Bush to annonce $600 Bn Tax Cut

[Lawrence of Arabia]

Kropotkin - yeah, it was a great line

[Kropotkin]

Well you know what happens if put thousands of spammers in front of a computerscreen; there's bound to be some substance being written. It's not luck, it's statistics.

[Guynemer]

Ahhh, good old trickle-down economics at its "best".

I wonder if Dubya remembers when his daddy called these plans "voodoo economics." I also wonder if Dubya was in a coke-haze at the time.

[Zkribbler]

Originally posted by Lawrence of Arabia
I didn't know that they had hard empirical evidence which refuted the trickle down theory.

1) The Great Depression
2) Reaganomics
3) Currently falling economy since Dubya took office.

[DinoDoc]

What does #1 have to do with trickle down theory?

[Lawrence of Arabia]

Zkribbler - What I meant by empirical data was data for the Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS.)

I think that there is a small trickle down effect, but I do not think that it is big enough to warrant a huge tax cut. I did say 'refute' but i did not say that this mean that it was proven.
My mistake.

[DanS]

Most of this stuff looks pretty modest in context. Less than 1/2 of the first tax cut, after all, which in turn wasn't very big either.

As to the merits of it all, the reason why the cost for the dividend taxation reform will be so small is because companies don't give out dividends due to Uncle Sam taxing dividends at outrageous rates. If taxation is reduced (bringing it more in line with capital gains rates), it should increase dividends, which is a good thing for most non-growth companies and most investors.

In short, I think it makes excellent policy.

[orange]

The government shouldn't be giving so large a tax cut, they should be spending more on education and healthcare

[Dinner]

It helps to bouy up the stock price of companies that give dividends but it doesn't directly do anything to help the over all economy. If you want to really improve the economy then you have to put more money in the hands of consumers who will actually spend it. That's why a payroll tax reduction would be much more efficient at boosting consumption.

If a poor or middle class person gets more in his check then he's likely to spend it on things he's been needing but which he's had to delay purchasing. If a wealthy person, who already has most of the things he wants, gets a wind fall they are more likely to save it or slush it into the stock market. Again that's good for stock prices but that doesn't help companies to sell more of their widgets so it doesn't help clear out inventories nor does it make them restart the production line.

I forget the reporter's name but NPR's chief economist did a detailed piece on why a pay roll tax reduction would be far superior to Bush's proposed reductions for millionairs. The economist also has a big spread on its web site explaining why Bush's "Fiscal Fine Tuning" doesn't andd up, is to expensive, and probably won't be needed any way. It's a great read I suggest you look it up at www.economist.com.

[Ted Striker]

I'd have to agree somewhat with DanS, and there should be 2 parts of a stimulus implemented:

1) Extended Unemployment Benefits
2) Cuts in the dividend tax (though this is a probably)

The cuts to personal income tax, however, should be reinvestigated. One figure said that the average middle class person would only get a $76 break, while the highest class would save $24,000. While that extra personal spending ($76 a person) when added up as a whole will have stimulating effects on the ecnomomy, it doens't do to much for the average person's personal situation. (Though I understand the argument that the increase in aggregate personal spending lifts everyone up as a whole).

The idea of the dividend tax would restructure the way the stock market works, smoothing it out, and encourging companies to actually make a profit, a far cry from the growth stocks of the late 1990s which would expand at any means necessary even if they were losing boatloads of money.

The only problem I have with the dividend tax idea is, (can you help me with this Dan) besides reducing tax penalties on the dividend, what is the incentive for companies to pay out more dividends instead of sitting on the cash (like Microsoft) or reinvesting it in the company?

[Ted Striker]

Originally posted by Oerdin
If a poor or middle class person gets more in his check then he's likely to spend it on things he's been needing but which he's had to delay purchasing. If a wealthy person, who already has most of the things he wants, gets a wind fall they are more likely to save it or slush it into the stock market. Again that's good for stock prices but that doesn't help companies to sell more of their widgets so it doesn't help clear out inventories nor does it make them restart the production line.

Excellent post, a more even distribution of a tax cut would do wonders to even out distribution of wealth problems.

[Adam Smith]

Dividends are taxed too high, no question about it. But that should not be at the top of the agenda.

First question is whether blunt instrument fiscal policy will get the timing right. I would rather use monetary policy (to the extent it can still be useful at low interest rates) or tax cuts which can be recinded if need be.

If there is a tax cut, far better at this point to raise the earned income tax credit (blunting some of the movement for higher minimum wages) than to cut the higher brackets.

The real gripe I have with this proposal is cutting the tax lives for certain types of assets. The lives that the tax code already assumes for certain types of equipment are shorter than their actual economic lives. This allows companies to write off depreciation sooner than it actually occurs, and amounts of a subsidy for capital investment. Further reducing tax lives will result in overinvestment in these goods. Capital could be better used elsewhere, and employment might increase in these industries, if there wasnt this tax distortion.

[DanS]

In the past, the market punished companies giving out dividends. Hopefully, with a reduction in the dividend tax, the market would punish them less or even reward steady dividends.

You are right to bring up Microsoft because that's where all the action is at. $40 Billion in cash and growing at $5 Billion each year. Almost anything we could do to encourage Microsoft to distribute that very inefficiently used cash seems worth it. Uncle Sam would get a large chunk of the distribution, after all...

[DanS]

Crossposted with AS. I agree with you on the subsidy of capital investment. However, inasmuch as industry has been making generational changes in equipment every couple of years, I do think that tax policy (and accounting principles) should recognize that this is going on. I don't know if that is going on economy-wide, but it seems like it is in some industries.

I guess I'm of two minds about it. It would encourage supply-side growth, which doesn't seem like the right thing to do now.

As for priorities, I think there's no better time than the present for the dividend tax cuts. I doubt there will be a more auspicious time in the future.

[Ted Striker]

Okay, now that would make logical sense, thanks Dan.

AS,

That's an amazing angle that I don't think anyone else would have thought of. (But you are the professional here. )

One example I can think of is the corporate IT infrastructure, which is at the end of its useful life. (Some have argued that it has actually lived beyond its normal life).

Now in the short term, I can see why this tax change would be a boon to corporate investment, which is comatose at moment. However, you bring up a good point in that I don't want to see a binge that leads to problems on the tail end where we end up in a similar position that we are in today. (Flatline investment in infrastructure).

Man, I just want it all smooth again.