The Washington War on Investment

· Friday, August 6, 2010

Will higher tax penalties on investment really spur jobs and faster economic growth? Most commentators would say no. It's really a matter of economic common sense. But Tim Geithner says, Yes!

Speaking to a group in Washington this week, the Treasury secretary said that extending tax cuts for the wealthiest Americans would imperil the fragile economic recovery. He argued that government needs the revenues from those top-end tax hikes. So failure to raise taxes would harm growth. And then he went on to say that the trouble with the wealthy is that they save more of their tax breaks than do other groups.

OK. Are you confused now? Most people would be.

Let's start at the top. The coming tax bomb would raise the top marginal tax rate on capital gains from 15 to 20 percent, on dividends from 15 to 20 percent (or perhaps all the way to 39.6 percent) and on top incomes from 35 to 40 percent. Meanwhile, the estate tax could go as high as 55 percent.

Now, it is indisputable that capital gains, dividends and estates are essentially investment. What's more, most successful earners who pay top personal tax rates are, by nearly all accounts, the folks who are likeliest to save and invest.

But Geithner is suggesting the economy doesn't need more saving. This thought was echoed by Jared Bernstein, a top White House economist, who told me in an interview that the saving and investment multipliers for economic growth are way below the stimulative effects of government transfer payments, such as more aid to state and local governments and further extensions of unemployment benefits.

Echoing that thought, the Senate this week voted to approve $26 billion in aid for state and local governments -- partly funded, by the way, by an $11 billion yearly tax increase on the foreign earnings of U.S. multinational corporations. Here, too, a tax on profits is a tax on investment. The Senate also rejected an amendment by South Carolina Republican Jim DeMint that would extend all the Bush tax cuts.

In effect, pulling all this together, the position of the Democratic Party in power in Washington is that transfer payments (taxing and borrowing from Peter to pay Paul) are good for growth and that investment is bad.

Go figure. I guess it's a battle between the demand side and the investment, or supply, side.

The great flaw in the thinking of the Democrats is that they are ignorant of the economic power of saving and investment. Saving is a good thing. Stocks, bonds, bank deposits, money market funds, commercial paper, venture capital, private equity, real estate partnerships -- all that saving is channeled into business investment. And whether that capital goes into new startups or small businesses or large firms, it finances the kind of new investment in plants and equipment and software and buildings that ultimately creates jobs and family incomes. And that, in turn, spurs consumption.

But pulling out just one dollar from the private sector and rechanneling it through the government as a transfer to someone else creates nothing. At best, it's a safety net. At worst, it may damage private-business activity and actually reduce employment.

Without saving, there can be no investment. And without investment, there can be no enhanced productivity, which is the ultimate source of long-term prosperity and wealth.

Now, there are some Democrats who understand this. Sens. Evan Bayh and Kent Conrad, among others, support an extension of the upper-end tax cuts precisely to increase investment incentives that will create jobs. Bayh and Conrad often refer to the John Kennedy tax cuts that lowered marginal rates across the board for successful earners and businesses. They correctly worry about small-business job creation in this process. And they have moved from the demand side of today's Democratic Party to the supply side of the John Kennedy era.

Bayh and Conrad have the story exactly right. And Treasury man Geithner has it fundamentally wrong.

Geithner tries to make a deficit-reduction argument, saying that extending tax cuts for the wealthy would cost $700 billion over the next 10 years. But the real debate in advance of the Erskine Bowles deficit commission, which will restructure budget and tax reform, is about a one-year extension of the Bush tax cuts. That's priced at $30 billion by the White House, about the same as the new bill to aid state and local governments. Which policy would help growth more?

My answer is to keep the incentives for investment. Or find spending cuts immediately to cover both options. That would restore even more confidence.

We might also be surprised when the growth- and revenue-increasing benefits of lower investment tax rates pay for those tax cuts in the future -- just as they have in the past.

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Comments

Harry

Incentives for investment makes perfect sense. Of course that is the correct line to take. The problem lies in the motivations of Geithner and Obama himself. The Obama administration can only be pursuing their chosen economic policies because of one of two possibilities:

1) They actually think they'll work, which in the face of current circumstance, is either stubborn, or inept.

