We’re Having The Wrong Debate On Taxes
- Posted by TheArmoTrader
- on September 17th, 2012
The US is having the wrong debate about taxes. The debate you will constantly hear on TV is how we should raise more revenue and how to adjust tax rates to meet that goal. Some (usually folks on the right) argue that we must cut taxes in order to increase revenue, but get rid of loopholes/exemptions/write-offs. Others (usually those on the left) argue that we must raise taxes on the wealthy in order to raise revenue whilst cutting or keeping the rates same on the “bottom 95%” or some type of variation like that. The right argues if you raise taxes, it will kill investment and lower revenue. The left argues if you dont raise taxes you won’t raise revenue and will increase income inequality. There is also the fairness argument.
While each side has solid points, both are dead wrong. Federal taxes serve not to “fund the government” but to lower aggregate demand (another way of saying lower inflation), create a demand for the currency (dollars in this case), and shape behavior (to encourage or discourage specific investments/spending).
As you probably already saw, Mitt Romney was caught on tape saying some pretty negative things about the “47%” that don’t pay federal income taxes. First off, nearly 2/3rds of that 47% do pay income taxes, they are just disguised (for accounting purposes) as “payroll taxes”. Last I checked, you needed to earn some type of income in order to pay the payroll tax. The rest of the population (18%) that does not pay either income or payroll taxes is composed of those with very low incomes and the elderly.
But all this is besides the point. The argument about taxes should be: “How much should we lower taxes on those who will spend the extra money to stimulate growth”. By definition, this will be on the bottom “95%” of income earners. The next question should be: “How much should we cut taxes?”. I say we first cut the payroll tax permanently by 15-20% right off the bat. Then have a full 1 year 50% cut on the rest of the payroll taxes (then phase that temporary cut out as the economy improves). This will put some much needed money into the pockets of those who will either spend it (thus adding to aggregate demand) or use it to pay down debt (which will put them in a better future fiscal situation). The total impact should be about ~500 billion added to the economy (Net Private sector savings) in year 1, which is huge.
This will easily bring down unemployment as people will have more money to spend (thus businesses will respond by hiring workers) or invest (thus creating jobs themselves). As you see, I have not mentioned anything yet about the “rich” (top 5%) or corporations. Well, this is where the shaping behavior part comes in. I have my tax policy laid out for corporations here, and its not too different than what I think about the “rich”. Supply-side tax cuts wont work in today’s economy. They were fine when rates were sky-high decades ago, but now, all it does is make a marginal difference. Anyway, corporations and the “rich” will see their profits go up as more people spend more money. So in the end, the payroll tax cut works wonders for everybody. However, we need to shape tax policy in a way so that it encourages investment, hiring, and R&D in the US and discourages any of that outside the US.
Lastly, I am probably going to hear about the “deficit” and how its unsustainable and how without spending cuts we will face a Greek-style debt crisis. Well, first off, did you know the US loses money when it taxes compared to when it borrows? The deficit earns a profit! Even besides that point, the deficit (as long as it remains in US dollars) is fully sustainable. The US, as a currency issuer can never run out of money like a currency user (Greece, California, You/me). The only constraint to the deficit is inflation. But given that inflation is very low, and given that the $FED can raise rates and that we can raise taxes, inflation is our least of our worries and should even be welcomed. Anyway, you don’t lower the deficit (deficit/GDP) by trying to lower the numerator through austerity, you lower it by growing the denominator.
Both the left and right should be all for my tax policy prescription. It adds money to those who need it (thus pleasing the left), while cutting taxes overall and not adding anymore “government spending” (thus pleasing the right).Now, let’s see that payroll tax cut.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Jerry Khachoyan is currently an undergraduate student at UCLA pursuing a degree in Political Science. He started trading in September of 2008. He concentrates on using technical analysis and reading the tape to enter the best risk/reward trades. The stock market to him is one of the greatest inventions by man.
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