So what does falling off the fiscal slope mean?

Filed in National by on December 31, 2012

So we have news this morning that, allegedly, Vice President Biden and the Turtle leader, Senate Minority Leader Mitch “I’m going to lose to Ashley Judd” McConnell have made some alleged and mysterious progress overnight in their last second talks to reach some kind of deal to avert falling off the fiscal cliff.

Sources close to the talks said a deal is now more likely will come together but cautioned that obstacles remain, including how Speaker John Boehner and House Republican leaders react to any tentative agreement.

“The Leader and the VP continued their discussion late into the evening and will continue to work toward a solution. More info as it becomes available,” a McConnell spokesman said.

I am cynical, and I am pretty convinced a deal is impossible, and thus this is nothing but further political kabuki theatre so that McConnell can later blame the breakdown on Biden and Obama, or Senate Dems. The reason why I say that is that because a raise in tax rates on the wealthy is the line in the sand and a dealbreaker for both sides. For the Dems, a deal must include it. And for the Rethugs, a deal cannot include it. There is no getting around that central fact. The Republicans have proved time and again that they will continue to fellate the rich and billionaires at the expense of the rest of us until the end of time.

So what is going to happen tomorrow?

Nothing, really. Not right away, anyway. Here are the affects of going over the slope:

1. The economy will shrink by .5 percent and unemployment will soar to 9.1 percent, according to the non-partisan Congressional Budget Office.

Ok, we can absorb that, though. A setback for an economy that is growing by 3 percent right now, so it will mean that the economy will grow by 2.5. It won’t be a double dip recession.

2. The vacation is over for payroll tax holiday, which Obama introduced in 2010 and affects 125 million households. Post-cliff: The average person making $50,000 annually will see $83 a month taken out of their paycheck, according to CNNMoney.

This will hurt a little bit, but the payroll tax holiday was always temporary.

3. Under the Bush era tax cuts, parents can get a $1,000 tax credit per kid. Post-cliff: That’s slashed to $500 per kid, according to The New York Post.

Again, this will be restored shortly after January 1, unless the Republican Party wants to lose all their seats in 2014.

4. For the estimated 5 million people who have been unemployed for at least six months — more than 40 percent will lose their benefits, according to CBS News.

This sucks. No doubt about it.

5. An 8 percent cut to the $2 billion federal grants to state and local law enforcement agencies has already triggered some prisons to release prisoners early because they can’t afford to keep them behind bars, according to The Associated Press.

I don’t see this as a problem. Release all those non-violent drug offenders who only bought or sold marijuana and who shouldn’t be in prison anyway.

6. The Research and Experimentation Credit was introduced in the 1980s and offers entrepreneurs and business leaders tax credits. Post-cliff? It’ll expire, according to The Tax of Adviser.

Meh.

7. Married couples receive double the tax deduction than that of single people under the Bush tax cuts. Post-cliff: That could expire, costing married couples $2,000 extra, according to CNN Money.

For those making under $250,000, this will be restored after January 1 as well. So no big deal.

8. Obama’s Higher Education Act — a prominent pillar of his 2008 election campaign — includes the American Opportunity Tax Credit. For families paying college tuitions, it’s a tax credit worth up to $2,500 annually for four years. Post-cliff: That tax credit could be reduced to $1,900 annually for two years, according to The Wall Street Journal’s SmartMoney.

I imagine this too will be restored after January 1.

9. Going off the cliff would reduce the national deficit by $607 billion between fiscal years 2012 and 2013, which amounts to 4 percent of GDP, according to the CBO.

That’s a good thing, right?

This fiscal cliff thing is just a media made and politician endorsed “crisis.” Isn’t cutting spending and raising taxes on the rich what we all are supposed to want in the end? Democrats want to raise taxes on the rich, and Republicans want spending cuts. Well guess what, a good compromise does both. In fact, we are cutting spending by a ratio of 2-1 over raising taxes. So Republicans should love it. The media should love it.

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  1. puck says:

    I am more cynical and I believe a deal WILL happen. A bad deal.

  2. cassandra_m says:

    The best Fiscal Cliff narrative is from Twitter:

    @pourmecoffee: Congress is waiting until the last possible minute. This has happened to me and means the fiscal cliff plan will come from Wikipedia.

