Friday, December 10, 2010

Tax Debate or Obfuscation...???

One of the most intriguing parts of the tax debate is the dramatic inability to articulate the differences in positions distinctly enough to allow for making a clear choice. This leaves the American public mystified. On the one hand, tax cuts will be problematic to the government budget thereby perpetuating deficits. And on the other hand, it seems tax cuts are stimulative albeit with diminishing effect as one goes higher on the income scale. That is why a compromise may be made. And that is why opinion polls show American public support of extending the Bush tax cuts for all brackets. Who benefits from this confusion? Why is the American public opinion important anyhow? Do they even understand what's going on?

To illustrate, it isn't clear how an individual who makes millions of dollars annually will add jobs with the extra take home pay if they aren't a business owner. They'll have more disposable income but the increased likelihood (think marginal propensity to consume) of them spending that disposable income dollar by dollar diminishes. In fact, as one climbs that income scale, the propensity to spend diminishes & the propensity to save increases. Now, while an individual may save by leaving the funds in a savings account, purchasing a CD, investing in a mutual fund, etc, this is all savings. And while the term investing as used in an individual's case may connote investing, it actually is counted as saving in economics. In economics, individuals save and firms invest. And so, in saving how is this money being used to create jobs? Well, a bank may use the funds on deposit to extend a loan to a business to expand operations. Or help a business move part of their operations overseas. So, perhaps one can say there is a 50-50 chance that these proceeds will be used for either domestic uses or foreign uses. But many businesses aren't expanding operations domestically because they already have a situation of overcapacity.

Okay, so lets say this person is a business owner. It is unclear how likely a business owner is to take tax cuts and re-invest it into their business. For a businessperson to substantiate an investment activity in their company, there must be the attendant return. At this point, with so much capacity unused, what is the incentive for a business to expand their operations? And if they're expanding, as in the case of a small, growing business, what is the likelihood of them using funds from taxes vs getting a loan or an investor? And does all expansions include adding a position for a person to fill? Typically in times of a recession, there is an oversupply of labor that itself threatens those who continue to hold a job. At any moment one can lose their job or be replaced by a more willing candidate seeking a job – especially at a lower rate. So, employers tend to find willing, more helpful employees to take on more responsibilities. This is part of what typically leads to improved productivity in these times. So, how indeed does paying less taxes aid a business owner in adding more jobs? Or more pointedly, why would a business owner take their increased income and invest it into their company?

So, what we have illustrated here is the inability to distinguish between a business & an individual tax situation, between saving & investing in economic terms, the different tax usage implications, etc to get to the point of understanding how these issues affect the economy. I intentionally didn't answer all of the questions posed to demonstrate the added complexity of these issues. In my estimation, these issues are too complex for the American public to know enough to have an opinion. But this also demonstrates that taking a stance entails answering these questions. And depending upon how one answers these questions, one may see how a position is taken.

Overall, one gets the impression that much of the debate is intentionally obfuscated to create a smoke screen in order to get what is desired – keep tax the cuts across the board. And, good or bad, that is what they may be getting.

Friday, December 3, 2010

To Whom Do The Benefits Accrue?

In economics, an important question that is asked in economic analysis is: "To whom does the benefits accrue?" After making that determination, a value judgement typically yields a policy formulation. In the current state of economic affairs, we find ourselves saving more thereby spending less on consumer goods, paying down debts, etc. If there is any wonder why we're still in the "pain zone" so to speak, its because we're in a transition space with implications of structural realignment. But take a look at one aspect of the benefit accrual analysis: saving more means more money in bank accounts for banks to lend & lending is historically low, spending less on consumer goods is keeping jobs at bay as businesses still have untapped capacity and so lack an incentive to hire, households are paying down their debts and in doing so forgo opportunities to make consumer purchases that further complicate the situation. So, with more money in the bank & consumers paying down debts, this begets the following question(s): To whom does the benefits accrue? What is that money doing in the bank? Where does this money that is paying down debt going to? Who is benefiting from all of this?