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Friday, September 22, 2017

Taxes and Incentive


Taxes and Incentive

A cranky opinion for

CRANKY OPINION SATURDAY

The following is the opinion of a cranky old man with no expertise on the topic opined.  Opposing opinions are welcome, but they are wrong.  As always, please, no name calling, and that means you, you big stupid-head!

I studied Economics about 50 years ago.  I am not an economic expert, I barely passed my final exams.  I have never used my economic degree since graduation, and yet I have no problem spouting economic opinions.  To paraphrase the famous TV quick draw artist Bob Ross, “It’s my blog I can post opinions when I want to.”

There will soon be much discussion about changing the US tax code.  There will be statistics and claims from many different perspectives. 

Some will tell us that we are running a huge deficit and reducing taxes now would be CATASTROPHIC!

Some will tell us that any tax cut to the rich (defined as anyone who has more money than you do) will cause DRACONIAN costs to the poor (defined as everyone who doesn’t pay taxes.)

Some will tell us that cuts will benefit the middle class (defined as everyone except Gates, Buffet and the homeless.)

Some will tell us that reducing taxes will increase revenues because people will work harder and longer and rising incomes will increase revenue.

Some will say we need to increase taxes, but only on the rich, in order to provide more services and to reduce the deficit. 

There will be experts and statistics to prove each and every claim from all perspectives.  Who is correct?  As long as the economy is a political football we will never know.  The politicians are more interested in a position which helps them win their next election than they are at designing the best code for the well-being of the country.

We need a tax code that is not static, but adjusts automatically to changing indicators.  The best tax is one that maximizes revenue while still encouraging investment and discouraging bad behavior (smoking, drinking, cheating at cards, bad breath, etc. etc.).

A tax is similar to price of any good or service.  Increase the tax (price) and revenues will rise as long as people can pay it.  Raise the tax too high and revenues will fall. 

If a banana costs a dollar to produce and you sell it for a dollar your profit is zero.  Sell it for fifty cents and you run a deficit.  Sell it for 2 dollars and you are revenue positive.  Sell it for ten dollars and you end up with unsold rotten bananas.

Point being, raising taxes is not always a revenue producer and lowering them can increase revenues, or vice versa.  Taxes need to be adjusted periodically just as produce prices are adjusted based on varying factors.

RAISING OR LOWERING TAXES IS NOT A REPUBLICAN OR DEMOCRAT POSITION.  EITHER IS SOMETIMES VERY SMART AND SOMETIMES VERY STUPID.  IT SHOULD DEPEND ON AN ECONOMIC ENVIRONMENT, NOT A POLITICAL IDEOLOGY!!!

To make my point let’s set taxes at ridiculous rates:

Tax the rich 99% of income and give the poor a tax rebate for zero income that reduces as income rises.  I don’t believe any thinking person would say this a good idea.

Tax the rich nothing, and tax the middle class 99% of their income.  I don’t believe any thinking person would say this a good idea.

Clearly any tax rate should be set somewhere in between these ridiculous examples, if only it were not politicians to make that decision.

Perhaps the most powerful economic stimulus is incentive and the biggest incentive crushers in the economy are high taxes and low competition.

We used to have one telephone company in the country.  There was no competition and government decided what prices were fair for that company to charge.  In sixty years, innovations in the phone industry was from operator assisted calls, to a rotary dial system and at its peak, push button dialing.

Better phones would not increase revenues, why develop them?  Improved service would not improve the bottom line, and lower costs would lower prices that government set.  The result was in sixty years we had pretty much the same telephone service; mediocre and fairly expensive.

When the telephone company was broken up and competition allowed, we had an explosion of technology and phone service.  People went from one phone homes to multiple phone homes and currently a cell phone for almost every person.  Long distance calls used to be prohibitively expensive.  You talked to great aunt Tilly for maybe a minute and then had to hang up or go broke.  Does the term long distance call even exist today?

