[quote name='Prefect' timestamp='1314042919' post='4852482']
The last point is actually a kind of tautology, because the size of the economy is the sum of all spending. The people who fantasize about growth while cutting spending are idiots (and unfortunately, being a politician or even an economics professor is not mutually exclusive to being an idiot).

No one wants to cut all spending, they want to cut government spending. Considering that there are many fortune 500 companies hoarding cash, our economy does not require government spending to grow. As government spending goes down, businesses feel more secure about their taxes staying the same or maybe even going down. Lower taxes encourages businesses to spend more money in this country and hire more people. As businesses spend more of their cash, and hire more people, the economy improves. You may not agree with it, but it's not idiotic. The worst thing that can happen to our economy is that businesses take their cash and elect to spend it in foreign countries. Something which is happening today on a regular basis, and instead of making it more attractive for businesses to hire in the US, we get situations like the NLRB vs Boeing.
[/quote]

There's no question that there's some supply-side effect from taxation, but the idea that business aren't spending now entirely because the government is spending and might maybe raise taxes at some point down the line sounds unreasonable to me. Even more unreasonable is the idea that businesses will start dumping money into middle and lower class hands, rather than continuing the upward distribution they've favored for so long.


Even if you could convince me that companies in general would pump their cash into the economy, there isn't demand. A company is far less likely to be concerned about hypothetical taxation later (and there isn't a whole lot of steam to raise corporate rates at the moment) if they can turn a profit now. If taxes make someone too expensive to keep on later, they can just be fired. It's really easy to do, easy enough that it would be odd for a company to turn down a chance at profit now for a fear that it'll be stuck with expensive ballast later.

And even if that weren't the case, strictly private sector spending (as wages and related compensation) would flow mainly to people who would use that extra money for
de-leveraging, so demand will continue to be flat. Since firms produce goods or services that need to be consumed for that company to make money back on their investment, weak consumption will not be good for them. Hence low investment in employees and production.

To be sure, government can't simply fix this by spending. But no one else has much of an incentive to spend at all- in investment, in production, as consumption. It's a vicious cycle which spirals down. Government spending can help, and it's certainly the only entity that will take some money off of the sidelines.

Money isn't scared of the US debt. We've had people flocking to Treasuries (though it's true that there aren't a lot of great places to invest just now), and more to the point the interest rates on US borrowing are extremely low. The US can spend money on the cheap and put it out to increase demand, or at accelerate the de-leveraging. Everything about the current situation in the US screams liquidity trap. That would not be solved by fiscal austerity on the government's part.

There's no question that there's some supply-side effect from taxation, but the idea that business aren't spending now entirely because the government is spending and might maybe raise taxes at some point down the line sounds unreasonable to me. Even more unreasonable is the idea that businesses will start dumping money into middle and lower class hands, rather than continuing the upward distribution they've favored for so long.

Even if you could convince me that companies in general would pump their cash into the economy, there isn't demand. A company is far less likely to be concerned about hypothetical taxation later (and there isn't a whole lot of steam to raise corporate rates at the moment) if they can turn a profit now. If taxes make someone too expensive to keep on later, they can just be fired. It's really easy to do, easy enough that it would be odd for a company to turn down a chance at profit now for a fear that it'll be stuck with expensive ballast later.

It might SOUND unreasonable, but this happens every day. Corporations exist for profit, domestic vs foreign spending is as easy as math. We can use the recent Boeing 787 as an example:

Cost of building in US + US Labor costs + domestic transportation + tax rate on profits = X
Cost of building in foreign country + foreign labor costs + international transportation to customers + risk of doing business in foreign country + tax rate on foreign profits= Y

If X < Y , they build a dreamliner plant in the US. If X > Y, jobs go overseas. There's no politics involved in that calculation. The politics become involved when decisions are made about tax rates, or future expenses for headcount (ie requirements to supply health care). These kind of calculations happen every day, and if you think a percentage point here and there doesn't add up, then you are naive. Corporations don't LIKE to hire overseas anymore than consumers LIKE to buy products made in China, but they do it, because it makes more economic sense.

Your comment about just firing people is also incorrect. Companies hate firing people, especially corporations. It is horrible for PR, lowers morale, and costs a lot of money. Most companies prefer to outsource whenever possible and only hire fulltime employees when it's clear it's a long-term critical functionality. The fact that the current state of taxation, employee costs, and most importantly, consumer trends are not known, means companies are much more likely to sit on their cash reserves than use that money to hire full time people or invest in infrastructure.

