Friday, May 7, 2010

EFFECTIVENESS OF TAXES

Modified from a post on the Motley Fool

The reasons often given for decreased personal income taxes not being effective is that only a small portion of the decreased taxes for the wealthy go into productive things and even this small percentage often takes years to be effective. For example, Greenspan worried that too much of the decreased income tax benefits the wealthy received would be invested in Treasury securities and that the tax savings of the lower classes (including middle class) would be used to pay off debt (with which they were loaded). Also the "windfall" tax benefit of the wealthy often goes to things that may benefit the global economy but have no or little benefit to the U.S. - such as purchasing existing stock, chalets in Switzerland, Canadian bombardier personal jets, islands in the Bahamas, and the like. Thus decreasing income taxes is an inefficient way to stimulate the economy.

I might add that buying more existing stocks is also not productive as once past the IPO (initial public offering), the corporation gets no more benefit from future trading of the stock.

I tend to agree with Paul O'Neill when he was Secretary of the Treasury that a better tack would have been to lower the corporate income tax. This would have given our corporations some advantage in international trade and might even decrease the price of goods sold domestically, thus stimulating demand. But there are few votes in lowering corporate income taxes so O'Neill was eventually canned (He tended to also make statements that were true enough but were impolitic.).

It might still be possible to do some decreasing of the corporate income tax. My suggestion is to take some* of the increased revenues from letting the Bush-43 personal tax cuts on the wealthy expire** and use them to decrease the corporate income tax. If the corporations used the lowered corporate taxes to reduce the prices on domestic goods, addition revenues could result from increased consumption. This would also stimulate the competitive nature of U.S. corporations in international trade, and increased revenues just might result. Among other things, if corporate profits should increase as a result, the price of stocks would correspondingly increase and enrich stock holders which could alleviate the increased personal income taxes on the wealthy.

*I say "some" of the increased revenues because some should also be used for debt reduction.

**Contrary to the claims of some, there is little indication that increased income taxes lower government revenues. President Bush-41 raised income taxes as did President Clinton. Although there were hysterical claims at the time that these would ruin the economy, the economy fluorished during the 1990s, and there was even positve cash flow the last four years of the Clinton Administration. George W. Bush lowered the tax rates, and there was no growth in employment or the economy in the first decade of the 21st century.

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