Wednesday, December 9, 2009

Time to Understand Taxes, the Generation Gap, Waiting for Health Care Reform, and Sexism is Alive in America

Quick Hits on December 9, 2009

* Adam Geller of the Huffington Post wrote a good article about how the decade has been bad for Americans generally, leaving most Americans worse off than they were in 2000. Unemployment rose dramatically from beginning to end of the decade, but also the Median Family income dropped by about $1,500. Republicans have long believed that the answers have always been tax cuts, but don't actually appear to think through the implications of taxation in its various forms.

1. Traditionally, they have focused on income taxes proclaiming the famous trickle down theory, the idea that if the rich have money, they will start businesses and employ us all. The problem with that is that the rich have no reason to take such risks. Those that start small businesses are often people at middle to lower levels of income who take risks because they need to. If there is no need to take a risk, they don't. Thus, the key would actually be people in the lower brackets, not the higher brackets because the higher brackets are trying to protect their money, not trying to risk it.

Additionally, people at lower income levels are more likely to spend their money out of necessity than those at higher income levels, which means they are more likely to keep the economy turning instead of stashing it away in a bank, which means more jobs, etc.

There also seems to be a mistaken assumption that higher taxes on the top brackets means the same higher percentage of tax on all income. We live in an era of what is called "marginal rates." That means that everyone pays the same taxes on the same brackets. So if the rate up to $15,000 is 0%, then even the richest pay 0% on that 15,000, whether they make it in one day or one year.

2. The thought from the right and the middle has been that capital gains taxes should be reduced. They explain that unless people are allowed to keep these gains, they will not take the risks to invest. Except that fundamentally ignores the culture of American society whereby people invest for the future in their 401k, in their buying and selling of homes to move up in status and wealth, and so on all the time. It is part of our culture, not simply an economic numbers game. Sure, if there was no money to be made, they would not do so, but there is a difference between a reasonable tax and no tax or a 100% tax in their effects. By having a capital gains tax of say the rate of the Clinton years, there is incentive to avoid paying that tax, but also incentive to make that money. That means people will seek profits, but they will also seek to re-invest that profit to avoid the tax. It is that very re-investment that keeps the economy going, instead of the siphoning off of profits in the last decade. It is why the rich-poor gap grew under President Bush, where Median Family Incomes fell but millionaires increased. And it is one reason why the economy stalled: people didn't re-invest.

3. Dividends taxes hold a similar argument as capital gains, that people won't invest in the stock market when dividends are taxed too high. The problem with that is it just isn't true, people traded in the 90s looking to make money off of price gains instead of dividends and the market grew. However, more importantly, like capital gains, it means corporations paid out higher dividends instead of re-investing in the future. Sure, some companies still re-invested, but there was record profit taking which would have normally been re-invested which means pay raises that didn't come, investment in future technologies that would have kept some of the jobs in America, and development of future lines of technology which has seen us start to slip behind the world in many areas other than defense.

None of this should be read as a return to the 90% tax brackets, or some obnoxiously high rates, but it should be cause to re-think the "tax cuts are always good" theory because even Reagan's economist who pushed tax cuts admitted that not all tax cuts were good but rather that there was a point where tax rates were most effective and it was lower than the rates they inherited. Think through your tax arguments, don't simply spout a line.

* Some have suggested that Japan's stagnant decade may be headed to America's economy. That may very well be true, but for totally different reasons. America is facing a population problem: We have the Baby Boomers being a huge generation but aging, and the Echo Boomers who are a larger generation but still in high school and college, but in between is Generation X whose numbers just aren't big enough to replace the spending of the Baby Boomers as they leave peak consumer spending years and go off into retirement. That means we may well have a relatively stagnant decade UNLESS America can increase its exports or import a whole lot of consumers, which isn't likely because of the income disparity of immigrants compared to the consumers they would be replacing.

We know certain things about demographics. We know that at age 44, Americans have peaked in their home buying and may buy down but generally are trying to pay off their home to retire in their 60s. We know that Baby Boomers peaked in 1961, which means in 2005, we knew the housing market would decline significantly because home buyers would decline significantly. And it did. We know that at age 49, people leave their peak consumer years because they start worrying about retirement and put more into their 401k, into paying off their homes, and so on. Thus, in 2010, normally, we could have expected a recession. However, the housing market collapse rippled through the economy, and hit the stock market and their retirement funds, causing an early reaction where they stopped consumer spending early.

Normally, those trends would be replaced with other consumers but the gap in ages means that the Echo Boomers are not in place to contribute to the economy in prime consumer years of 30 to 49. Instead, they are preparing to contribute in high school and college. The result means that we may well have to wait a decade before they are ready to take over in the economy to replace the Baby Boomers.

The departure of the Baby Boomers may well cause hyperinflation due to lacking enough workers in the economy in the next decade, but the growth of GDP won't be as significant as one would expect for that kind of inflation. This gap in population will create significant economic problems, and will be responsible for problems with Medicare and Social Security, but it also helps to explain the current situation and to understand the future problems we face.

* I have to admit to be perplexed by the recent compromise by Senate Democrats, partially because I don't think any of us fully knows what it is. One problem with these kind of dealings, which is natural, is that we don't know the details for a few days because they are busy being written up so the details can be viewed as a whole with the general framework. However, if the compromise does not bring significant option changes for Americans from 20 to 50 that worked incredibly hard to elect President Obama, the Democrats risk losing a lot of votes and a generation of voters that they appeared to have gained in the last election. The consequences go beyond this single election for them. They need to show significant change for people under 40 in health care options.

We will have to wait for the details before evaluating them, but what is funny is how critical Republicans are of something that they don't even know what it does. All they know is Democrats proposed it. It clearly illustrates it is the Party of No instead of the party of working to find solutions, and clearly indicates the blame for lack of bipartisanship doesn't belong with President Obama but instead it rests with Republicans who refuse to even look at ideas before opposing them.

* Sexism is alive and well in our society where Viagra is still covered under government health care, but the GOP and some Democrats insist on elimination of womens' health coverage for things like Birth Control pills, and pelvic exams, not counting the refusal to cover the constitutional right to abortion for women. Apparently, it is more important for a man to get an erection than it is for women to have the ability to be properly taken care of and to have their rights.

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