I'll grant that companies have options about where to send jobs, and that they choose based on where costs are lowest. It's also true that taxation is a fairly changeable part of that equation. But again, there is far less talk about corporate tax rate hikes than others, though there is still talk (unlikely to become action).

Corporations don't care about where their hiring is outside of the simple calculations that you mentioned. They don't care if they open a call center in Bangalore vs. New Mexico. They care which is cheaper, and that's the one they like. It's not like it's a burden for them to overcome, or that they feel guilt burning in themselves for having done so.

The idea that companies hate firing people is naive. You seem to hold a 1950's style view of corporations, in which they care about their employees. They often don't, especially corporations. They might dislike the PR, but it doesn't stop them from outsourcing or sitting on record levels of cash while also drawing record profits, which are also bad PR. Even if they would prefer not to do it, it's not like it's something that companies have shown themselves to be especially leery of actually doing over the past 30 years. The point that they can gives them another avenue to reach profit, which, as you say, is their purpose for existing.

All that aside, you still have not explained why companies will hire here as a direct result of lower deficits despite extremely weak demand. They have record cash. They have excess capacity. The short run costs of hiring are not uncertain. For cash that's in the US, the idea that taxes are the obstacle to hiring now (when effective tax rates are low) isn't very compelling especially when compared with soft demand. Not to mention that historically corporate tax holidays have resulted in corporations buying back stock, buying other companies, increasing dividends, and so on, none of which pump employment.

That's not to say that it isn't a factor in corporate decision making. But it does need to be weighed against what would happen if we slashed deficits right now. There would be less super-low-interest federal debt than otherwise. But there would also be weaker demand, and weaker demand is already a very serious problem for companies. Do you really think that the liquidity trap we're in is due more to possible higher corporate rates in the future (again, not likely to happen) or anemic demand now and for the forseeable future?

All that aside, you still have not explained why companies will hire here as a direct result of lower deficits despite extremely weak demand. They have record cash. They have excess capacity. The short run costs of hiring are not uncertain. For cash that's in the US, the idea that taxes are the obstacle to hiring now (when effective tax rates are low) isn't very compelling especially when compared with soft demand. Not to mention that historically corporate tax holidays have resulted in corporations buying back stock, buying other companies, increasing dividends, and so on, none of which pump employment.

It's not so much about the act as it is the general business environment. Corporations are scared shitless right now because the government is demonizing them. Financial institutions are being eyeballed every day, oil companies are being scrutinized for making too much money, employers are being asked to source more worker benefits, and to top it off, we have companies like Boeing, who create thousands of jobs in the US and they are being threatened with shutdowns. If team Obama came out and made clear definitive statements about what will and won't be pushed for, and corporations could feel secure that taxes won't be raised or costs won't go up, they will ramp up domestic production. We live in a global economy, the demand doesn't even have to be domestic. With the weak dollar and overseas instability, there's a lot of reasons to invest in the US right now.

Really we need stability more than anything else right now, short-term stimulus doesn't provide that. In fact, I think it does the opposite because it scares people about our sustainability (confirmed by S&P downgrade).

That's not to say that it isn't a factor in corporate decision making. But it does need to be weighed against what would happen if we slashed deficits right now. There would be less super-low-interest federal debt than otherwise. But there would also be weaker demand, and weaker demand is already a very serious problem for companies. Do you really think that the liquidity trap we're in is due more to possible higher corporate rates in the future (again, not likely to happen) or anemic demand now and for the forseeable future?
[/quote]

Taxes affect consumer demand as well. If we overspend in the government that has to come from somewhere. Yeah we can "stimulate" now, but that means more taxes later. So people save more instead of spend. If the government showed it could achieve fiscal responsibility, people could rest easier that their taxes won't go up and feel more comfortable about spending. This won't happen overnight, especially since fiscal responsibility entails potential cuts in benefits. However, I think it's irresponsible to look at increasing our deficit any farther when all models on both sides of the aisle point to us running out of money before 2030.

[quote name='Prefect' timestamp='1314042919' post='4852482']
The last point is actually a kind of tautology, because the size of the economy is the sum of all spending. The people who fantasize about growth while cutting spending are idiots (and unfortunately, being a politician or even an economics professor is not mutually exclusive to being an idiot).

