Wednesday, January 08, 2003

Whoops! What a Mistake! Well, friends, it looks like Bush's tax plan is even worse than I previously believed. According to this article from those damn socialists at The New York Times, the White House tax cut plan is going to further degrade the states' fiscal position. It is difficult to overstate how serious a blunder this is. Once again, we're talking about basic economics.

Because most states have a constitutions which require them to run balanced budgets, states don't have the same leeway that Washington does to run a temporary deficit. This is very bad policy, because temporary deficits can be extremely helpful to deal with short-term economic slow downs. You see, one of the things that stimulates a stagnating economy is consumer spending, but another thing is government spending. So, if your economy slumps, unemployment goes up, and tax receipts are down, you spend some extra money, kick start the economy, and make up the deficit when the economy is bustling again and tax receipts are higher. In theory, this can be done without any tax cuts or hikes, because the same tax rates produce more tax income in a good economy when more people are working and earning taxable income.

But, most states, including New Jersey, don't have that option. They are not allowed to run deficits. What does any of this have to do with the White House's federal tax cut? Well, most states' tax codes piggyback on the federal tax system, which is pretty convenient if you are a tax lawyer, but bloody inconvenient if you are a governor of state serving at the same time as a president who doesn't give two shits about mushrooming federal deficits. Because when the federal government stops taxing, say, stock dividends, your state will automatically stop taxing them too, which means less tax revenue. Now, this might not be a problem if the tax cut immediately stimulated your economy. But, since the dividend tax cut will not stimulate the economy for quite some time, if it ever does at all, you're going to have a very serious problem. You can't run deficits, so when taxes are down, you MUST either raise taxes or cut spending. Both of these options will depress your state economy.

Sure, the White House threw in some money to help the states, but it won't cover the cost of the dividend tax cut. So, the states will be in an even worse position than they are now, if the White House plan passes. That's bad news for the national economy. I don't care how low federal taxes are, if you have fifty bad state economies, you have one bad national economy. Pure and simple. Another blunder for the Bush Administration.

Tuesday, January 07, 2003

Talk Radio: No Intelligence Needed. Frequently, I listen to talk radio while driving in my car. I think it's helpful, an sometimes entertaining, to listen to conservative's viewpoints in their own words, when they are talking to a friendly audience. You will notice, if you pay attention, that conservative pundits sometimes sound very different on the radio than they do on cable television.

Anyway, I frequently find Rush Limbaugh too much to bear. Through a great deal of perseverance, however, I've begin to acquire an almost intuitive sense of the truth. I can listen to a story that he is peddling, which I have never heard of before, and spot the lies he tells, even when I have no prior knowledge of the subject. He's that predictable. But if I wanted to talk about him lying, I'd be here all day. I just want to talk about one simple point of economics that he got egregiously, hilariously wrong. [Actually, he's a fairly bright guy, so he probably knows that what he said was wrong, so it may also fit as a lie, but I'll leave you to decide that for yourselves.]

He was talking about the Bush tax cut plan, which I discussed in considerable depth this morning. Specifically, he was discussing the Democrat's pre-emptive attacks against it. He mentioned that Dems said that it would cost $600 billion over ten years. [I now know that it will cost $670 billion over ten years, but why quibble over such minor sums?] He then launched into a tirade against "libruls" for committing savage acts of barbarism against the English-language. He said, and I'm paraphrasing, that when you cut taxes, it means that the government won't receive the money in the first place, so you can't really call it a cost. What he means is that it isn't a cost in the sense that buying something is a cost. However, in an economic sense (and that is what we're talking about: economic stimulus), it is precisely a cost. Whether you are spending currently held money or foregoing future earnings, you are taking on a cost. If Limbaugh doesn't know this, he is really, really, really stupid. If he does know this, he's not only a liar, but he's comfortable in the knowledge that his "ditto-head" audience is really, really, really stupid.

Much to my surprise, that wasn't the dumbest thing I heard on conservative talk radio yesterday. Late last night, I heard Bill O'Reilly talking about his proposal for a "flat tax". I thought, "Oh boy, this again!" I first encountered the flat tax issue when Steve Forbes ran his hopeless campaign for the Republican Presidential nomination in 1996. The premise of the "flat tax" is that the current tax system is unfair, because it taxes rich people at a higher rate than poor people. Flat tax proponents don't believe (at least not in public) that all people should pay the same amount of tax, but they do believe that all people should pay the same rate of taxation. The idea has a certain amount of appeal, I confess, though I personally support the progressive income tax system, whereby the tax rate is higher for higher levels of income.

Anyway, Bill proceeded to explain his plan. First, for Americans making $30K/year or less, the tax rate would be zero. Second, for Americans making between $30K and $100k/year, the tax rate would be somewhere around 22 or 23 percent. Third, Americans making more than $100K/year would pay some higher rate (I don't remember what he proposed, but I think it was in the low 30s, percent-wise). Without discussing the merits of O'Reilly's plan (he's an entertainer, much less a journalist, much less a politician... he's tax policy holds no interest for me), one thing should immediately jump out at anyone who has taken at least one semester of economics, or anyone who read the paragraph immediately preceding this paragraph: that is NOT a flat tax. It is a flat-ter tax; i.e., it is less progressive than the current federal income tax. But it is not flat. And, if the current system is unfair precisely because it is progressive, which is a common Republican/Libertarian claim, than O'Reilly's tax is also unfair, for the same reason.

