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Let's talk taxes

Why are we ignoring the real problem: that production obviously got out of hand.

How can production get out of hand without sufficient demand?
 
How can production get out of hand without sufficient demand?

It can probably only happen temporarily. Sometimes I help out at a concession stand. We will have a big crowd of people show up all of a sudden and start cooking a lot of hamburgers and hotdog not hardly able to keep up with the orders. Then the next thing I know, we have a huge stockpile of hamburgers and hotdogs but all the customers are gone. It results from over zealousness.

Then we end up giving away the waste after the game.
 
...When a small business owner wants to give someone a job, they do so under the premise that a new employee will increase production in some facet of their operations. A small business would only be inclined to "increase production" if they are experiencing production shortages given their current workforce and physical capital alignment. Small business owners do not hire additional employees based on the taxation of their personal income. To believe anything in this regard is similar to believing in Santa Claus, The Tooth Fairy, etc....

The recent recession was caused by a demand shock that persists to this day. This demand shock did not magically appear when Obama was elected, enacted stimulus, or enacted his health care reform. Insufficient demand has a direct relationship on labor markets. Therefore, it would seem obvious that in order to decrease unemployment, we have to increase demand.

Does continuing a lower tax policy increase demand? I don't see how you can assume such a notion. Would lowering income taxes spur demand? Maybe, but only for those who are currently at zero to negative savings rates.

What will spur demand is a sudden 0% tax holiday on corporate income taxes (from January 2011 -January 2012 minimum). Such a fiscal policy severely diminish the need for corporations to "Dutch Sandwich" their overseas profits into Caribbean banking institutions, and bring that money home. These profits would then be used to increase capital, pay dividends to shareholders, or invest in US assets. Such a tax holiday would cost the federal government between $65 and $75 billion in tax revenue.

Comments?

i disagree with your premise about demand; but on to your specific proposal:

I think that the effect of one-year tax breaks will be muted by the brevity of time. I would rather see a dramatic slashing of corporate income taxes that leaves a lower rate (say, 5-10%) over a longer period of time or (preferably) indefinitely. I think slashing the capital gains rates taxes would also give us powerful results.

...Some excellent work on this topic has come from Valerie Ramey of the University of California, San Diego. Ramey finds a government-spending multiplier of about 1.4 — a figure close to what the Obama administration assumed, but much smaller than the tax multiplier identified by the Romers. Similarly, in recent research, Andrew Mountford (of the University of London) and Harald Uhlig (of the University of Chicago) have used sophisticated statistical techniques that try to capture the complicated relationships among economic variables over time; they conclude that a "deficit-financed tax cut is the best fiscal policy to stimulate the economy." In particular, they report that tax cuts are about four times as potent as increases in government spending.

Perhaps the most compelling research on this subject is a very recent study by my colleagues Alberto Alesina and Silvia Ardagna at Harvard. They used data from the Organization for Economic Cooperation and Development to identify every major fiscal stimulus adopted by the 30 OECD countries between 1970 and 2007. Alesina and Ardagna then separated those plans that were in fact followed by robust economic growth from those that were not, and compared their characteristics. They found that the stimulus packages that appeared to be successful had cut business and income taxes, while those that evidently did not succeed had increased government spending and transfer payments...




what about combining a slashing of the corporate and capital gains tax rates with adopting the debt-reduction comissions' suggestions of lowering income tax rates and removing the vast majority of tax credits and loopholes?
 
How can production get out of hand without sufficient demand?

because (insert bubble asset here) can only go up!!! there will never ever ever ever be a market correction!
 
It can probably only happen temporarily. Sometimes I help out at a concession stand. We will have a big crowd of people show up all of a sudden and start cooking a lot of hamburgers and hotdog not hardly able to keep up with the orders. Then the next thing I know, we have a huge stockpile of hamburgers and hotdogs but all the customers are gone. It results from over zealousness.

Then we end up giving away the waste after the game.