No one wants to cut all spending, they want to cut government spending. Considering that there are many fortune 500 companies hoarding cash, our economy does not require government spending to grow. As government spending goes down, businesses feel more secure about their taxes staying the same or maybe even going down.[/quote]

Congratulations, you've bought the Ricardian equivalence propaganda hook, line and sinker. (Short summary: Ricardian equivalence is the theory that private actors anticipate future tax changes and adjust their savings accordingly - out of curiosity: when have you ever done that? I don't know a single person that has ever done anything remotely like it, rather the opposite is the case.)

Out here in reality, several countries have actually implemented government spending cuts that were justified by Ricardian equivalence, at the forefront of that movement was the UK. Economists were telling politicians and the public that cutting government spending would encourage private actors to spend more. Well, private actors now had about a year to do that, but they still have that - as a result, growth in the UK tanked and fell to something like 0,1% (annualized). If that doesn't convince you that Ricardian equivalence is magical thinking, I don't know what will. The empirical evidence is right there in front of your nose.

Lower taxes encourages businesses to spend more money in this country and hire more people.[/quote]

Supply side thinking. What do you think businesses should spend their money on? Producing products that will pile up in their inventory because consumers don't have enough money in their pockets? Managers aren't that stupid.

The truth is that taxes aren't the problem. The problem is that a lack of demand has made investments unprofitable.

Edit: I should add that yes, perhaps some very small headwind can be made with taxes (though I will maintain that increased government spending will give you a much higher effect per increase of government net spending). The problem with reducing taxes is that it is a step in a race towards the bottom. I mean, a perfect way to reestablish industry in the US would be to reduce taxes, reduce wages, and reduce working standards until you are back at the level of a Third World nation. Capitalists will certainly rejoice. But what the heck is the point in doing that?

It's just so much better to make sure the people in general are well off first (not by giving them handouts, but by targeting government spending to create jobs e.g. in infrastructure projects or education or whatever is considered useful for the future of society). Then capitalists and entrepreneurs can compete for the money of the population. Isn't that the point of the free market, after all?

(I know I am taking a very anti-Reagan/Trickle-Down stance here, but it is my conviction that trickle down economics is actually hindering the development of a well functioning free market, and I am propagating a largely opposite view; call it Seep-Up economics or something if you like ;))

[quote name='Prefect' timestamp='1314042919' post='4852482']
[quote name='way2lazy2care' timestamp='1314025526' post='4852332']
I'm in favor of rewriting the entire tax code as soon as possible. Was that not clear from my previous post?

This is an ironic sentiment for someone who frequents an internet forum full of programmers. One of the most important lessons in programming is that it's usually a bad idea to rewrite things from scratch. What makes you believe that this lesson does not apply to the tax code as well?
[/quote]

Iterating on a broken product doesn't unbreak it; it just makes it more broken. Much like rapid iterative development where fixes are put in to fix short term problems, they end up being no longer effective in the long term. One of the keys of iterative development even in programming is that if things become difficult, a redesign is probably necessary.

Things have been difficult with the tax code for decades. That signals to me that at the least we'd have to roll back our tax code decades, and by doing that you may as well just start over from scratch. There's a lot to be said for starting from scratch with what we know now.
[/quote]

The problem is that the tax code is running in production, at all times. You can't really run it in a test environment, can you? Rewriting the tax code effectively means pulling a Netscape.

So yes, it probably needs a redesign. But the way to go is to figure out where you want to go, and then develop a series of self-contained refactoring steps to get there. Kind of like developing a patch series for a well-run Git (or probably, other DVCS) project. Not to forget all the politics involved in convincing people to actually commit those steps - after all, tax codes develop in certain ways because there are always people who actually want them to develop in that way.

The problem is that the tax code is running in production, at all times. You can't really run it in a test environment, can you? Rewriting the tax code effectively means pulling a Netscape.

So yes, it probably needs a redesign. But the way to go is to figure out where you want to go, and then develop a series of self-contained refactoring steps to get there. Kind of like developing a patch series for a well-run Git (or probably, other DVCS) project. Not to forget all the politics involved in convincing people to actually commit those steps - after all, tax codes develop in certain ways because there are always people who actually want them to develop in that way.

Putting aside that tax code is nothing like software development and we're running the metaphor a bit too far now, we have a tax code equivalent to having a black jack application with a dependency graph that looks like this:


that was designed to run on a calculator. It is better to just start over.

