Musing on an Economics Tuesday

So, here are some of the things I’ve been thinking about:

1) I wish Barack Obama would stop saying he is giving a tax cut to 95% of Americans. He is not, he can’t. To get a tax cut, one must pay taxes, and only 62% of Americans actually pay taxes. What Obama is proposing is giving everyone in this county several ‘refundable’ tax credits, with the average being somewhere around $1,000 a tax filer. A ‘refundable’ tax credit is different from a deduction in that a deduction offsets any tax you incur, so, you have to make enough to pay taxes to take advantage of the deduction - a ‘refundable’ credit is where you get the $1,000 whether or not you have a tax liability to offset with the $1,000. There is another name for a ‘refundable’ tax credit: welfare.

2) I was feeling pretty good about the bailout until I read this. Prof. Zingales brings up many good points on how the original bailout was a bad idea, and how the modified bailout leaves a lot to be desired. The problem that I have with Prof. Zingales plan is that it would require a lot of administration; and if there is one thing the Federal Government has proven, it is this: it is very inefficient at administering anything.

3) I have my own plan for turning around the economy. Here it is: lower the corporate income tax rate to 20%, keep the capital gains tax rate at 15% for individuals, raise the top individual tax rate back to 39.5%; and create a separate tax bracket for LLC and S-Corp small businesses so that income derived from them is only taxed at 30%. There are few reasons I think this would help.
A) Businesses create jobs, and businesses are started when the return offered to the shareholders exceeds what they can get in other investments. Taxes lower the Net Income, and thus lower the return. So, by lowering the business taxes more firms would be created, more people employed, more good purchased, new technologies brought to market, etc.
B) Raise the top individual tax rate to 39.5%. Companies do not keep income/cash; S-Corps and LLC’s do not be definition, and C-Corps do not by function. A company earns a negative return (because of inflation) on any cash it keeps on hand, so a company either pays its excess cash to it employees (more people employed) or as dividends to its owners. So, to the extent that these increased rewards are passed onto the people who already make a lot, the government should get a larger chunk of the pie.
C) Small businesses that are S-Corps and LLC’s pass through their income to their owners. So the return that is calculated is based off of the tax rate the owner pay as an individual. So, if the business throws off more than $250k a year, the owner is taxed at the top bracket. While this seems reasonable at first blush, it isn’t; here’s why: If, say, the business had $10,000,000 in revenue, but $650,000 in income before taxes, that’s a 6.5% margin. Under the current system (and assuming my top bracket tax increase) the after tax net income would be $393,250, or a 3.93% return, less that a government bond. If, however, the income was classified as small business income, and taxed at 30%, the after tax net income would be $455,000, or 4.55%; greater than a government bond. This example is a bit contrived; but it illustrates how effective tax structure can affect business investment decisions: the return possible by the business has to be greater than the possible alternative investments.

4) I guess Prof. Wildman was wrong, Paul Krugman's being a first class ass was not enough to keep him from getting a Nobel for economics.

Anyways, those are a few of the things I’ve been think about recently. Oh, and the Browns won last night. Woo-Hoo!

Later,

B