But your desire to make a bunch of food is based on the assumption of static demand from a previous time period. How would you know to make too many hotdogs if nobody had ever bought that many before?
 
because (insert bubble asset here) can only go up!!! there will never ever ever ever be a market correction!

You have just defined speculation.
 
malinvestment. which is put into hyperdrive by a policy of encouraging people to take on debt to invest.


but i tried to address your OP first :).
 
i disagree with your premise about demand; but on to your specific proposal:

I think that the effect of one-year tax breaks will be muted by the brevity of time. I would rather see a dramatic slashing of corporate income taxes that leaves a lower rate (say, 5-10%) over a longer period of time or (preferably) indefinitely. I think slashing the capital gains rates taxes would also give us powerful results.

...Some excellent work on this topic has come from Valerie Ramey of the University of California, San Diego. Ramey finds a government-spending multiplier of about 1.4 — a figure close to what the Obama administration assumed, but much smaller than the tax multiplier identified by the Romers. Similarly, in recent research, Andrew Mountford (of the University of London) and Harald Uhlig (of the University of Chicago) have used sophisticated statistical techniques that try to capture the complicated relationships among economic variables over time; they conclude that a "deficit-financed tax cut is the best fiscal policy to stimulate the economy." In particular, they report that tax cuts are about four times as potent as increases in government spending.

Perhaps the most compelling research on this subject is a very recent study by my colleagues Alberto Alesina and Silvia Ardagna at Harvard. They used data from the Organization for Economic Cooperation and Development to identify every major fiscal stimulus adopted by the 30 OECD countries between 1970 and 2007. Alesina and Ardagna then separated those plans that were in fact followed by robust economic growth from those that were not, and compared their characteristics. They found that the stimulus packages that appeared to be successful had cut business and income taxes, while those that evidently did not succeed had increased government spending and transfer payments...




what about combining a slashing of the corporate and capital gains tax rates with adopting the debt-reduction comissions' suggestions of lowering income tax rates and removing the vast majority of tax credits and loopholes?

Consumers
pushed the price of gasoline up to $4.75 on the basis of speculation? Come on, there was a serious demand shock that pushed all asset prices towards record lows.

Perhaps this will help.

Under federal tax law, U.S.-based multinational corporations are allowed to defer paying U.S. corporate taxes on profits made overseas as long as the profits are invested outside the United States. It is an option corporations often take and a big reason many of them pay taxes far lower than the nominal 35 percent corporate tax rate.

The massive sums of money held by corporations overseas have prompted calls for a temporary tax reduction to encourage corporations to bring more of the money home.

Former Service Employees International Union president Andrew L. Stern, now a senior research fellow at Georgetown University, has proposed that the government temporarily reduce taxes on repatriated corporate earnings, then use the tax revenue to fund an infrastructure bank. The proposal, he said, could generate at least 2.4 million jobs.
 
malinvestment. which is put into hyperdrive by a policy of encouraging people to take on debt to invest.

but i tried to address your OP first :).

Malinvestment is relative. Speculaiton requires one to throw out fundamentals and invest with their gut.
 
nowhere in there did i mention gasoline; did you actually want to talk taxes; or are you going to spend the entire thread in the old "demand v malinvestment" debate?



but hey :D


because it never get's old :lol:


 
nowhere in there did i mention gasoline; did you actually want to talk taxes; or are you going to spend the entire thread in the old "demand v malinvestment" debate?

There is no debate. All prices suddenly collapse, and you are trying attribute it to malinvestment. I guess someone who purchased gasoline for $4.75 a gallon contributed to "malinvestment". The reason gold prices fell following the collapse of Lehman is due to malinvestment. Corn prices; that was due to malinvestment as well. How about natural gas?

