GOP's official report says tax cuts for the rich just don't do much of anything to help the economy.

[giblets]

Maybe he's talking about real interest rates? Weren't they negative in 1980?

[Kidlicious]

You should. He has a better understanding of the concept of economic elasticity than you do.

You two are like brothers.

[Kidlicious]

You're not being coherent because you're not using a precise term. Sure, I understand that you're vaguely talking about some sort of return to capital - some sort of interest rate on it. But interest rate for whom? There are all sorts of people who own capital. Some people get better returns to capital than others, and we can't possibly measure them all. Usually, the one that's important to macroeconomics is the marginal one.

In the absence of you pointing out the specific interest rate on capital you're concerned with, I will continue to assume you mean the risk-free nominal interest rate for the marginal investor, as indicated by US treasury bonds - which went up during that time period. Way, way, way up.

I'm talking about the rate of profit (a precise term) and it is calculated (you can use historical costs or market costs). It decreased from the end of WWII until the 80's.

Here's an article about it in the Cambridge Journal of Economics. Educate yourself then you may be able to talk about the effect of taxes on economic growth.

http://cje.oxfordjournals.org/content/11/4/331.extract

[Jaguar]

Look at the last sentence of the first page. Rate of profit is not a precise term until you add some qualifiers.

You didn't do that. Thankfully, they did. They let me know that they're talking about average returns on capital, not marginal ones. They also let me know that they were talking about returns on physical capital - not other sorts of capital, like intellectual property, R&D, or brand value.

The numerator of his profit ratio was profit before taxes, including net interest, of all US enterprises, while the denominator was the total value of physical capital.

I needed all of this information to proceed. You leave out details because you don't understand why they're important. The important distinction was average versus marginal. The marginal rate is the one that affects people's decisions, not the average one, so a calculation of returns on inframarginal investments isn't relevant.

I can take a look at the Fed's paper to try to unwind the actual explanation of the historical data for you, but I don't think it's worth my time.

[Kidlicious]

Jaguar,

Why would I be talking about treasury bonds and interest rates? That doesn't even make sense. I'm refering to your claim, that taxes reduce expectations of profits and therefore reduces economic growth. Really you are doing the same thing Ben does.

[Jaguar]

The treasury bond interest rate (plus risk premium or equity premium) is the rate of return that a marginal investment has to achieve in order to be made.

[Kidlicious]

Look at the last sentence of the first page. Rate of profit is not a precise term until you add some qualifiers.

You didn't do that. Thankfully, they did. They let me know that they're talking about average returns on capital, not marginal ones. They also let me know that they were talking about returns on physical capital - not other sorts of capital, like intellectual property, R&D, or brand value.

The numerator of his profit ratio was profit before taxes, including net interest, of all US enterprises, while the denominator was the total value of physical capital.

I needed all of this information to proceed. You leave out details because you don't understand why they're important. The important distinction was average versus marginal. The marginal rate is the one that affects people's decisions, not the average one, so a calculation of returns on inframarginal investments isn't relevant.

I can take a look at the Fed's paper to try to unwind the actual explanation of the historical data for you, but I don't think it's worth my time.

OK let's go this way. I'm assuming that you believe that the rate of profit of all US enterprises did not decrease between the end of WWII and 1980. Every source that I've looked at says that's not true. Of course they have used different calculations. But how would you calculate it?

[Kidlicious]

The treasury bond interest rate (plus risk premium or equity premium) is the rate of return that a marginal investment has to achieve in order to be made.

Ok. I'm asking you about this...

"Taxes on profits lower the after-tax risk-adjusted expected nominal rate of return on new business investments. For some investments, those taxes lower the after-tax rate of return enough that it goes below the interest rate at which the firm can borrow."

Why would you think I'm talking about treasury bond interest? I'm talking about expectations of profits for decision makers. I'm saying that those expectations decreased from the end of WWII until the 80's yet we had much economic growth during those years. What do you say to that?

[Jaguar]

OK let's go this way. I'm assuming that you believe that the rate of profit of all US enterprises did not decrease between the end of WWII and 1980. Every source that I've looked at says that's not true. Of course they have used different calculations. But how would you calculate it?

I would agree that the rates as defined and calculated by Nordhaus, etc are accurate. I studied with William Nordhaus. And those calculations were relevant to the issue he wanted to discuss. The problem is that they aren't relevant to what we're discussing in this thread.

Nordhaus was calculating the average (inframarginal) return on physical capital. We want the marginal rate of return on all sorts of capital.

[Kidlicious]

I would agree that the rates as defined and calculated by Nordhaus, etc are accurate. I studied with William Nordhaus. And those calculations were relevant to the issue he wanted to discuss. The problem is that they aren't relevant to what we're discussing in this thread.

Nordhaus was calculating the average (inframarginal) return on physical capital. We want the marginal rate of return on all sorts of capital.

What do you mean, like financial capital? Why should we be concerned with that?

[giblets]

Kidicious, why did you post a graph that's impossible to read?

[Jaguar]

What do you mean, like financial capital? Why should we be concerned with that?

Financial capital is physical capital.

[Kidlicious]

Financial capital is physical capital.

No it isn't. They have different returns. Wasn't your claim that the return on physical capital determines investment in it and therefore economic growth. Return on financial capital determines investment in it. As you have said, if the return on financial capital is higher than the return on physical capital investors will invest in financial capital.

[Jaguar]

The treasury bond interest rate (plus risk premium or equity premium) is the rate of return that a marginal investment has to achieve in order to be made.

Ok. I'm asking you about this...

"Taxes on profits lower the after-tax risk-adjusted expected nominal rate of return on new business investments. For some investments, those taxes lower the after-tax rate of return enough that it goes below the interest rate at which the firm can borrow."

Why would you think I'm talking about treasury bond interest? I'm talking about expectations of profits for decision makers. I'm saying that those expectations decreased from the end of WWII until the 80's yet we had much economic growth during those years. What do you say to that?

This is puzzling. You quoted something I wrote, and then asked the question it answers. I'll spell the calculation out even more.

Treasury bond interest, plus risk/equity premium, is the rate at which firms can raise capital. A treasury bond represents an alternative, for savers, as opposed to handing your money over to a business. A business project whose expected return is below the treasury interest rate (after risk adjustment), will not be able to get any money from savers, and therefore won't be made.

[Kidlicious]

This is puzzling. You quoted something I wrote, and then asked the question it answers. I'll spell the calculation out even more.

Treasury bond interest, plus risk/equity premium, is the rate at which firms can raise capital. A treasury bond represents an alternative, for savers, as opposed to handing your money over to a business. A business project whose expected return is below the treasury interest rate (after risk adjustment), will not be able to get any money from savers, and therefore won't be made.

Believe it or not, I've taken finance 101. I know what you're talking about, and I'll say it again. I'm not arguing about that. I'm saying that the evidence suggests that a falling rate of profit (return on investment) does not mean less investment. That the rate of profit fell from the end of WWII until the 80's. So what is your explanation? That is my question, but you keep talking about the basics of the investment decision.