The us tax code has over 10 times as many pages as the bible and comes in a 20 volume set that costs $1,000. US citizens and businesses spend over 5 billion hours on their taxes (avg >17 hours/person). The average tax attorney makes ~$50/hour (100k avg salary/52 weeks/40 hours). That is $250 billion dollars spent on taxes without actually paying any taxes; close to $1,000/person is wasted on the tax code.

That is a hefty amount of leeway to mess up by starting over.

There's nothing saying they can't move forward with a piecemeal approach to an overall goal. They just have to pick a direction. They can slash all the tax rates and then close the loopholes. Or they can close the loopholes and then slash the tax rates. Or they can attack from a different direction altogether.

[quote name='Alpha_ProgDes' timestamp='1314025192' post='4852325']
So you're in favor of letting the Bush tax cut expire on Jan 1 as well?

I'm in favor of rewriting the entire tax code as soon as possible. Was that not clear from my previous post?
[/quote]
I'm in favor of that too. But it doesn't answer the immediate question. Actually, it sidesteps the issue altogether. The tax code is not going to be rewritten by January 1, fact. The supercommitee, subcommittee(s), either party or the President will not have a plan and set of goals that are sane and solid by January 1, IMO. So the question still stands (and this goes to anyone of course). If you're in favor of the Obama Tax Cuts for the middle class expiring by January 1, then are you also in favor of the Bush Tax Cuts for the rich and corporations expiring on January 1 as well? I like neither because at this point they are not creating any increase in spending or creating any new jobs. If anything, both tax cuts are just increasing the rate of expansion of the debt. So they both can go, as far as I'm concerned.

There's nothing saying they can't move forward with a piecemeal approach to an overall goal. They just have to pick a direction. They can slash all the tax rates and then close the loopholes. Or they can close the loopholes and then slash the tax rates. Or they can attack from a different direction altogether.

Yes. They could spend 20 years iterating on a 17,000 page document. Or they could spend 6 months writing a 600 page document.

I'm in favor of that too. But it doesn't answer the immediate question. Actually, it sidesteps the issue altogether. The tax code is not going to be rewritten by January 1, fact. The supercommitee, subcommittee(s), either party or the President will not have a plan and set of goals that are sane and solid by January 1, IMO. So the question still stands (and this goes to anyone of course). If you're in favor of the Obama Tax Cuts for the middle class expiring by January 1, then are you also in favor of the Bush Tax Cuts for the rich and corporations expiring on January 1 as well? I like neither because at this point they are not creating any increase in spending or creating any new jobs. If anything, both tax cuts are just increasing the rate of expansion of the debt. So they both can go, as far as I'm concerned.
[/quote]

I am in favor of not voting for or against anything related to the tax code other than a complete rewrite.

[quote name='ChurchSkiz' timestamp='1314060644' post='4852597']
[quote name='Prefect' timestamp='1314042919' post='4852482']
The last point is actually a kind of tautology, because the size of the economy is the sum of all spending. The people who fantasize about growth while cutting spending are idiots (and unfortunately, being a politician or even an economics professor is not mutually exclusive to being an idiot).

No one wants to cut all spending, they want to cut government spending. Considering that there are many fortune 500 companies hoarding cash, our economy does not require government spending to grow. As government spending goes down, businesses feel more secure about their taxes staying the same or maybe even going down.[/quote]

Congratulations, you've bought the Ricardian equivalence propaganda hook, line and sinker. (Short summary: Ricardian equivalence is the theory that private actors anticipate future tax changes and adjust their savings accordingly - out of curiosity: when have you ever done that? I don't know a single person that has ever done anything remotely like it, rather the opposite is the case.)
[/quote]

I did it this year, when I took the extra money I have every month for discretionary spending and put it straight into my Roth IRA. Savings rates are the highest they've been in decades. People and businesses alike are unsure of what the future holds, so they are hanging onto their cash in case of more hard times. Having unstable tax rates doesn't help. Also, knowing that the spending we are doing is unsustainable is not helpful either, because long term tax rates MUST be raised or we will run out of cash or devalue our currency. Why would you buy a new big screen TV in an economic situation like today when everything is up in the air? The markets are screaming for stability, else gold would not be trading at $1900 an ounce. Yes people are still buying treasuries, because there isn't any safe haven right now except for gold. Tax rates are not THE problem but are definitely a piece of the pie. The POTUSA, whoever it may be, really needs to work to create a clear, concise guideline of what he intends to do and just stick to it. Adding uncertainty right now on tax rates and employee costs is just exacerbating the situation.