  3. puck says:

    There is a scenario where the Senate passes something late tonight and the House passes it on New Year’s Day. Now THAT would be what I call snatching defeat from the jaws of victory. Their thinking is since the markets are closed it won’t affect the economy. My thinking is at midnight tonight the politics for a deal totally change.

  4. kavips says:

    Whether we cross the lip of the cliff or not, the additional taxes are not really felt until next year by the economy.. Most have gotten used to the payroll tax, so that will be the one item that causes the most disgruntlement among those getting paychecks.

    Regular withholding will not change for most, they are not in the top 1%. So really as you point out, credits which get applied on the next tax return, are the causalities of going over the cliff.

    The tax credits for 2012 will still be taken and received this year. It is next year that less will be taken off everyone’s final tax bill. Hopefully we shall all be making 10% more in salary because our bosses have to pay that much to keep us from jumping because the economy is creating jobs faster than employers can fill them…

    The economic boom will begin the second half of the year as those who’s accountants tell them that they will now pay additional taxes on their gigantic earnings, look for ways to bury those earnings into the economy, an economy still starved that any additional investment will create jobs.

    (On a personal tone, I think it is prudent to be optimistic just before the new year; not to do so portends bad luck.)

  5. Aoine says:

    At this point I really think that the news reporters are the news makers

    really?? all this jumping about and wondering – its like super bowl time in Politics. Evey little jot and tittle is talked about and commented on – the pundits and news folks are making a goOd living off this

    Its much ado about………what may end up being nothing in the long run.

    color me dumb, but the effects, like kavips said are long down the run and may be changed retroactively – sooooo, that said the clownS are going to do what turtleS and clowns do

    and its all a media grab…. if I am like most Americans I am so sick of the posturing and saber rattleing. In this case the Senate and House Rs are the clowns, but sometimes the left pushes too hard the other way – I mean I get it, but bi-partainship IS the only way to move forward together

    sometimes we get to be the windshild, sometimes we get to be the bug.

    lets just hope some of these folks GROW UP!SOON!

  6. puck says:

    The economic boom will begin the second half of the year as those who’s accountants tell them that they will now pay additional taxes on their gigantic earnings, look for ways to bury those earnings into the economy

    @kavips- That’s assuming Democrats stand strong on dividend taxes, letting them expire back to being treated as regular income. But if we set dividend taxes only to 20% same as capital gains, which keeps getting floated, we won’t be reaping the benefits of that tax avoidance behavior and the jobless recovery will grind on while the rich compound their gains forever.

    Raising taxes on the rich isn’t about revenue; it’s about changing their behavior to make them job creators once again. The Mitt Romneys of the world aren’t concerned about taxes on their wages.

  7. cassandra_m says:

    I want to know where you people work where your employers will just hire people just because they want to avoid taxes. Where they will hire people not because there is work for them to do, but because they are tax shelters. This is a serious question, because I have never, ever worked for anyone (publicly held or privately held company) who will just hire people to make the books look good. It is typically the other way around — firing or adjusting the hours of current staff to make the monthly or quarterly numbers.

    Tax policy isn’t going to make these people into job creators — consumer demand will. All the current package addresses is the debt and maybe the deficit. And as we can see in Europe, imposed austerity is not a path to economic growth.

  8. puck says:

    ” It is typically the other way around — firing or adjusting the hours of current staff to make the monthly or quarterly numbers.”

    And where do you think those numbers come from? They come from bean counters who are looking at the whole profit-and-loss picture, including taxes. And beyond the bean counters we have executives – decision-makers – whose wealth (and the wealth of their friends) depends not on wages but on investment income from their business. Their decisions depend as much on emotion or psychology as the bean count.

    There is plenty of work in the American workplace right now. But we’ve often got two or three persons’ work assigned to one employee.

    Suppose you are running a for-profit business, say a chain of nursing homes. Demand is basically unlimited. Maybe you have an uncomfortable level of safety complaints against you due to understaffing. Your investors could always count on you to skimp on costs to pay out dividends. But now taxes go up to 43% on dividends, and some of your big investors start pulling out for more long-term investments taxed at capital gains rates of 20%. Are you still going to focus on short-term dividends? Or are you going to form a new business strategy focused on stabilizing the workforce and building the company for the longer term?

    I say you’d go out and buy some improved efficiency equipment, hire some more workers, or both.

