If you were to ask the man in the street if we should give subsidies to very wealthy oil companies, the overwhelming response would be a loud "No!". But if we peel back the curtain and look closer at this issue, we most likely will come away with a different opinion. First of all, most of the stockholders (owners) are from the middle class....many of whom are in union pension funds.
But what specifically are these subsidies? First of all, many "tax breaks" are not subsidies at all but rather accounting devices like depreciation of expensive equipment which lower taxes. These are the same "subsidies" that all companies, large and small, use. But of the true subsidies, in dollar terms, what did they amount to? In 2010 the total was $4.5 billion. Of that a little over $1 billion went to the Strategic Oil Reserve which is designed to protect the country from prolonged oil shortages. The second is tax exemptions for farm oil subsides which comes to another $1 billion. The 3rd is roughly $570 million for Low Income Home Energy Assistance. Those 3 programs account for $2.6 billion of the subsidies.
Most of the remaining "subsidy" is from section 199 of the IRS Tax Code. It is a credit to encourage manufacturing in the US rather than out of country. Microsoft and Apple take advantage of the same credit. This protects jobs and few would lobby to take it away.
In short, if we are to have an adult conversation on this issue, we need more than emotional political talking points. My hope is that for those that may have been enlightened by this article that if you are presented with the question posed at the beginning of this article, that you will now respond with a "yes!".
Saturday, June 7, 2014
Wednesday, January 15, 2014
What Is Supply-Side Economics?
First some definitions. All of economics involves a dance between supply and demand. And government policies toward these two variables can have a profound effect. Keynesian economics is all about the demand side. If in a period of high unemployment a government spends more revenue than it takes in from taxes, this will spur demand and help the economy recover. Virtually every country in the world practices Keynesian economics by regularly running fiscal deficits. Problem is that even in good times they still persist in running deficits, and this has a very dark side. It results in too much demand and inflation in prices, and it also increases federal debt. The other side of the equation is supply. This affects the producer of goods and services. Companies that are hiring in good times, and laying off in slow periods. Let's look closer into the supply side.
Many critics of supply-side economics argue that it favors only the rich. The argument goes that most people that run and/or invest in business are already wealthy, so why would we have policies that benefit only them? This complaint is short sighted and just plain specious. Economic journalist the late Warren Brooks did an analysis of Reagan's supply-side policies , and focused on how much more taxes Americans would have paid if the Reagan tax cuts had not happened. He found that the average filer with an income of less than $10,000/yr would have paid $500 more in taxes, or 134% higher. People with incomes between $10,000 and $30,000 would have paid roughly $2000 more, or 79% higher. People with income of $60000 would have paid $6000 more.* As you can see, these were not tax cuts for just the rich.
Harvard economist Lawrence Lindsey showed that taxes paid by the rich were substantially higher than they would have been if the top tax rate had remained at 70%. In a famous study published by the Journal Of Public Economics he found that for all of Reagan's income tax cuts, between one sixth and one quarter of expected revenue loss was "recouped by changes in taxpayer's behavior." But what was most remarkable about Lindsey's findings was that the tax cuts for the richest Americans raised revenues. He found that about $17.8 billion more was collected from these wealthy individuals than had been predicted. Lindsey concluded, "Some of the more extreme supply-side hypothesis were proven false. But the core supply-side tenant -- that tax rates powerfully affect the willingness for taxpayers to work, save, and invest, and thereby also affect the economy -- won as stunning a vindication as has been seen in the last half century of economics.**
In short, the student of economics should conclude that fiscal tools of both supply and demand need to be used to insure a strong economy.
* Warren Brooks, "The Tax Capitalization Hypothesis", Policy Review, Winter 1987
** Lawrence B. Lindsey, "Individual Taxpayer Response to Tax Cuts: 1982 -84: With implications for the revenue maximizing tax rate," Journal of Public Economics, 1987, Vol. 33,issue 2, 173-206.