Get the point....
 
i got to the 'point' already. you cited it above, in post 33. if you want to argue in favor of aggregate demand, do it with phattonez, or one of the others, who has the patience for it.
 
i got to the 'point' already. you cited it above, in post 33. if you want to argue in favor of aggregate demand, do it with phattonez, or one of the others, who has the patience for it.

The premise of this proposed/theoretical tax cut is to stimulate aggregate demand.
 
The premise of this proposed/theoretical tax cut is to stimulate aggregate demand.

i thought it was to bring that money from overseas for reinvestment and/or disbursement to investors. perhaps you could explain to me in greater detail how this is demand-side.
 
If you believe that producer actions are independent of consumer sentiment, then yes, the problem is excess supply. However, if you believe producer actions are a product of consumer sentiment, the problem is insufficient demand.

So do tell: how did supply increase in lieu with prices unless demand was at an appropriate level for producers to get their asking prices (necessary or prices to increase)?

Secondly, why the sudden fall in all commodities following the collapse of Lehman; was there suddenly too much oil and corn, or was there a sudden negative wealth effect which manifested across the entire world?

Because production was way too high and the only way for companies to clear their products was by lowering prices. It had to happen eventually. Before the crash in home prices, people were having trouble selling homes, hence prices had to come down.
 
How can production get out of hand without sufficient demand?

People make investments all the time by estimating future demand. We have to ask ourselves why there was a common error among most investors that over-estimated future demand.

Robert P. Murphy said:
The hard part of economic affairs, then, is to produce things. After the product is available, consuming it is a piece of cake. To hear some crude versions of Keynesian thinking, you would get the impression that businesses are in trouble because Americans all of a sudden just decided that they didn't like steak and they didn't enjoy plasma screen TVs.

Of course that's not what happened. Instead, what happened is that American consumers decided they weren't prepared to spend as much on these nonessential items. To prove that our recession isn't due to a lack of consumption desire per se, imagine that car dealerships announced they would sell each vehicle on the lot for $1. Or, those trying to sell their homes and finding "no buyers" could charge $10 for each property. Does anyone doubt that these firesales would unload all the excess inventory in a matter of hours?

Of course, car dealerships and house flippers wouldn't want to slash their prices to such lows, because they hope to get more if they wait things out. More generally, they weren't expecting to charge merely $1 or $10 per item, when they invested money over the years to arrive in their current predicament, sitting on unsold inventories.

And now we finally see the problem: the businesses right now that are struggling made bad forecasts. This doesn't mean the people in charge are immoral or dumb, and it could be true that their forecasts would have been accurate, were it not for foolish decisions that other people made. But whatever the excuses, nonetheless there are lots of businesses that used up scarce resources creating products based on the assumption that they would fetch more for these products than consumers are actually willing to pay.

http://mises.org/daily/3332
 
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i thought it was to bring that money from overseas for reinvestment and/or disbursement to investors. perhaps you could explain to me in greater detail how this is demand-side.

This should be of help.

The accelerator effect in economics refers to a positive effect on private fixed investment of the growth of the market economy (measured e.g. by a change in Gross National Product). Rising GNP (an economic boom or prosperity) implies that businesses in general see rising profits, increased sales and cash flow, and greater use of existing capacity. This usually implies that profit expectations and business confidence rise, encouraging businesses to build more factories and other buildings and to install more machinery. (This expenditure is called fixed investment.) This may lead to further growth of the economy through the stimulation of consumer incomes and purchases, i.e., via the multiplier effect.
 
There is no debate. All prices suddenly collapse, and you are trying attribute it to malinvestment. I guess someone who purchased gasoline for $4.75 a gallon contributed to "malinvestment". The reason gold prices fell following the collapse of Lehman is due to malinvestment. Corn prices; that was due to malinvestment as well. How about natural gas?

Get the point....

When home prices fell people realized a huge decrease in wealth in nominal terms. Of course demand would fall for other goods in response to such an occurrence. So why did perceived values of wealth get so out of whack?
 
Malinvestment is relative. Speculaiton requires one to throw out fundamentals and invest with their gut.