    No, I don’t think I can come up with a case study, because we have been cutting investment taxes for fifteen years now. I can say that when dividends began being treated as regular income in 1993, we experienced an eight-year hiring boom.

  9. puck says:

    Correction: Dividends were actually treated as regular income long before 1993. So I guess that part of my example doesn’t work. But regular income tax rate did go up in 1993. And dividends were treated as regular income during our periods of highest employment. When they were brought down to 15% in 2001, that corresponds to our current period of sluggish job growth.

  10. anonymous says:

    Yes, the system has been broken. The system of government that was to be of,by and for the American people, not the wealthiest 1-2%. Isn’t it odd, not a word of protest, from poor, middle income tea party voters, as the politicians of the 1% wealthiest don’t mind the prospect of rising taxes on average republican Tom, Dick.

    What seems like a major tax battle now, is just a skirmish, a minor battle, of a larger upcoming war.

    But of course, the tea party wasn’t started by average Tom, Dick’s anger over income taxes, federal spending, bail outs or CO2 tax, (but the wealthy few, did figure out a way to tap into issue votes and get into power.) It started with a call for city traders as a movement for financiers to dump securities into Lake Michigan, as protest to Obama’s plan to subsidise “losers.” (Humm, millionaires say they don’t want to ‘subsidise’ poor, looser Americans, like the 47% Romney told the millionaires about.) Actually though, I think they want to make and hold onto every dollar they can.) At about the same time, a group founded and funded by billionaires Charles and David Koch (of Koch Industries, oil, gas, mineral, timber, chemicals companies,) a powerful group of CO2 polluters, started organizing ‘tea party’ events. This group was called Americans for Prosperity (AFP.) Over 15 years the Koch group spent $85 million plus on lobby groups to argue for against taxes – and weaken regulations for industries. Groups and their politicians fought to stop laws that would reduce carbon emissions. Denial, by any method, was a handy tool.

    You just heard Republican Senator James Inhofe, who is on the U.S. Senate Committee on Environment and Public Works,say, “…what ‘He’ is doing in the climate.” “He is doing” it. Yep, climate change is ‘God’s’ doing – according to U.S. Senator James Inhofe.

    Never mind that there are plenty of questionable earthly devils willing to shovel coal for the fossil fuel industries, to continue to heat the planet to the tipping point of no return. (You can look at these later:)

    http://epw.senate.gov/public/index.cfm?FuseAction=Minority.PressReleases&ContentRecord_id=d6d95751-802a-23ad-4496-7ec7e1641f2f&Region_id=&Issue_id=

    Continuing…… the income tax battle is – a minor skirmish.

    Back in 2008, AFP circulated an anti-tax pledge to government officials at the federal, state, and local levels. A candidate who signs the “No Climate Tax Pledge” vows to “oppose any legislation relating to climate change that includes a net increase in state or local government revenue.” (And the backers had plenty of money to see that such ‘signers’ would get elected. I don’t understand why such a group as AFP are allow to buy off government officials with a predetermined ‘pledge’ to undermine legislation of our local, state and federal governments. But apparently, it’s allowable, and that’s the point where the government has been sold, broken, thrown in the trash heap.

    The tea party political skirmish, regarding the TAXING OF MILLIONAIRES, BILLIONAIRES, is nothing, compared to the upcoming war of TAXING CO2 – even though reducing anthropogenic CO2 is the only way man can turn down the global heating. That’s when poor, average tea party voters will too late realize, it was they who put these tea party, no tax, no regulations, politicians into office – to break the system with the ultimate ‘no tax’ pledge, as all fossil fuel burning hell breaks out around the world.

    One would think this income tax skirmish would show the poor, middle class republicans, exactly who it is the 1% are looking out for. But no. Even if an average republican would end up paying thousands more a year, the 1% wealthiest would have their politicians, Rush et al, convince them – it’s the democrats’ fault and the average tea party republican would believe it. After all, republican senator Inhofe says, climate change is, “what ‘He’ is doing in the climate,” as poor, average republicans stand quietly by.

    One wonders when the 1% will start saying, climate change is the people’s fault, therefore they must pay. (Presently, they don’t need to, because they can dump all the CO2 pollution they want into your air and their “CO2 is not pollution” according to the Clean Air Act and “No Climate Tax” legislators, are lining the halls of your county state and federal governments, to obstruct any change that would take dollars from the wealthiest.

