcontractors in lower brackets.”

 

And apparently even some Democrats agree, which suggests that it's not just a partisan-politics thing.

 

So far, House Republicans and at least 31 House Democrats have called for an extension of Bush-era tax cuts for all income brackets.

[iNow]

I have no earthly idea why I have to repeat this point so often on a damned science forum... but here it goes... again...

 

Truth is not determined by popularity, so stop appealing to popularity to make your arguments.

 

Stick to the analysis and evidence, will you please?

[Mr Skeptic]

I guess the question is whether to favor (rich) investors or (poorer) consumers. But are consumers really good for the economy? Just as rich investors make foreign investments, consumers purchase foreign goods. In both cases money leaves the country, though in the case of investors it leaves as an investment and in the case of consumers directly as an import.

 

But while investment is a valuable process it is also long-term, which makes it an unlikely choice for jump-starting of economies. Certainly there could be short-term speculation as to what effects the investments will have, but that would be very difficult to quantify.

 

Another question would be as to the cause of the recession. If the problem is that there is not enough investment money to do all we're trying to do, that doesn't sound much like a recession.

[/ uninformed ramblings ]

[CharonY]

iNow, I suppose the information of why is within the statement:

 

The economists who signed the letter disagree, saying that not extending the tax cuts to wealthier Americans would have "deleterious effects" since "households earning more than $210,000 account for one of every three dollars in consumer outlays."

 

"Furthermore," the letter reads, "businesses directly impacted by upper-bracket tax increases would slow their activities, thereby diminishing economic opportunities for their subcontractors in lower brackets."

 

What is lacking, however is the analysis accompanying this. I.e. what is the impact of the deleterious effects and at least an estimate of the how much the activities of the upper-bracket business would be diminished.

 

The important question is IMO not whether tax expiration has an impact in economy or not, but rather how much the impact would be and how it compares to the impact if this tax revenue would be invested by the government in certain programmes (or to reduce deficit or whatever).

Edited October 6, 2010 by CharonY

[iNow]

What is lacking, however is the analysis accompanying this. I.e. what is the impact of the deleterious effects and at least an estimate of the how much the activities of the upper-bracket business would be diminished.

 

The important question is IMO not whether tax expiration has an impact in economy or not, but rather how much the impact would be and how it compares to the impact if this tax revenue would be invested by the government in certain programmes (or to reduce deficit or whatever).

Precisely. I've been trying to make this point since the start, and appreciate your clarity in articulating it. Yes, tax cut expiration has an impact, but the impact of extending them is greater.

 

Here's a rather simple breakdown for those who find reading economics like reading Swahili:

 

 

http://money.cnn.com/2010/09/15/news/economy/bush_tax_cuts_faqs/index.htm

 

Here's the main concern of many economists and lawmakers: If Americans' tax bills go up next year, they will have less money to spend and invest in the economy, and that could erase whatever economic ground has been recovered since the housing crisis sent the country into a tailspin.

 

"The biggest argument for extending the tax cuts right now is our economy is very weak, and raising taxes during a recession, or the recent weak recovery from the recession, could reverse our economic growth," Roberton Williams, a senior fellow at the Tax Policy Center, noted in one of the group's videos.

 

If the tax cuts are extended, however, taxpayers won't really notice any change in their bottom line. So it's unlikely to create any new stimulus for the economy.

 

That's in part why some deficit hawks, like Diane Rogers of the Concord Coalition, say the Bush tax cuts should be compared in their effectiveness to other types of tax cuts to make sure the money is well spent.

 

Overall, extending the tax cuts may prove to be a mixed bag for the economy if they are extended permanently, according to a recent analysis by the Congressional Budget Office. In the short-run, making them permanent might help preserve the recovery, but may actually dampen economic growth in the long run because extending the cuts would add significantly to U.S. debt.

 

 

 

 

The blue and green are what we're debating right now (although, is sort of OT for the intended purpose of mississippi's thread).

 

http://finance.fortune.cnn.com/2010/09/15/greenspan-calls-tax-hike/

 

"I don't think we have time to wait," Greenspan said. "Our choice is not between good and bad, it's between terrible and worse."

