Matthew Yglesias » In The Long Run…

Dec 30th, 2008 at 6:25 pm

In The Long Run…

Cato’s Chris Edwards offers his proposal for warding off depression: “What Obama should do is a pass a large corporate tax rate cut, which would spur long-run growth.” Yes, neo-Hooverism taken to new and exciting heights allowing everyone to dust off the Keynes line about how in the long-run we’re all dead in an appropriate context. Long-run growth is important, but it’s not going to be worth anything unless we get out of the downward spiral that’s facing us immediately.

Meanwhile, what we actually need is corporate tax reform — close loopholes, grow the tax base, and lower the tax rate.

Comments
57

Filed under: Cato, Neo-Hooverism, taxes

57 Responses to “In The Long Run…”

James Gary Says:
December 30th, 2008 at 6:35 pm
If an epidemic of of super-virulent bird flu broke out, or if astronomers discovered a huge asteroid on a collision course with Earth, or if Godzilla came out of the Pacific and threatened Los Angeles with total destruction, the Cato Institute would propose addressing the problem with a large corporate tax cut.
howard Says:
December 30th, 2008 at 6:35 pm
i agree about the need for true corporate tax reform (as well as personal tax reform!), but honest-to-goodness, what is up with the notion that lower corporate taxes are the route to long-term growth?

i mean, there’s at least a comprehensible theory behind cutting personal tax rates as a spur to growth, but corporate taxes? because lower corporate taxes would…spur investment? lead to new hires?

recent history tells us that a lower corporate tax rate would lead to: a.) higher retained earnings; b.) higher payouts to senior management; c.) higher dividends; d.) stock buy-backs; and e.) foolish purchases. i suppose, in a very tiny way, b, c, and d might possibly have some economic growth contribution to make, but surely nowhere close to that provided by intelligently targeted infrastructure investment.

if Cato wants to push a tax cut right now, the one to push is a 12-month payroll tax holiday, which actually puts money in every working person’s pocket (and is particularly beneficial to the lower paid) and makes the cost of hiring cheaper….
Why oh why Says:
December 30th, 2008 at 6:36 pm
GOP Eco 101:

- In good times: cut corporate tax rates and capital gains taxes
- In an historical Depression: cut corporate tax rates and capital gains taxes
- When in doubt: cut corporate tax rates and capital gains taxes

All Praise Reagan and Friedman, Amen!
daveNYC Says:
December 30th, 2008 at 6:39 pm
Don’t companies need to be making money before a tax cut does anything for them?
Dan B Says:
December 30th, 2008 at 6:41 pm
What’s the difference between our “successful” bailout and what Cato proposes?

We just sent an astronomical amount of money to financial institutions. It came with no strings attached. How is this different from a Tax Rebate, er… a Corporate Tax Rebate?

Maybe when they realize how easily their trial balloon is punctured they’ll want to retract it, like a recent pardon…
SPURIOUS Says:
December 30th, 2008 at 6:51 pm
What we need is something to base an economy on. We don’t build anything. We don’t even have an idea of what to build now, such that anyone else in the world would buy it.

In a miserable economy, without market demand, will corporations respond to a tax cut by increasing production? Will they blow the tax cut on risky, capital-intensive research? Not unless the government makes them do it in exchange for the tax cuts. And not all of them are capable of doing research in the first place.

The U.S. has very few private centers of excellence, a la Bell Labs or Digital Equipment Corporation. They all got broken down and sold off in the last 28 years of stupidity.