  11. cassandra_m says:

    And I know fairly precisely how this works. Except taxes aren’t exactly the biggest line in the calculation of how to doctor the bottom line. What is? Salaries and benefits. Eliminating some of those gives you a pretty immediate increase to the bottom line vs a stable revenue figure. Employer taxes are a small bit in comparison. Besides, this is true for all companies, not just those that pay out dividend (which is a small percentage of American companies). Adjustments to personnel on a quarterly or whatever basis are not about paying dividends, but a quick (and often self-destructive) way to get to short term net income targets.

    The first thing that your investors are going to be looking for is some pattern of increased share value. Some will look for dividend payouts as proof of this, but most companies don’t do this. Mostly shareholders want their share to be worth more over a period of time. And if the nursing home company is taking in more money that he pays out, he’ll be increasing shareholder value. Hiring and firing will be done based on whether that gets the work done and whether it helps the bottom line. Even if dividends are taxed more, there will still be investors who want dividend-paying instruments in their portfolios AND the nursing home operator still has shareholder value to contend with.

    If you think about this same nursing home operator who may buy back all of the publicly held shares, he just needs to deliver value to himself. He *may* make some investments to stabilize this business, but in the long run, the odds are good that this owner will continue to manage this operation so that increased value redounds to himself. Which has been the American compensation story for more than 30 years.

    The Clinton hiring boom was a result of a package of economic policies — certainly not traced to just the tax treatment of dividends.

  12. puck says:

    “I hope we can keep in mind – and I know we will – that our single most-important goal is to protect middle class families,” said Reid.

    This is the rhetorical shift that signaled the cave in 2010. The priority used to be expiring the tax cuts on the rich.

    Once you make middle class tax cuts your top priority, that means you will agree to tax cuts for the rich in order to win your new and updated “top priority.”

  13. Joanne Christian says:

    I’m w/you cass-no employer hires to avoid taxes. With employees often accounting for 86% of operating expenses, that new hire had better deliver in production or value to a company. Sure, there may be a few bones tossed out to employers in regards to some tax credits for hiring an under-represented profile (gender/race/handicap/vet/unemployed/rehabbed/parolee etc., etc.,), it’s a huge commitment by an employer to undertake a real unknown in expense from orientation to workman’s comp, and everything in between. I think of one case I had that comes to mind in the last year–single mother, 40’s w/ newly acquired GED, coming off long-term unemployment, and a few other goodies. In my employ 4 months as an “extern”, then off to greener pastures of full time (which I couldn’t offer), and encouraged her to pursue. BINGO. That job didn’t work out with a mutual release after about a year, and guess who unemployment wanted to derive some benefit from? Me. Dodged that bullet by about 30 days in whatever look back they do in employment–and assess my rate. So really puck, it’s a HUGE commitment, not a tax advantage to hire.

  14. puck says:

    Thanks for playing, Joanne, but your story has nothing to do with what I was talking about. You aren’t a candidate for the kind of tax avoidance I was describing.

  15. puck says:

    By the way, since the Clinton tax rates are now officially in effect as of this writing, Democrats can no longer propose to let the Bush tax cuts expire on the rich. They’re already expired!

    The opportunity to make a deal that raises taxes on the rich ended two hours ago. They are already raised without a deal. What Democrats are now proposing is massive tax CUTS for the rich.

    So if you hear reports that dividend taxes are being raised from 15% to 20%, that’s just wrong. They’re being CUT from 39.6% to 20%, almost as much as GWB cut them.

  16. cassandra_m says:

    Actually, puck, Joanne’s story *does* have some relevance to the story in that your unicorn hiring scenario never pays attention to the potential of backend hiring costs. I have asked you repeatedly for some evidence that an incremental change in taxes produces more hiring — outside of increased demand — and you continue to fail to produce it. Your scenario is much like the much derided Laffer Curve — it is an article of faith with absolutely no data that it works.

  17. puck says:

    So never mind the evidence about dividend taxes being treated as regular income correlating with our our times of greatest job creation, and the last decade of stagnation correlating with the change in that policy. Or the CRO report showing how lower investment taxes suppress wages. Oh well.

    Well good news Cassandra; it looks like Obama will sign a massive tax cut on dividend taxes for the rich, so you get your wish.

  18. cassandra_m says:

    That isn’t evidence, since you haven’t produced one damn thing that demonstrates that correlation. Especially since the Clinton era economic policy was multi-faceted — evidence would entail tying your fairy tale directly to all of that job creation.