Bad investment is relative. Malinvestment has a very specific definition.

Wikipedia said:
Malinvestment is a concept developed by the Austrian School, a non-mainstream school of economic thought, that refers to investments of firms being badly allocated due to what they assert to be an artificially low cost of credit and an unsustainable increase in money supply, often blamed on a central bank.
 
The premise of this proposed/theoretical tax cut is to stimulate aggregate demand.

Austrians support tax cuts, but it's not because of an effect on aggregate demand. Theoretically, you could have just as much aggregate demand if the government spent an amount equal to the money that is left in people's hand from a tax cut. The difference is that Austrians believe that people spend money for themselves better than anyone else can and that some of that money will be saved which has a positive effect on production which creates its own demand.

Second there is an incentive argument. Especially if the tax reduction comes in the form of lower marginal rates (rather than lump-sum rebates), then individuals have the incentive to produce more. Notice that this is the exact opposite of the standard Keynesian analysis. In other words, the pragmatic argument for tax cuts isn't to give consumers more money to go buy stuff, but rather it's to give producers the incentive to go make stuff.

http://mises.org/daily/3332
 
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When home prices fell people realized a huge decrease in wealth in nominal terms. Of course demand would fall for other goods in response to such an occurrence. So why did perceived values of wealth get so out of whack?

Speculation driven by unstable patterns in public information. I believe Greenspan called it irrational exuberance.
 
Personally, I think that reducing corporate tax rates is long overdue. I know a lot of people that do not like this idea because corporations are evil and all but the fact is they control where a lot of jobs are created throughout the world. We need to make it more worth their while to keep jobs domestically instead of outsourcing them.

. When you consider loopholes, as a percentage of GNP, rank as some of the lowest in the world. Additionally, other reason that businesses outsource is the low salaries and lack of safety regulations. So, here's my suggestion.
Let's go back a few decades. We can resend child labor laws, minimum wage, safety regulations, the limits on the hours worked, etc. And, while in the process, let's do away with legal liability. That way the corporations will have free reign and can increase production without any restrictions. Sarcasim aside, government involvement is neccessary. Whatever we do relative to the budget deficit, it requires a mixture of budget cuts and tax increases. It's time for the adults to step forward and the children to enroll in a good daycare. We need to find some common ground and not use this as an issue for the 2012 election. That is inclusive of both parties. I'm not which polictician stated that his primary goal was insuring the Obama did not get re-elected, but certainly spoke volumes. If people stop being concerned about winning the next election and solving our economic problems then we may have a chance.
 
. When you consider loopholes, as a percentage of GNP, rank as some of the lowest in the world. Additionally, other reason that businesses outsource is the low salaries and lack of safety regulations. So, here's my suggestion.
Let's go back a few decades. We can resend child labor laws, minimum wage, safety regulations, the limits on the hours worked, etc. And, while in the process, let's do away with legal liability. That way the corporations will have free reign and can increase production without any restrictions. Sarcasim aside, government involvement is neccessary. Whatever we do relative to the budget deficit, it requires a mixture of budget cuts and tax increases. It's time for the adults to step forward and the children to enroll in a good daycare. We need to find some common ground and not use this as an issue for the 2012 election. That is inclusive of both parties. I'm not which polictician stated that his primary goal was insuring the Obama did not get re-elected, but certainly spoke volumes. If people stop being concerned about winning the next election and solving our economic problems then we may have a chance.

You think that in this country, if we made child labor legal, it would become prevalent?
 
Austrians support tax cuts, but it's not because of an effect on aggregate demand. Theoretically, you could have just as much aggregate demand if the government spent an amount equal to the money that is left in people's hand from a tax cut. The difference is that Austrians believe that people spend money for themselves better than anyone else can and that some of that money will be saved which has a positive effect on production which creates its own demand.

Remember the Bush tax cuts? That money was spent wisely!
 
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