The tax code is a major determiner of incentive.  It should be designed to be as high as possible or needed while low enough to stimulate incentive for investment and greater profits. 

Maximum revenue while maintaining incentive for investment and profits should be the goal that will be best for all, the rich, the poor, and the middle.

Unfortunately, politics will dictate the direction of any tax code changes.
The preceding was the opinion of a cranky old man and not necessarily that of management…Mrs. Cranky.    

24 comments:

  1. Our country used to have one phone company too. We also had government owned utilities, electric, gas, water, each state had their own company, but they were all government owned. Prices were reasonable and people could afford to pay their bills.Unless they were careless or gamblers I guess. Then one by one, these things were sold off to private ownership and just like in the USA things went horribly wrong and continue to get worse.

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    1. Breaking up government controlled companies in the US HAS NOT GONE HORRIBLE WRONG. Some inter-structure-centric companies are most efficient as monopolies and government controls are needed to prevent gouging. Contrary to your assertion that when our Telephone monopoly was broken up costs rose and service suffered, as I said in the post, service and technology exploded and prices remained reasonable or were substantially reduced.

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  2. While i know little or nothing about economics, i agree with you that whatever is the right thing to do will not be done as long as the lawmaker's number one concern is not doing what is best for the country but doing whatever it takes to get her/his constituents to vote her/him back into office.

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  3. You're right, Joe, there is a sweet spot somewhere in there that moves. The trick is to find it and stay flexible.

    "IT SHOULD DEPEND ON AN ECONOMIC ENVIRONMENT, NOT A POLITICAL IDEOLOGY!!!"

    Bingo! But alas, that isn't how we do it in America. Every time a Republican opens his mouth, the first thing that comes out is "tax cut" (and the first thing a Democrat says is "more please"). Sometimes tax cuts make sense, sometimes raising taxes makes sense. Right now it makes NO sense to have a tax cut. The Republicans will tell you that a tax cut now will create JOBS, but that's a lie. It won't. In times of tight money, when entrepreneurs can't get funding for their creative new products, or established companies can't get the funding they need to modernize or expand, a tax cut to the wealthy likely would result in increased investment capital, and the byproduct WOULD be more jobs. But right now the wealthy have a glut of cash, with no where to invest it. Much of it is parked offshore, or put into short term investments barely making them 2%. The WSJ and The Economist, among others, estimate there is more than $1.5 TRILLION dollars available for investment RIGHT NOW, if they could only find good place invest it.

    Here's a really easy way to determine if a tax cut would be beneficial or not: If interest rates are high, say, for home loans or car loans or 10-year Treasury yields, there is a shortage of money in circulation and a tax cut would bring down rates and spur growth and jobs. THAT IS NOT WHAT WE HAVE TODAY. Home loans are in the 3% range, car loans are even less, and T-bill yields are around 2.25%. Truth is, all the Republicans want to do now is cut taxes, the overwhelming majority of it going to their already super-wealthy pals. They no good and well this "JOBS" chant of theirs is pure bullshit. But they can't very well say, "Hey, we control the government, and we're going into the vault and pull out $800,000,000,000 and give it to our billionaire friends"...very un-PC. If we're smart we'll leave taxes alone for now, and leave that arrow in our quiver for later when we really DO need it.

    Great post Joe!

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    1. Well thought out points.

      Some will agree, some will say that money is parked to avoid high taxes and because there is no incentive to invest it. There is absolutely nothing simple about economics because so much theory depends on motivation and psychology, it is never cut and dry, always a moving target, it should have nothing to do with a political agenda.

      JFK ran on the idea to lower taxes, an idea that Republicans wrongly derided. Clinton raised taxes an idea Republicans wrongly derided. Reagan lowered taxes an idea Democrats wrongly derided.

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    2. There's no incentive to invest? Then why are investors stampeding for the "opportunity" to make a whopping 2.25% on T-bills?

      Don't forget it was about JFK's time that Republicans and Democrats began to swap ideologies. And remember, Reagan lowered taxes in order to (correctly) spur the economy after the disastrous run up of interest rates during the Carter years.