It’s up to the government to drive the next wave of innovation. Fund the universities and the research labs.
Realist Says:
December 30th, 2008 at 6:57 pm
Huh? Cutting taxes in bad times is perfectly consistent with Keynesianism. The problem is the right-wing isn’t willing to raise them again after the crisis passes. But that’s the same problem the left (and modern Republican party) has with social programs.
El Cid Says:
December 30th, 2008 at 7:00 pm
What would really spur growth if there were no taxes of any kind at any level on anyone or anything. Revenue would grow so huge that according to the Laffer curve then taxes collected would somehow reach infinity, even though not existing!
howard Says:
December 30th, 2008 at 7:00 pm
realist, yes and know.

yes, keynes believes that fiscal policy should be counter-cyclical.

no, keynes didn’t believe that tax cuts were the exact same form of counter-cyclicality as government spending, particularly in a time of liquidity preference, at which point keynes believes that government spending – not tax-cutting – was our only choice….
fostert Says:
December 30th, 2008 at 7:03 pm
So, if I’m going bald, will corporate tax cuts regrow my hair? And can they keep my neighbor’s cat out of my yard? They seem to do everything at once, after all.
fostert Says:
December 30th, 2008 at 7:15 pm
“Huh? Cutting taxes in bad times is perfectly consistent with Keynesianism.”

Umm, yes and no. The problem with tax cuts is that they might not be spent. If you give me a tax cut, I just put it in my IRA. I don’t spend it. And they don’t hire extra people at Charles Schwab just because my account has more money in it. If you increase government spending, the money gets spent and creates jobs. Of course some government spending is better than others. If you build a nuclear bomb, it just sits there until it needs to be decommissioned. If you build a bridge, people can use that bridge for decades. Essentially, infrastructure spending has a much higher multiplier effect than tax cuts. Keynes, and Arthur Laffer oddly, would argue that infrastructure spending is far superior to tax cuts. Before you lay into me about Laffer, understand that he never advocated low taxes, he just advocated optimum taxes. In the Reagan years, that meant lower taxes. But it now means higher taxes. His point was that if government optimized tax rates, it would have more money to spend on things like infrastructure and education.
fostert Says:
December 30th, 2008 at 7:29 pm
“Revenue would grow so huge that according to the Laffer curve then taxes collected would somehow reach infinity, even though not existing!”

That’s not the Laffer Curve, that’s the Tax Fairy Curve. Republicans have completely rejected Laffer’s theories. They now only believe in the Tax Fairy. Laffer actually argues that some taxes are now too low. And that’s not just based on his theory, but his actual recent statements. And I mostly agree with him. Where I disagree is on capital gains taxes. He thinks they should go lower, and I think they could go up a little. The reason we disagree is that we’re looking at different issues. He’s looking at theoretical growth, and I’m looking at market volatility. If capital gains taxes go too low, markets become too volatile for companies to be able to plan for the markets. And I think that’s a disincentive to business investment.
El Cid Says:
December 30th, 2008 at 7:33 pm
fostert: To be fair, I was making fun of the religious invocation of the ‘Laffer curve’ by our market fundamentalists, not so much Laffer himself. As for Laffer himself, I regard him as completely irrelevant other than as a meta-issue.
fostert Says:
December 30th, 2008 at 7:37 pm
“I never understood this argument. What do you think Charles Schwab does with the money – put it under Chuck’s mattress???”

Of course not. But they hire employees based mostly on the number of accounts, not how much is in each of them. It takes no more effort to decide how to invest two million dollars than one million dollars. The decisions that Charles Schwab makes are based mostly on what proportion of their money they put into which investments. At some point, they obviously run into size of market problems and need to seek new investments. They can only own a limited percentage of any given investment under SEC rules. But if they had twice as much money, they’d need maybe 1% more employees to figure out how to invest it. If they doubled the number of accounts, they’d need a lot more employees (+25%?) to handle it.
fostert Says:
December 30th, 2008 at 7:45 pm
Fair enough, El Cid. But if you listened to Laffer recently, you might change your mind about his relevance. True, nobody listens to him. But that’s because liberals learned to hate him, and Laffer no longer agrees with the conservatives. But liberals would be wise to give Laffer another shot. He endorsed Obama’s economic plan, after all. Interestingly, Keynes had his own version of the Laffer Curve. And he wasn’t the first. It originally comes from a Muslim economist from the 10th Century.
fostert Says:
December 30th, 2008 at 7:48 pm
“It originally comes from a Muslim economist from the 10th Century.”