 

Greenspan said he feels so strongly about the issue that he is now in favor of raising taxes -- a position he could hardly have imagined earlier in the decade, when he famously came out in favor of former President George W. Bush's 2001 and 2003 plans to cut taxes.

 

Greenspan said all the Bush tax cuts should be allowed to lapse -- a position that conflicts with Republicans' desire to extend the cuts and the Obama administration's efforts to let them stand for those making less than $250,000 annually. He said he still believes taxes should be cut, as a general principle, but not at a time when the government is digging a deeper and deeper fiscal hole.

 

"We should not have tax cuts with borrowed money," he said. Otherwise, he said, there are "very grave problems ahead."

[Pangloss]

I'm not making an argument, I'm passing along an argument made by others. I intend to continue doing that.

 

How does hard data tell us how the highest-earning taxpayers will behave when they lose their tax cut? The chart below (based on the same source you quoted in the other thread) says the government will receive another $68 billion annually in tax revenue (I think your source put the figure at ~61).

 

 

http://www.csmonitor.com/USA/Politics/2010/0913/Bush-tax-cuts-101-What-changes-could-be-in-store-for-taxpayers/%28page%29/2

 

How do we know that the affect on the top earners and their behavior in the market and in their businesses will not exceed the benefits gained from that additional revenue? What does your hard data tell us about their plans and emotions and intentions?

[iNow]

How do we know that the affect on the top earners and their behavior in the market and in their businesses will not exceed that amount? What does your hard data tell us about their plans and emotions and intentions?

Uhhmmm... As pretty clearly articulated above, it tells us that historically they save most of it.

 

---

 

 

But wait... There's more:

 

 

http://www.washingtonpost.com/wp-dyn/content/article/2010/07/30/AR2010073002671.html

 

As a stimulus measure, a one- or two-year extension has one thing going for it -- it would be a big intervention and would provide at least some boost to the economy. But a good stimulus policy can't just be big; it should also offer a lot of bang for the buck. That is, each dollar of government spending or tax cuts should have the largest possible effect on the economy. According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.

 

<...>

 

In fact, of 11 potential stimulus policies the CBO recently examined, an extension of all of the Bush tax cuts ties for lowest bang for the buck. (The CBO did not examine the high-income tax cuts separately, but the logic it used suggests that extending those cuts alone would have even less value.) The government could more effectively stimulate the economy by letting the high-income tax cuts expire and using the money for aid to the states, extensions of unemployment insurance benefits and tax credits favoring job creation. Dollar for dollar, each of these measures would have about three times the impact on GDP as continuing the Bush tax cuts.

 

<...>

 

One of the most common objections to letting the cuts expire for those in the highest tax brackets is that it would hurt small businesses. As Sen. Orrin Hatch (R-Utah) recently put it, allowing the cuts to lapse would amount to "a job-killing tax hike on small business during tough economic times."

 

This claim is misleading. If, as proposed, the Bush tax cuts are allowed to expire for the highest earners, the vast majority of small businesses will be unaffected. Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets -- individuals earning more than about $170,000 a year and families earning more than about $210,000 a year.

 

And just as most small businesses aren't owned by people in the top income brackets, most people in the top income brackets don't rely mainly on small-business income: According to the Tax Policy Center, such proceeds make up a majority of income for about 40 percent of households in the top income bracket and a third of households in the second-highest bracket. If the objective is to help small businesses, continuing the Bush tax cuts on high-income taxpayers isn't the way to go -- it would miss more than 98 percent of small-business owners and would primarily help people who don't make most of their money off those businesses.

 

<...>

 

A main selling point for the cuts was that, by offering lower marginal tax rates on wages, dividends and capital gains, they would encourage investment and therefore boost economic growth. But when it comes to fostering growth, this isn't the whole story. The tax cuts also raised government debt -- and higher government debt leads to higher interest rates. If estimates of this relationship -- by former Bush Council of Economic Advisers chair Glenn Hubbard and Federal Reserve economist Eric Engen, and byoutgoing Office of Management and Budget Director Peter Orszag and myself -- are accurate, then the tax cuts have raised the cost of making new investments. As the economy recovers and private borrowing rises, the upward pressure on interest rates is likely to grow even stronger.