    I’ll wait. Still.

  19. puck says:

    And I’ll wait for you to produce just one damn policy idea. What good are Democrats if they aren’t willing to articulate and defend policies?

  20. cassandra_m says:

    Bullshit. I talk about policy ideas here all of the time. But this is a deflection from the fact that you simply cannot defend this business of increased taxes = job creation. I’ve linked to Delong, Krugman, Johnson and others who point out with some data and authority that job creation is not a function of taxes. And yet here you are with your reverse Laffer Curve telling me that I don’t produce any policy ideas. You can’t even contend with real economists on this point, much less produce any policy ideas that don’t chase tax magic unicorns as fast and furiously as any wingnut wielding the laughable Laffer Curve.

    And I’m still waiting.

  21. Joanne Christian says:

    And puck I’m not playing, I’m paying. Human capital is expensive overhead, and not at all utilized for tax advantages. Business models wouldn’t have embraced the cross-training of employees so fervently if it wasn’t helping their bottom line. And your poor example of a nursing home chain w/ limitless potential for hiring is a real scream. Any dividends paid out on those is from the front end of building and first in occupancy. After that, it’s all employee costs, losses, and family feuds, upsets, lawsuits and ombudsmans. I wouldn’t go near one that is up and running in an investment portfolio. A new enclave or concept perhaps, but I would unload the place the day full occupancy is met.

    No charge for the tip :)

  22. Davy says:

    In no world does higher taxes = more employment. Forget data. No theory supports the argument.

  23. SussexAnon says:

    Theory? How about reality.

    Clinton raised taxes and employments numbers went up.

  24. kavips says:

    Davy, don’t make us laugh. Where have you been over the last twelve years?

  25. kavips says:

    The difference in the two points being argued on this thread is that one group is looking at the micro side, and the other the macro side.

    Cass and Jo Anne are correct when looking at business from the micro side by saying that no one hires employees because their taxes are too high… “Gosh, darn it, made too much money again this year; gotta hire two new people”.. No small business works that way. Instead, it is when the realization occurs: “Gosh, this is too much damn work for me and my staff. I need one more person, and had better hire two, in case one doesn’t work out.” that one begins looking…

    On the micro scale, demand is indeed the driver.

    What Puck is describing is hiring(ie. investment) on the macro side. (Btw Puck you are correct that the dividends not rising to a higher rate, will grow the economy slower than was predicted had the higher rates continued.)

    In this scenario, around December 15, a corporation’s accountants approach the CEO and say, “If nothing changes between now and the 12/31, you will be paying $100 million in taxes”…. He says, “Tell me how I can pay less.” They say, “if you spend $250 million you will pay zero taxes because you will have zero profit. For every $50 million you decide to report as profit, you will pay an additional $20 million in taxes (at 39% rate)…” He says, my projections were for $90 million. Lets keep $100 million, pay $40 million in tax, and get contracts signed for $150 million before 12/31… At least that way, we are keeping the money “in house” instead of giving it away…

    Although he is not saying “go out and hire “x” number of people, his investment into his business for the express purpose of enriching his company instead of Uncle Sam, will create jobs. It might be construction jobs; it might be charity jobs if he gives it away; it might be R&D jobs since finding the next new best thing, is better than giving away money… When you try to bury $150 million, jobs are going to be created…

    It is this investment that Puck is alluding to. Not putting want ads in the News Journal that say: Dupont is hiring; Please apply.

    And it is this prevalent economic activity one finds when they goes back before the year 2000 and before Bush’s election. Part of that pre-tax investment was put toward IT and new Y2K software. But the reason that money was so readily available, was because investing in one’s own company, was preferable to investing in Uncle Sam… because of the 39% rate.

    Applying the exact same figures in the scenario above but to a 20% rate or lower, the tax bill on $250 million is now $50 million. So reporting $250 million in profit now makes sense. A) You have cash available. B) You pay only $10 million more in taxes than you did under the old rate. C) Your reported income jumps $150 million! You just made a net of $140 million… But… you didn’t create any jobs… Really, why would you? It would cost you money you would rather have in cash…

    So here is why on a macro scale, higher rates are better for all (but those investors who invest for high dividends). Society is better served with higher tax rates…

    To really spur economic growth, write into the IRS code, a tax credit that allows the full deduction of any physical capital expense against that year’s tax bill. But that is getting way ahead of this argument.