Oops, that’s not right, Laffer cites 14th Century scholar Ibn Khaldun. But he probably wasn’t the first.
burritoboy Says:
December 30th, 2008 at 7:52 pm
“Of course not. But they hire employees based mostly on the number of accounts, not how much is in each of them. It takes no more effort to decide how to invest two million dollars than one million dollars. The decisions that Charles Schwab makes are based mostly on what proportion of their money they put into which investments. At some point, they obviously run into size of market problems and need to seek new investments.”

The problem that you’re not addressing is that Al is effectively claiming that more available investment capital will create more economic activity. You’re on the right track, but not really addressing Al’s claim head-on.

Here’s a number of arguments against Al’s claim:
1. There could be situations where the investment capital simply is invested in ways that don’t increase economic activity substantively: in foreign countries (which might boost the economy in those countries, but that in term wouldn’t seem to be the goal of a tax-cut in the US), or simply held in cash, etc.
2. There could be a lack of available investments that investors believe have any potential. This is, of course, the central problem in an economic downturn.
3. An economy could be in a situation where it’s problem is not lack of investment capital, but all sorts of other problems, including lack of buyer demand (particularly in a downturn), political turmoil, structural uncertainties, etc.
fostert Says:
December 30th, 2008 at 8:04 pm
“Charles Schwab doesn’t hire (many) employees with your money. They invest it. In other companies. That themselves hire people.”

Well, they have 13,000 employees. Not huge, but not too small, either. But buying stocks doesn’t hire employees. It increases the bonuses of the executives. In theory, companies would use that money for R&D efforts, but they won’t do so if there isn’t a market. So in a declining economy, companies just pump that money back into their own stock. You’ve obviously never had to create a business model for investors. Try telling a VC guy that you’ve got a great new product that nobody can afford to buy. But, really, it’s a great investment. The VC guy will invariably tell you need to start a new career as a comedian. Successful companies understand that they can’t afford to produce products if there isn’t a market for them. And if unemployment is really high (which it will be soon), people just don’t buy things. And among those things that people don’t buy is your new product. I’ve moved to the medical field because it’s more insulated from the business cycle. But we’re not immune. When our suppliers lose business (almost nobody is doing solely medical manufacturing), they raise their prices on us. They have to do it to survive, and we have to take it because we need them to supply us. The process of approving new vendors is very costly in the medical field.
El Cid Says:
December 30th, 2008 at 8:11 pm
Actually, neo-Hooverism must be defined separately from Herbert Hoover’s policies, since Hoover’s actual policies included closing tax loopholes, tax breaks on low income earners, tax reductions for the wealthy, surcharge taxes on financial transactions, and tax raises across the board and on the wealthy.

Prior to the start of the Depression, Hoover’s first Treasury Secretary, Andrew Mellon, had proposed, and saw enacted, numerous tax cuts, which cut the top income tax rate from 73% to 24%. When combined with the sharp decline in incomes during the early depression, the result was a serious deficit in the federal budget. Congress, desperate to increase federal revenue, enacted the Revenue Act of 1932. The Act increased taxes across the board, and the percentage increased with income, to near pre-1928 levels for top income earners. It also implemented a 13.75% tax on corporations.

The final attempt of the Hoover Administration to rescue the economy was the passage of the Emergency Relief and Construction Act which included funds for public works programs and the creation of the Reconstruction Finance Corporation (RFC) in 1932. The RFC’s initial goal was to provide government-secured loans to financial institutions, railroads and farmers. The RFC had minimal impact at the time, but was adopted by Franklin Delano Roosevelt and greatly expanded as part of his New Deal…

In order to pay for these and other government programs, Hoover agreed to one of the largest tax increases in American history. The Revenue Act of 1932 raised income tax on the highest incomes from 25% to 63%. The estate tax was doubled and corporate taxes were raised by almost 15%. Also, a “check tax” was included that placed a 2-cent tax (over 30 cents in today’s dollars) on all bank checks. Economists William D. Lastrapes and George Selgin,[30] conclude that the check tax was “an important contributing factor to that period’s severe monetary contraction.” Hoover also encouraged Congress to investigate the New York Stock Exchange, and this pressure resulted in various reforms.
burritoboy Says:
December 30th, 2008 at 8:18 pm
“Charles Schwab doesn’t hire (many) employees with your money. They invest it. In other companies. That themselves hire people.”