Many critics of supply-side economics argue that it favors only the rich. The argument goes that most people that run and/or invest in business are already wealthy, so why would we have policies that benefit only them? This complaint is short sighted and just plain specious. Economic journalist the late Warren Brooks did an analysis of Reagan's supply-side policies , and focused on how much more taxes Americans would have paid if the Reagan tax cuts had not happened. He found that the average filer with an income of less than $10,000/yr would have paid $500 more in taxes, or 134% higher. People with incomes between $10,000 and $30,000 would have paid roughly $2000 more, or 79% higher. People with income of $60000 would have paid $6000 more.* As you can see, these were not tax cuts for just the rich.
Harvard economist Lawrence Lindsey showed that taxes paid by the rich were substantially higher than they would have been if the top tax rate had remained at 70%. In a famous study published by the Journal Of Public Economics he found that for all of Reagan's income tax cuts, between one sixth and one quarter of expected revenue loss was "recouped by changes in taxpayer's behavior." But what was most remarkable about Lindsey's findings was that the tax cuts for the richest Americans raised revenues. He found that about $17.8 billion more was collected from these wealthy individuals than had been predicted. Lindsey concluded, "Some of the more extreme supply-side hypothesis were proven false. But the core supply-side tenant -- that tax rates powerfully affect the willingness for taxpayers to work, save, and invest, and thereby also affect the economy -- won as stunning a vindication as has been seen in the last half century of economics.**
In short, the student of economics should conclude that fiscal tools of both supply and demand need to be used to insure a strong economy.
* Warren Brooks, "The Tax Capitalization Hypothesis", Policy Review, Winter 1987
** Lawrence B. Lindsey, "Individual Taxpayer Response to Tax Cuts: 1982 -84: With implications for the revenue maximizing tax rate," Journal of Public Economics, 1987, Vol. 33,issue 2, 173-206.
Friday, January 10, 2014
The Great Recession of 2008
The cause was the housing bubble, but just how did we get there? In 2001 after the dot.com collapse, housing prices actually rose. This gave a false sense of security to real estate. The FED kept interest rates way down and this spurred demand for housing. With government programs like the Community Reinvestment Act, banks were encouraged to loan to potential buyers who normally could not qualify. Historically it was very difficult for buyers to get a loan with a FICO score of less than 660. But the standards were lowered. In 2003 Only 8% of loans were sub-prime. But by 2007 it had jumped to almost 25%. Nonetheless, the sub-prime mortgages were not scams. The intent was to eventually convert them into conventional mortgages once equity was built.
Lowering the standards for loans enabled home ownership to climb from 64% in 1994 to 69%. Freddy and Fanny were major players in creating the housing bubble. They would buy mortgages from banks and repackage them into mortgage backed securities. The banks would then have more money to lend.
In the Fall of 2003 the Bush Administration raised concerns about GSEs like Freddy and Fanny. They sent Treasury Secretary John Snow to Congress in an attempt to create a new regulatory agency to reign in the GSEs. But they got serious pushback from Congress, and the legislation was blocked. In 2005 the FED Chairman Alan Greenspan added his voice before Congress about a systemic problem with GSEs and the need to reign them in and strengthen the regulations over them. But the two mortgage giants had staunch defenders in Congress, and Greenspan's pleas were ignored. Our fate was now sealed.
Lowering the standards for loans enabled home ownership to climb from 64% in 1994 to 69%. Freddy and Fanny were major players in creating the housing bubble. They would buy mortgages from banks and repackage them into mortgage backed securities. The banks would then have more money to lend.
In the Fall of 2003 the Bush Administration raised concerns about GSEs like Freddy and Fanny. They sent Treasury Secretary John Snow to Congress in an attempt to create a new regulatory agency to reign in the GSEs. But they got serious pushback from Congress, and the legislation was blocked. In 2005 the FED Chairman Alan Greenspan added his voice before Congress about a systemic problem with GSEs and the need to reign them in and strengthen the regulations over them. But the two mortgage giants had staunch defenders in Congress, and Greenspan's pleas were ignored. Our fate was now sealed.
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