    The real question, then becomes.. which is better for the US… benefiting the micro scale, or the macro scale. Micro scales are nickels and dimes compared to the macro scale. To jump start the economy, a policy that penalizes very big businesses for NOT re-investing into themselves, is the preferable option…

    That is why Puck is absolutely correct when he says raising taxes causes economic growth… History has shown it over, and over, and over, and over, and over…….

  26. puck says:

    Yes, that is what I meant kavips, but it could be even simpler than that. All it would take is for short term investments to start yielding lower returns due to taxes. Then even small mutual fund investors would start moving their money to funds focused on long-term returns.

  27. Davy says:

    @Kavips:

    The tax code already allows accelerated depreciation for many investments. That’s one element of the 2001/2003 tax reform acts – the Bush tax cuts.

    Also, the Bush tax cuts did promote long-term investment in stocks, etc. Look at the difference (1) between short-term capital gains and long-term capital gains and (2) ordinary dividends and qualified dividends.

    Finally, the eventual (hopefully!) profit of an investment is taxed. So, taxes have no net-impact on the decision, unless taxes will be lower or higher on profit from the investment vs. profit today.

  28. cassandra m says:

    Clinton raised taxes and employments numbers went up.

    Clinton also worked at reducing the deficit (and not just through increased revenues), tightening monetary policy (almost writing into concrete the focus on low inflation), removing tariffs, NAFTA and a whole lot of other policies that went into the bubble that almost got us to full employment. You aren’t able to demonstrate that the higher taxes caused greater employment any more than the low taxes causes greater employment advocates can. Especially for Clinton who was especially active in changing a great deal of economic policy — not just taxes.

  29. cassandra m says:

    What Puck is describing is hiring(ie. investment) on the macro side. (Btw Puck you are correct that the dividends not rising to a higher rate, will grow the economy slower than was predicted had the higher rates continued.)

    And this is just more Bullshit. And how can you tell? If this really worked on a “macro” level, there would be examples — of how ALCOA (for example) decided to just hire more miners rather than pay more taxes.

    Seriously, how can demand just work on a “micro” level and not just on a “macro” level? Apparently all of the work being done to assess consumer confidence and business confidence (all “macro” indicators of where demand is heading) makes no difference if all it takes is higher taxes to create some demand.

    What tax policy does help to accelerate is the replacement of workers with better machinery. The acquisition of new technology and machinery can be boosted via tax policy via more aggressive depreciation rules and so on.

    But I’m still waiting for somebody to show me the numbers on how increased taxes directly increase employment.

  30. puck says:

    “makes no difference if all it takes is higher taxes to create some demand. ”

    There’s your logical fallacy – it takes both demand AND tax incentives. It’s a virtuous circle that requires both, but you keep arguing either/or.

    Now we don’t have either. We had the tax incentive part in hand for less than 24 hours before we gave it back. Now when do you expect the demand fairy to show up?

    The problem with stimulus-driven demand is the wealthy have adapted, and have figured out to skim it all away from the middle class and into their own pockets. So most of any stimulus package is quickly drained away and redistributed to the wealthy, where it is then compounded at only 15% (now 20%) tax rates. And there it sits today in the form of “wealth inequality.” That is part of what Krugman and others meant when they said ARRA was poorly designed.

    To get demand back organically, first we need to fix the structural problems that destroyed the jobs, and this deal does not do that. The current deal has an extension of unemployment benefits, but nothing to address what caused the jobs to go away.

  31. cassandra m says:

    There’s your logical fallacy – it takes both demand AND tax incentives.

    This is not a logical fallacy. There is some thinking that it was car sales that powered a good deal of the growth in 2012. While I have no idea if this is true, car sales have been very much up and there are no tax incentives for that — just lots of people who need new vehicles.

    To get demand back organically, first we need to fix the structural problems that destroyed the jobs, and this deal does not do that. The current deal has an extension of unemployment benefits, but nothing to address what caused the jobs to go away.

    The jobs went away because the demand went away. Construction is still in a crisis because people still aren’t buying new construction at any rate that would significantly boost the demand for new building. The only thing ever on the table to do anything about jobs was more stimulus. Tax policy was NEVER going to provide incentives to hire for people who just don’t need unproductive bodies.

