The Taxman Cometh
by Richard
Poor Ben Bernanke…
He is a very smart guy in a slippery, no win scenario. In a world where the combined financial assets of the United States total just one third of global financial assets, he is the designated hitter to halt the worldwide implosion in the financial markets, and there is just no way he can do it all himself.His made his mark in academia by becoming an expert on the Great Depression. No doubt, along the way, he read Charles Kindelberger’s classic Manias, Panics, and Crashes
I’m not an economist, and only time will tell if his interest rate interventions will eventually work. But he is only at the controls of monetary policy, not fiscal policy. And here is where the problems are intractable. We have the so called stimulus package in the works, also known as the “no politician left behind” act. The best that can be said is that it should not cause any lasting major harm. It’s sole purpose is to keep the bread and circuses rolling at least through the election.
But in the end, I suppose I must side with Milton Friedman, who said that any tax cut, at any time, in any amount, and for any purpose, is preferable to having the government spend your money.
What the markets are steadily anticipating is the demise of the Bush tax cuts in 2010. If the Republicans could not extend these tax cuts while they held the majority, the chance of doing so as a minority party is virtually nil. The incredible bull market of 1982-2000 was the legacy of the Reagan Tax cuts. The bull market of 2003-2007 was the result of the Bush Tax cuts.
The market is functioning as a forecasting and discounting mechanism, and it is trying to tell us something.
No matter who is elected president, there will be a tax increase by 2010, if not sooner.
Arthur Laffer explained why targeted tax cuts to the so-called middle class, and selective tax increases on the “rich” will not work. The top income earners have an army of advisors to help them shape shift the form and timing of their income, through unrealized capital gains, deferred compensation, and a virtual library of loopholes. Their effective rate of taxation is amazingly constant regardless of the existing marginal tax rate.
The working population does not have access to all these palliatives. At the margin, they may be able to fund their 401K plan, but they do not have the luxury to defer income into the myriad of shelters available to higher income earners. As far as incentives go, of course they would welcome any lower tax rates, but that will not be the mechanism that propels them to earn more income. And if by dint of their hard work and advancement, middle class workers transition to the upper income brackets, well….then they are rich…and they will be expected to give it all back. Not much in the way of a lasting incentive.
So, what is “rich” these days? $100,000 in income? $150,000?
Try telling a young dual income couple in California that they are rich at these levels of income, when they cannot afford to buy a home even in today’s depressed real estate market.
As Arthur Laffer succinctly summarized, raising taxes on the rich will not produce more tax revenue, and cutting taxes on the middle class will automatically lower tax revenue. So, with the demise of the Bush tax cuts in 2010, expect not increasing tax revenue, but dramatically lower collections. Nevermind. What our congress lacks in economic coherence it more than makes up for in political correctness.
I hate to think about, but I’ve been to this dance before. It was the Seventies. High marginal tax rates. Stagflation. Oil Shortages. Gold bugs. The weapon of choice chosen by President Ford was to distribute WIN buttons. Whip Inflation Now. Seriously… that was the response at the very highest level of the government. I think I still have that button in my old Marine Corps footlocker, Time to bring it out, dust it off, put it on. Back to the future.
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