Seriuosly, this is basic, basic economics. I'm not an expert in economics by any means. I have a bachelor's degree in economics which I obtained in 1999. I have forgotten far more than half of what I ever knew about the subject. My mastery today wouldn't surpass that of a college freshman who has taken Intro to Micro- and Intro to Macroeconomics only. Armed with such little knowledge as that, I can tell you that Bill O'Reilly doesn't know what a flat tax is and Rush Limbaugh doesn't know what a cost is. How is it these clowns are taken seriously?

The Straight Dope on Tax Cuts. Oh boy, has this issue been fun to watch! And, surprisingly enough, the media's been doing a fairly good job of covering it. One example from yesterday's Inside Politics: Judy Woodruff explained the logic behind the White House plan (though she didn't explain why, in current situation, that logic fails to hold), but she also mentioned that Americans making $40-$50K/year would see about $84/year in tax cuts, while Americans making $1M/year would see about $27,000/year in tax cuts. That's a devastating statistic. We've seen so many articles over the last year about the rising gap between the rich and the poor... well, this is how it happens, people.

So anyway, we've got these two competing plans, right? We've got the White House plan, which centers on cutting taxes on dividends (and if you don't know what dividends are, then don't worry: you won't be getting that tax cut), vs. Nancy Pelosi's House Democrat plan, which I really don't know much about yet. So, I'm going to discuss the White House plan.

Here's the idea, presented as fairly as I can manage. The tax on dividends is, in effect, a cost of buying stock in certain companies. You see (and I'm a little sketchy on this myself), sometimes, owning stock in a company pays off dividends in regular intervals, and those dividends are taxed, just like any other income. Some Republicans call this "double taxation", because you were taxed when you initially made the money, then you bought stock, and presumably it's unfair to be taxed again when the stock yields dividends. Run a mile whenever you hear anyone complain about "double taxation", because literally anything could be construed to make it look like "double taxation". It's a political ruse, and this one was perpetrated by Charles Schwab at the President's Economic Summit at Crawford, Texas. Yes, that's literally who is running the economic policy of this administration. Straight up. No shit.

So, what does this mean to the economy? Well, in theory, it means that the cost of buying stock (in companies that pay dividends... only some do) will be effectively reduced, because you won't lose part of your earnings to taxation. This is supposed to promote the buying of stock, which means that those companies will suddenly have more money on hand to hire workers, expand facilities, or what have you. So, the goal is to spur business investment (which is an economic term which has nothing whatsoever to do with the stock market) as a means to stimulate the economy. On paper, it's actually a decent plan. On paper, it will work. In real life, it will not.

Let's set that aside for a moment, though. Let's assume it will work. The plan still sucks. Why? Because it's too expensive, for one thing. The White House plan (which includes lots of other things besides the dividends tax cut) is projected to cost $600 billion over ten years. In case you don't know, that is a whole helluva lot of money. [Come back later today for a special post on Right-Wing Radio Morons to hear why Rush Limbaugh says that this isn't a "cost".] But that's not all. It's also too slow. Business investment (again, economic term, not the stock market) is a slow process. What happens is that some business decides to hire more people, or build a new factory, or start manufacturing new products, or whatever. This creates jobs, either directly (if one of these companies hires Tucker to fill a new position, that's a created job) or indirectly (if the contractor hired to build the factory hires Tucker to weld steel girders, that's a created job too). Job creation is an excellent goal for the White House to have, and lowering the unemployment rate will help grow the economy. Eventually.

But it's all very nebulous. I mean, imagine that one of these corporations that benefits from this tax (and remember, it's only some of them that benefit at all) decides to use the new money to move its production facilities to Mexico where it's cheaper. That won't help the econopmy, that will hurt it. That would mean more layoffs in the U.S., and more jobs for Mexicans in Mexico. There is absolutely nothing in the White House plan to prevent this from happening. It's hard to estimate exactly to what extent, but there is no doubt that some portion of the economic benefits of this tax cut will end up benefitting economies other than our own. It's inevitable. It's just a question of how much.

Another problem: the whole idea is premised on the notion that, if only they had a sudden influx of cash, these corporations would expand production. That's utter bullshit. Most of these corporations have plenty of cash on hand right now, and they could expand tomorrow if they wanted to. They won't, because they are waiting for the economy to improve first. And why not? If the economy is bad, people might not buy your brand new products, or whatever. That's no good. So, the central premise of the Bush plan is false. What's going to happen is that these corporations will get this new money, and wait for the economy to improve. They won't expand production, which is the mechanism by which, according to the White House, the economy will improve. It's like refusing to hit the accelerator until the car is going fast. The car, and the economy, is not going to move.

Why would the Bush White House push an expensive plan that won't work? Because it will help him get re-elected. Duh. But if it's such a bad plan, how will it help him get re-elected? Listen close, this is the clever part. The dividend tax cut will spur "investment". That is, people will buy more stock in these corporations. That will give a boost to the stock market. The stock market is not the economy, but not many journalists know that. Bush will give himself lots of positive news coverage when the Dow Jones breaks 9,000 again, or 9,500 again. Shit, if the Dow gets much higher than 10,000 before the '04 election, we might as well give up now. No, not because the stock market matters economically. It doesn't. But enough people think that the stock market matters economically, so the result is that it matters politically. And there's the money word: politics.

This shit (and as an economic stimulus plan, it is shit) is not about the economy. It's not about jobs. It's about politics. It's a political pay-off to the special interests (wealthy people and huge corporations) designed to increase campaign donation, not employment. It's a political ploy to increase the stock market to make the economy look good to people who don't know better. It's designed to make you think the economy is better when it really isn't. Because this plan will not help the economy. At least, not much, and not nearly enough to justify a $600 billion pricetag.

For lots of facts and figures on this issue, please check out the Center for Budget and Policy Priorities.