Yet more problems with this picture:

1. Charles Schwab invests fostert’s money in public equities or debt. That is, Charles Schwab buys stocks (or bonds) from other investors with fostert’s money. None of fostert’s money goes to any actual business firm, it goes to other previous investors.
2. Now, obviously, if there’s a lot of fostert’s out there (i.e. net new investments), the stock (or bond) market will probably rise. The assumption is that rise will automatically lead to more companies going public or issuing debt, which means that, some of this new money will be going to actual business firms.

Problems with this mechanism:

1. It could take a very long time for many new fosterts to be putting money into the capital markets before new issuance of equity and debt increase. It easily could take two, three or more years. Meanwhile, it would mainly be previous investors who would benefit from fosterts’ money and the transmission of investments to actual business firms would be rather low. (Sure, venture capital firms will probably start to ramp up their investments but that takes time too).
2. Investors may invest in instruments which don’t necessarily lead to much business firm expansion – cash, derivatives, commodities, real estate, art, positional status items, etc.
3. There could be structural or institutional problems with capital markets that freeze issuance of new equity or debt. This is particularly likely during severe economic downturns.
El Cid Says:
December 30th, 2008 at 8:25 pm
Al: It’s not clear from Matt’s post that the term “neo-Hooverism” refers to an emphasis on the deficit. The only thing referenced directly is a recommendation for a corporate tax cut. Unless we’re providing our own synthesis with earlier uses of “neo-Hooverism” by Matt.
Ed Marshall Says:
December 30th, 2008 at 8:40 pm
Yeah, I was going to comment on fucking stupid it would be to buy bad debt for tax advantage, but I’ve hit the bottom on how stupid our investor class is. Still a bad idea, don’t encourage that it, it might happen.
fostert Says:
December 30th, 2008 at 8:43 pm
Burritoboy, you’re right. You posted that while I was typing my last post, which sort of addressed it. Here’s the way I see it. We lost a lot of money that didn’t really exist anyway. But because that fake money shows up on the corporate balance sheet, people have been laid off, and those layoffs will continue. That will cause declining demand. Now if you cut a corporation’s taxes, they’ll have more money on hand because of that. But those corporations will also have less money on hand because the demand for their products has dropped. Which, in turn, results in more layoffs and less demand. That cycle can spiral to the point where everyone loses everything. That situation happened in Laos. During a period where Laos actually increased their production of goods, their economy collapsed. The reason was that everyone lost faith in the currency. And markets are based on faith. I was talking to a rice farmer there, and he said: “I don’t don’t understand it, I grow three times the rice I did five years ago, and I’m poorer than ever.” All I could say was: “Welcome to Capitalism.”

Ultimately, private corporations rarely act in a counter-cyclical fashion. They can’t, because they’re always borrowing money. And lenders don’t like to lend against the cycle unless there is some entity that can guarantee the investment. The only real entity that can guarantee anything is the entity that prints the money, the Federal government. Right now, investors just don’t see much worth investing because the market sucks and there is even more risk. But if the Feds come in and start building a bunch of infrastructure products, investors will have a safe place to put their money. It’s government guaranteed, after all. As an investor what would you chose: a guaranteed +3% return, or a return in the +5% to -100% range? The fact is, there is money to invest now, there just aren’t many safe investments. Federal highway spending would be a safe investment. That’s why spending is the right thing to do.
efgoldman99 Says:
December 30th, 2008 at 8:44 pm
Look, gang, all the Schwab speculation misses one very big point: Schwab’s primary business is brokerage, which means their primary income source is trades (there are many, many other sources, but brokers make most of their money from trades. I know this because I have worked for one of Schwab’s major competitors for almost 14 years.)