 

I have used standard growth and investment formulas to calculate that the overall effect of the Bush tax cuts on economic growth has therefore been negative -- and it will continue to be negative if the cuts are extended.

 

<...>

 

According to these same projections, the yearly deficit would rise to 6 to 7 percent of GDP by 2020. The Bush tax cuts would account for a significant chunk of this, considering that in each year they are in effect, the revenue lost because of them amounts to nearly 2 percent of GDP.

 

Compounding the problem: By increasing the government's debt, the tax cuts have already led to higher interest payments on that debt. So even if all of the cuts expire on Dec. 31, we will still be paying for them for years to come.

[Pangloss]

I'm not sure if you're not understanding my question or if I'm not understanding your answer. I changed the bold statement, perhaps while you were composing the reply, to try and be more clear. I don't understand what you mean by "they save most of it". Who is they? How can people who are spending more "save most of it"? I don't understand how your quote addresses my question; it seems to be addressing other (peripheral) issues.

[iNow]

I'm not sure if you're not understanding my question or if I'm not understanding your answer. I changed the bold statement, perhaps while you were composing the reply, to try and be more clear. I don't understand what you mean by "they save most of it". Who is they?

The people who make the most money... That top 1%... The "top earners."

 

From the first quote in the first reply to this thread:

 

Give the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.

 

Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.

 

To simplify: The people most impacted by the tax cuts tend to save more when they receive those tax cuts than they would when their taxes are raised. The fact that they save the money instead of reinvesting it directly negates the arguments made in support of tax cuts... arguments which assert that tax cuts benefit the economy in some significant way.

 

To more directly answer your question... We don't know for sure what will happen in the future... what the top earners will do if we extend the Bush Tax Cuts, of course not. We don't have a crystal ball. However... We DO have history to review... We do have data from PAST experiences... and ALL of that data suggests that high wage earners receiving tax cuts tend to save that money... When they are given a tax cut, they basically stuff it into a mattress and forget about it. The fact that they save the money means it's impact on improving the economy is essentially lost, and arguments along those lines are rendered moot.

 

 

 

Regardless... We continue to go farther and farther off-topic from the OP. MChem was asking about the impact of tax cuts on the market. I suppose it's my fault for immediately suggesting that the market is an inappropriate metric to use since it is so volatile and impacted so easily by other sociocultural events... Since tax cuts are hardly the only or even primary variable for consideration.

Edited October 6, 2010 by iNow

[Pangloss]

We don't have a crystal ball. However... We DO have history to review... We do have data from PAST experiences... and ALL of that data suggests that high wage earners receiving tax cuts tend to save that money... When they are given a tax cut, they basically stuff it into a mattress and forget about it.

 

So if I understand you correctly you're suggesting that this most of this new tax revenue will come from "under a mattress" (proverbially speaking).

 

I don't have any problem believing that people who earn millions per year do that. But for families earning $210,000, I do have a problem believing that. That's still very much "middle class", and strikes me as guilt by association. They'll get a whole bunch of new tax revenue from these hapless 210k-ers, who then may not be able to spend as much on the economy, while wealthy millionaires just pull out a little more pocket change, then sit back and laugh.

 

How do we know that that's not the case?

[iNow]

So if I understand you correctly you're suggesting that this most of this new tax revenue will come from "under a mattress" (proverbially speaking).

No. I'm stating that historically when the rich are given tax cuts they tend to save that money, which reduces the economic benefit of the tax cuts themselves (since those benefiting most significantly from the cuts are not, as a general rule, investing it back into the economy in other ways).

[Mr Skeptic]

No. I'm stating that historically when the rich are given tax cuts they tend to save that money, which reduces the economic benefit of the tax cuts themselves (since those benefiting most significantly from the cuts are not, as a general rule, investing it back into the economy in other ways).

 

And if I understand correctly, the loanable money supply can be increased by changing the monetary policy, which would be cheaper than tax cuts.

[Pangloss]

So if I understand you correctly you're suggesting that this most of this new tax revenue will come from "under a mattress" (proverbially speaking).

No. I'm stating that historically when the rich are given tax cuts they tend to save that money, which reduces the economic benefit of the tax cuts themselves (since those benefiting most significantly from the cuts are not, as a general rule, investing it back into the economy in other ways).