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    3. Hey, I said I was C student. Perhaps in times of uncertainty, 2.25 looks good, and money parked over seas avoids taxes. My point and I don't think you are disputing it is the code is tremendously complicated and because so many non-mathematical, difficult to predict physiological factors are involved, the code needs to be very flexible which when we argue every four or eight years to make any change at all, it clearly is not. Should we raise or lower? Soak the rich? Give breaks to the rest of us? I sure do not know, if only there was a magic formula.

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    4. Agree completely. It is very complex, with lots of constantly moving parts. It's a shame we let our $#%^& politicians anywhere near our tax code.

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  4. I'm just glad I don't have to make the decisions on how much tax to charge. Given the current disastrous situation in the States due to several severe hurricanes and the government promising huge payouts to all affected areas, I would assume taxes would indeed be going up.

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  5. Tax code will always be political. The money to support decent services is there, until the next economic collapse. And that means, people will get by, even in misery, until money comes back into the economy.
    Nothing is apolitical; there always will be a point of view. We waste our energy arguing about the mechanism of government. It is our responsibility to refine the politics of our political system.

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    1. It is indeed a moving target, we need to hold politicians responsible for results.

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  6. The middle ground is where we need to be but our politicians seem to always swing from one extreme to the other, like you said they are not really interested in what is good for the people, it's all about what they can do to get reelected.

    Excellent post Joe, you have my vote when you get ready to run for office.

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  7. I'm for a simple flat tax for all with no loopholes, write offs, nor exemptions. I just put a ton of accountants and a good portion of the IRS out of work.

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  8. I vote for Joeh for President and Patti for Vice President! I'll be Secretary of the Interior...

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    1. I'm OK with the questions, not so much with answers...I decline the nomination.

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  9. Giving tax credits to the rich is the basis for the "trickle Down" theory, and his connected to the notion that the rich create jobs so more money heading their way is good for the economy. This was tried before but most people don't know history. There was a time when the sun never set on the British Empire. Britain was rich beyond measure, yet the wealth accumulated by the super wealthy did NOT trickle down. And it won't here in the United States. We are no longer a democracy--we're an oligarchy--rule by the rich.

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    1. It works when the rich (or the most productive) are taxed too much, it is a bad idea when they do not pay their fair share. I don't know where to draw that line. Do you?

      It has been tried and worked, it has been tried and failed. History is tricky when economic conditions are not static.

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  10. Why do phones and phone service cost so much now, and why do I have to pay a long distance charge to call my cell phone from my house phone?

    Oh, wait. You're the question man, not the answer man.

    As for the tax part...I got nothin'. My husband is the opinionated sort, and he says it's fair enough to be taxed on the money when you earn it, but it's not fair to be taxed again if you earn interest while saving it, and yet again when you take out what you saved.

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    1. There is no crying in baseball and there is no fair in taxes.

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  11. Meanwhile, I'm paying close to $200 per month for a bundled cable package because Spectrum is my only choice if we want to watch live sports. Talk about a monopoly.

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  12. I would not argue that the tax code needs work. But giving more tax breaks to the people earning the highest incomes will do little for you, me, or those less fortunate. Regan tried trickle down economics and most would say that was a failed approach.
    I'm not sure what the answers are but you can bet I will be paying attention to any tax legislation brought before this congress.

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    1. Actually Reagan cut taxes from an obscene 78% income bracket while eliminating many write-offs and we went from a weak stock market beaten down by "Stagflation" stagnating + inflation at over 12% and the economy took off and yes benefited all. That does not mean I favor reductions at this time or increases, my point is it should not be a political football.

      Clinton increased taxes at a time when the economy was overheating and we had many years of stability and a robust economy. Either direction is not knee-jerk wrong or right, it depends on the current economic conditions. Personally I would like to see the code simplified, but not necessarily have taxes increased or decreased at this time, But as I said, I was a C student.

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