That’s why it was such a huge shock when Bear and Lehman went down. The fact that they owned SO VERY MUCH shite that their profitable brokerage and clearing operations couldn’t overcome the weight.
raylward Says:
December 30th, 2008 at 8:55 pm
That so few appreciate deflation is a testament to Keynes (”we are all Keynesians now” President Nixon so famously declared). That supply side economics, value added tax, even a consumption tax have been given serious consideration shows how far we have strayed. Anybody who hasn’t read Keynes’ great gift should avoid embarassment and keep silent.
fostert Says:
December 30th, 2008 at 9:09 pm
“Investors may invest in instruments which don’t necessarily lead to much business firm expansion – cash, derivatives, commodities, real estate, art, positional status items, etc.”

Art is probably the best investment right now. Artists are hurting now because they produce unneeded goods. But if you can keep a good artist going through these hard times, he could become famous and the art you bought on the cheap could become priceless. And both you and him benefit.

My grandfather took a different approach. In the Depression, my grandfather did very well. But the symphony closed, and one of the violinists sold his violin to my grandfather. My grandfather wouldn’t accept what it was worth, but made an agreement that the guy could always buy it back at the original selling price. The guy never came back. The violin in question wasn’t a Stradivarius, but it wasn’t too far off. Sold today, it would be worth close to a million. Had my grandfather kept it in proper condition, he’d have made a lot of money. Instead, it rotted in the attic, and was pawned for almost nothing.
JohnH Says:
December 30th, 2008 at 9:09 pm
Given that the market is all wise, all knowing, and all efficient, and given that free-market types contribute disproportionately to Cato, I think the optimal recovery strategy would be for the federal government simply to borrow Cato’s funding list and give all its members money. Or maybe just give it all directly to Edwards. All these workarounds are just so inefficient.
fostert Says:
December 30th, 2008 at 9:37 pm
“Look, gang, all the Schwab speculation misses one very big point: Schwab’s primary business is brokerage, which means their primary income source is trades”

I haven’t really missed that, which is why I made the point about Schwab and the number of accounts vs the value of those accounts. Ultimately, Schwab benefits more from lower capital gains taxes than from anything else. More volatility means more trades. More trades means more money for them. But I’m frozen now. I don’t trust any new stocks, and the stocks I own now are with companies that will still be strong after I die. Oil prices may be low, but does anyone think Exxon-Mobil will go out of business? How about Proctor & Gamble? Anyone going to stop buying soap? Schwab hates me because I’m only holding long term investments with them. The short term ones were converted to gold in 2003. And I don’t mean gold stocks. I mean real gold coins under the mattress. It seemed crazy at the time, but not so much now. That and betting against the Dollar turned out to be good investments.
burritoboy Says:
December 30th, 2008 at 10:42 pm
“But if you can keep a good artist going through these hard times, he could become famous and the art you bought on the cheap could become priceless. And both you and him benefit.”

Probably not a good strategy: it’s extremely difficult to know which artists will become famous. The people who do best with this strategy are the core taste-maker art dealers, or things like Berenson’s secret deal with Duveen. I.E. you need a way to arbitrage early knowledge of relatively certain future famous-ness. A taste-maker art dealer has a certain sense of which artists he can make famous, has some instruments and strategies by which he can get that artist moved up the fame ladder, and arbitrage those. Berenson had early knowledge of which (dead Renaissance) artists he was going to herald in his future writing, which Duveen could then arbitrage by early purchase of currently unheralded but soon to be Berenson-praised works.
fostert Says:
December 30th, 2008 at 11:04 pm
“Probably not a good strategy: it’s extremely difficult to know which artists will become famous.”

Very true. You can help you’re chances with multiple artists, but then there’s more investment. They key is not so much in their art, because they can change what sells. It’s really in their audacity. That’s what impresses dealers. And dealers impress everyone. It’s important to know the artist. I haven’t made too much money on art, but I’ve had a lot of fun doing it. And what’s hanging on my wall is all worth more than I paid for it. Try that with the Stock Market.
fostert Says:
December 30th, 2008 at 11:49 pm
“but I’ve had a lot of fun doing it.”