 

I don't understand. As far as I know no new tax cuts are being proposed. The question is which economic groups lose an existing tax cut.

 

So aren't you saying that taking the tax cuts away from families making more than $210,000 per year will take money that was, under the tax cuts, merely stowed away and saved, and place it into government coffers?

 

How do we know that the full range of those earners, from families making $210,000 per year all the way on up from there, have been putting that money away rather than spending it?

[iNow]

I don't understand. As far as I know no new tax cuts are being proposed.

I give up. Is there anybody else who can explain my point to Pangloss on my behalf?

[Pangloss]

Yes please, somebody help me out here. In the meantime, regarding your previous post:

 

No. I'm stating that historically when the rich are given tax cuts they tend to save that money, which reduces the economic benefit of the tax cuts themselves (since those benefiting most significantly from the cuts are not, as a general rule, investing it back into the economy in other ways).

 

1) Do you feel that families making over $210,000 per year are "rich"? They're included in the category that will lose the tax cut no matter what, so I think it's a valid question.

 

2) Is there any data regarding what families who make, say, $210,000-$300,000/year do with their extra income when there is a tax cut that affects them? As opposed to, say, people who earn $1,000,000/year?

[iNow]

And if I understand correctly, the loanable money supply can be increased by changing the monetary policy, which would be cheaper than tax cuts.

There is a small limitation to this suggestion, Mr S. With normal monetary policy, you basically have the option of increasing or decreasing rates. To stimulate the economy, you would decrease the rates. However, right now, the rates are already so low that they are against the zero bound. You can't go lower, really, so monetary policy can't really address the current issue.

 

You comment is most certainly valid in times of normal economic activity. However, right now is not one of those times.

 

The reason I call this limitation "small" is because there still exists the option of printing money. Printing money would increase inflation, but a slight increase in inflation right now is not such a bad thing... It would lower the real value of the debt (people will still owe the same amount of money, but the relative worth of each of those dollars is lower so it's easier to pay off that debt). The challenge is that this ignores the root cause of the problem, so sooner or later (unless the impact of intentional inflation is high enough) we're right back to where we started AND the value of our dollar has been shot to crap (although, a lower value dollar WOULD encourage more exports, and hence would create more jobs in the country).

 

I guess my point is that it's about balance, and we've already more or less exhausted our ability to handle the situation with monetary policy. This leaves the need for fiscal policy, like federal programs and expenditures.

[padren]

I don't understand. As far as I know no new tax cuts are being proposed. The question is which economic groups lose an existing tax cut.

 

So aren't you saying that taking the tax cuts away from families making more than $210,000 per year will take money that was, under the tax cuts, merely stowed away and saved, and place it into government coffers?

 

How do we know that the full range of those earners, from families making $210,000 per year all the way on up from there, have been putting that money away rather than spending it?

 

I think the point is that while some of those $210,000 income families would have to lower spending to meet the raised tax burden, that overall there would be a net-gain in spending instead of a net-loss. This net-gain would stimulate more jobs than maintaining the tax cut, because even if not every family is stuffing the mattress in that tax bracket enough of them are that taxes here net the highest liquidity.

 

 

It's also worth noting that those families that are currently pulling $210,000 often depend on a wide range of consumers, and right now a lot of those consumers are right near the breaking point. These "near break" conditions require tactical solutions, because every "full break" causes that person to drop out of the economy in a meaningful way while they try to get back on their feet despite the volatility of couch surfing with kids and staying at shelters. Not only can you be sure these "near break" consumers will spend any assistance they get via the tax immediately, the vast majority will spend it on improving their economic viability and stability.

[jackson33]

No. I'm stating that historically when the rich are given tax cuts they tend to save that money, which reduces the economic benefit of the tax cuts themselves (since those benefiting most significantly from the cuts are not, as a general rule, investing it back into the economy in other ways). [/Quote]

 

iNow; You keep insisting indirectly, that the money available for investments are not as important to an economy as those that consume. The trouble is, today most purchases in some way require that invested money, for the consumer to actually purchase products. By far most consumers, in order to purchase a flat screen TV, a new carpet, furniture or a used car either take out a loan or charge to some credit card, both requiring those invested funds. You remove 1$ from those that invest and 1$ is removed from those that need to charge their purchase.