    Seriously puck — we are recovering from a *credit* bubble and will be for some time. As long as people are still working at getting employed, paying down debt, living with the salary clawbacks and all of the other bullshit they lived with to make corporate balance sheets look better, demand will recover just as slowly. And may not ever get back to prior levels as people adjust to the new normal — meaning living more within your means and not on so much credit.

  32. Dave says:

    There is no large direct correlation between taxes and hiring. Hiring is simply a function of demand, growth, and investment leading to growth. Taxes is one of the costs of doing business. Business owners expand or contract in response to demand or because they have an idea and are investing in future growth. Taxes affect profit. Unless taxes became so high that they cancel out profit, making it unecomonical to hire, companies will continue to hire to meet demand.

    Now one could ask whether higher taxes affect demand. I believe a case could be made for that, such as in the higher payroll taxes (from the expiration of temporary payroll tax cut). Less disposable income certainly would affect demand, thus affecting industry’s growth.

    Still, higher taxes on industry is just a cost of doing business which could ultimately cause the cost of goods to rise. All in all, considering both supply and demand, taxation policy is, at best, one small factor in the economic equation. It certainly is not the tall pole in the tent that it’s made out to be. Direct casuality has never been proven, and never will be, because the other factors related to economic growth are not constants. Due to that variability a casual equation cannot be established with any degree of confidence. The best one can do with tax policy is political sloganeering.

    Of course, we could try a little experiment by eliminating the deductions for dependents and see if it affects the birth rate, but even then it might be difficult to prove casuality.

  33. puck says:

    Direct casuality has never been proven

    You are right. The best we can do is empirical observation. I personally observed the increased taxes on the rich in 1993, and the subsequent increase in jobs. Then I observed the radical decrease in taxes on the rich in 2001 (especially investment taxes), and the subsequent decay of jobs and the accumulation of wealth by the very rich.

    So you are right; those observations could have been caused by cosmic rays or the Mayan Calendar.

  34. cassandra m says:

    Actually, no. The American economy has gone through enough tax increases and tax decreases that you might expect that there is data plenty to directly demonstrate something about tax policy on hiring. But, alas, much like the Lafferites, you can’t come up with anything persuasive.

  35. Dave says:

    “I personally observed the increased taxes on the rich in 1993, and the subsequent increase in jobs.”

    I’m sure you did. As did everyone else. However, I observed that in 1993 the Toronto Blue Jays won the World Series and I subsequently bought a new automobile, but the timing of events doesn’t automatically create a casual relationship. If the Jays had lost, I would have still bought a new car because I wanted one (and no I’m not Blue Jay fan, it just happens to be a event in 1993).

    What you are suggesting is that tax policy is a direct factor. That is it is deterministic (if A causes B, then A must always be followed by B). What I am saying is that there is no evidence that validates it as deterministic. I believe (because I have no proof) that it is, at best, what referred to as an intermediate or intervening factor. Additionally, I have not found any studies that even demonstrate a meaningful probabilistic causation between tax policy and hiring.

    I have seen some data that suggests a correlation between tax policy and disposable income, which affects spending. But really that’s about it. Companies hire when they need or want to grow, which is a function of demand. One could suggest that tax policy affects labor cost, which affects prices, which influences demand, but unless we have drastic tax increases, I believe that even that effect is neglible.

  36. Joanne Christian says:

    cass @ 0911–Car sales have remained up because if you remember “cash for clunkers” and rebates etc., were around as an enticement as either a bargain for what a consumer needed, or an even trade of payment scale of what they already were managing. So it wasn’t so much an anomaly as it was a prop for an industry. And granted, it did keep alot of people in work, and helped clear overstocked lots. Sure it helped the auto industry (macro), but it screwed the little guy wanting to buy a used car for the kids, or a struggling person needing to buy transportation (micro).

    I get what kavips is saying–but the drill down is John/Jane Q. Public isn’t concerned with moving national indicators, but surviving their personal circumstances.

  37. cassandra_m says:

    Cash for Clunkers lasted from July 2009 until September (or so) 2009. Once those subsidies died down, so did the demand for cars for awhile. Last year, however, demand was pretty high and the car makers did awfully well. The point being that as a federal subsidy (not a tax), it did what it was intended to do, ended, and any subsequent incentives for buying cars came from the carmakers — not from American taxpayers.