If you really want some fun, go in in the oil business. But we can’t talk about that kind of fun. But the Art business is pretty close.
Patrick E Says:
December 31st, 2008 at 5:53 am
You propose three things:
1. close loopholes,
2. grow the tax base, and
3. lower the tax rate.

I’m with you on 1 and 2, but you lose me on 3. Closing loopholes is fine, all well and good, but one man’s loophole is another man’s tax planning. But overall, it would be best if our tax system was less complex.
Growing the tax base is better, if only because

Lowering the tax rate, however, seems a bit far afield.
Patrick E Says:
December 31st, 2008 at 5:55 am
Blargh, accidentally hit enter before I finished.
Growing the tax base is better, if only because the broader the tax base is, the lower the rate has to be.

But lowering the tax rate, especially if we’re talking about corporate taxes, seems a bit far afield. The tax rates are quite low right now. I do believe that we need to lower tax rates on the first $50-100k of income, but past that, the current tax rates are not historically high.
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December 31st, 2008 at 7:41 am
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ssa Says:
December 31st, 2008 at 8:00 am
Do these conservative neo-liberal hooligans realize what happened under the Bush regime? Tax cuts, tax cuts and more tax cuts got us into this dire financial/economic situation. It;s time to hold business and financial firms accountable, and fill up the coffers to spend it on legitimate projects and aid programs to help our most vulnerable citizens.

http://www.sunstateactivist.org/
makkale Says:
December 31st, 2008 at 8:33 am
Don’t companies need to be making money before a tax cut does anything for them go in my home http://www.makkale.blogcu.com newyears
SM Says:
December 31st, 2008 at 8:45 am
Did this happen with the American Jobs Creation Act of 2004?
Njorl Says:
December 31st, 2008 at 9:16 am
You propose three things:
1. close loopholes,
2. grow the tax base, and
3. lower the tax rate.

I’m with you on 1 and 2, but you lose me on 3.

You probably don’t realize just how large corporate tax loopholes are. While personal income taxes are only slightly affected by unintended consequences of the tax code, collection of corporate taxes is reduced by about 30% by loopholes and evasion (only 20% is lost due to intended tax breaks). Evasion would be made more difficult with a simpler corporate tax system.

Closing corporate tax loopholes would, in essence, be a huge tax increase. Lowering the official rates at the same time to defray that would probably be necessary.
joe from Lowell Says:
December 31st, 2008 at 9:35 am
Al,

Charles Schwab doesn’t hire (many) employees with your money. They invest it. In other companies. That themselves hire people. Do you see a lot of companies hiring people right now?

No matter how much investment capital they get, corporations aren’t going to ramp up operations in a recession, nevermind a depression, because it would be a bad investment for them to do so.

Maybe they use that capital to buy back stock. Maybe they use it to pay down debt. Those aren’t bad things, by any means, but they’re not stimulus.
Zephyrus Says:
December 31st, 2008 at 12:51 pm
Honestly, though it’s obviously not the best use of funds in the short term, I think abolishing corporate taxation would be a good thing.

You’re taxing incorporated activity, essentially subsidizing non-incorporated investment. Such as, say, real estate. But by and large most productive activity in our economy is done by incorporated entities.

Now, if you cut tax rates for it, three different groups–consumers, workers, and investors all benefit. I suspect rich investors would disproportionately, but that has a simple fix: hike up the income tax on high incomes to make up for the shortfall in government revenue. Then, everyone wins.
Drowning in a sea of red Says:
December 31st, 2008 at 5:13 pm
Of course none of these people at any of these think thanks have ever run a business, which is why they actually think tax rates are any influence on the running of a business(by the way it isnt). You can spend 4 years of college to talk about how to run a business or spend $400 on your articles of incorporation, tell me which give you more insight on how a business works.
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Matt Yglesias

In The Long Run…

57 Responses to “In The Long Run…”

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