 

I'm frankly not sure you even understand most of this issue, other than from "Liberal Talking Points", but tax brackets and incomes are NOT related. Depending on the hundreds of variables, a person earning 1M$ or more, can end up in a bracket owing nothing or in one of the highest brackets. In any event the WEALTH of that person, has nothing to do with either and most importantly (which you continue to ignore) is that many of those variable can be maneuvered. Any tax increase, which is what's being proposed on the top brackets, will result in less Federal Revenue in the near future, which is counter productive to the purpose of allowing them to sunset.

 

Then I have to re-emphasize, the other taxes which cannot be maneuvered, such as Property, School, County, Sales and many others that have been increasing more by percentage than the progressively decreasing Federal Income Taxes of 2001-3 and the resulting total paid on that last dollar earned.

 

I'll throw one more thing in here, you might not be considering; As those incidental taxes have been going up, so has the cost to the poorest and not so poor Americans who rent, purchase or simply consume, detectable as inflation. Those that own the stores, rental property or products/services are NOT going to absorb their increased tax burden, but pass those cost on to the consumer, if not in whole, certainly in part. Not trying to confuse the threads intent, this also involves regulation, mandates or requirements on the free market, which again you seem to ignore, or what pending cost might be to business, employers and the free market capitalist system.

 

Even Obama, who IMO knows nothing about business or economics, has now admitted raising taxes on the higher brackets might not be the best action, but not to do it now, in his mind means it will never be done. I'd suggest, we have long passed the idea our problems can be solved by increasing taxes at all, that only cuts in Federal Expenses and somehow increasing GDP (flow of money), could result in fiscal stability. Frankly, I don't see either party actually taking that path!!!

[mississippichem]

-Anyone care to discuss the effect of taxes on Markets? I specifically mentioned equities in the OP. GDP is a non sequitur in a discussion of tax effects on Wall Street.

 

(Though I do agree with the post by Jackson 33 directly above.)

 

_________________________________________________________________________________

 

The Financial Review, spring 1980

 

Notice the quantitative analysis on page 3. These are the kind of arguments I'm looking for, from peer reviewed sources involving calculations and statistical analysis. Good luck arguing this one, you'll pretty much have to prove that algebra is a conservative propaganda machine incited by Rush Limbaugh.

 

page 66

 

Inow, you've yet to fully address this evidence above. I think it shows very clear correlation between market rallies and lower taxes. Please take the time to read it carefully.

 

Also please attack back with peer-reviewed sources. News articles and punditry don't present convincing arguments, their numbers have not been fact checked by experts in the field. Plus if I were to cite Fox News I would be crucified, and rightfully so. So don't site "the Politico" as I think many would agree it is viewed as somewhat of a partisan source.

[iNow]

Correlation [math]\ne[/math] Causation, yet that is EXACTLY what you are suggesting. Hey... Look at that... Everyone is carrying umbrellas again while it's raining... Umbrellas must make it rain.

 

---

 

 

iNow; You keep insisting indirectly, that the money available for investments are not as important to an economy as those that consume. The trouble is, today most purchases in some way require that invested money, for the consumer to actually purchase products.

No, actually. I am insisting no such thing. The only thing I've been insisting is that there is a very clear difference between savings and investments. You keep conflating the two, yet they are different. The studies I've cited show that the rich save when taxes are cut. You have offered nothing but logical fallacy in response.

 

 

By far most consumers, in order to purchase a flat screen TV, a new carpet, furniture or a used car either take out a loan or charge to some credit card, both requiring those invested funds. You remove 1$ from those that invest and 1$ is removed from those that need to charge their purchase.

Which means it's money not saved. Why is this so difficult for you to grasp?

 

 

I'm frankly not sure you even understand most of this issue, other than from "Liberal Talking Points",

Yeah. I'll be crying in my pillow tonight. Such harsh criticism from a mind as logical and crisp as yours really just cuts to the core. Tears... Jackson... in my pillow.

 

 

Most of the rest of your post was a result of you misunderstanding mine, so it's been deleted from my reply.