2) They know their policies will not work, but don't care. The overarching goal of greater governmental power trumps the feasibility of the economic policies, or the policies serve that end, effectiveness notwithstanding.

I can't think of a third possibility. Hopefully right minded people (excuse the pun) in positions of power will be able to correct the situation before long term damage is done.

Harry

Posted August 6, 2010 at 12:26:23 PM


Gina

What would you expect? With an administration drowning in corruption and scandal, spending like a drunk sailor, with the tax payers money, no accountability, and no transparency, this is history repeating itself, and the elites thinking we the people are too stupid to relies it, are we?

Posted August 6, 2010 at 1:07:37 PM


Tommy

You mistake your economy for Geithner's. Your economy is our economy. His is the size and strength of the US government dedicated to an elite running our complete lives. Obviously it isn't big enough for him. And to allow citizens to keep what he deems as too much of their own money isn't good for his economy. Therefore your answer or plan - like any from others who oppose Washington - doesn't mean diddly. Your title sums it up: war. The obamanation administration is just like al qaeda - an enemy we repeatedly excuse and refuse to accept is hellbent on destroying us and our way of life for their own political benefit.

Posted August 6, 2010 at 2:12:30 PM


Tommy

You make the mistake of believing that your economy is Geithner's economy. Your economy is our economy. His is whole sale government expansion - becoming God to all who receive from its bounty. Your title sums it up: war. The ombamanation administration is just like al queda; the American public refused to accept the fact that these people are hell bent on destroying us and our way of life for their own political gain.

Posted August 6, 2010 at 2:16:47 PM


TJS

Democrats are the vote-buying party. To them, it is more important to buy votes than to have a normal, healthy economy. We need to cut the federal government from its current 25% of GDP down to its historic level of tax collections from GDP - 18%. That means we need a 28% reduction in size. Looked at from the other direction, since the Clinton average of 18% of GDP, the federal government grew 39%.

To understand Democrats, you must study the Rasmussen polls and their findings on the "political class". "By a 54% to 43% margin, the Political Class believes the federal government should be allowed to do most anything. Mainstream voters reject that view by a 94% to three percent (3%) margin." Democrats are infested with political class people.

Posted August 6, 2010 at 3:41:25 PM


Marcus

The market is being gamed now by the big players(market makers). With so many people using brokers to manage 401k's for them for their retirements it's a constant sea of money flowing into the market to be scooped up. Just watch how the market is behaving with the huge up and down waves. All these poor schmucks who have money taken out of their checks every month load up the system and the market makers time it so they put their money in and raise the stock prices, then start yanking their money (selling) in big chunks which swings the market down again causing massive losses across the market. The poor schmuck loses whatever gains he might made for the quarter in his little 401k,(market makers however will use call options) but just like at the casino, our citizen goes at it again by allowing money to continue to be taken from his check and the cycle starts over. It is the speed of information and speed of transactions that allow these modern day pirates to collect their booty with merely keystrokes and not saber strokes.

People need to be convinced to stop investing in any form in the national and world markets and keep their money to save or invest locally where they know what is going on. Wall street and others like them are raping the citizens of this country and the people don't even know it. It's their own fault though really. They dump their money into a system they don't have the slightest comprehension of and hope it works out. It's fascinating to watch. All Geithner and company are trying to do is get their share of Wall street booty, ie, your retirement.

People, spread the word and stop your mutual funds, your 401k's and anything else that you are not directly doing the trading with.

Posted August 6, 2010 at 4:01:31 PM


pete

This is why Warren Buffet and others are discussing giving billions to charity. Rather than have wasteful government take it and pizz it away, they would give it to charity. This works for me. I'd rather see them give to charity, where they can see where their money is going, and take the tax break - or not - than have the govenment confiscate their money and waste it. Anything the government takes is first skimmed off the top to pay whatever agency they determine to be "necessary" to distribute the money.

Posted August 6, 2010 at 4:15:44 PM


Gene Garman

If ninety-five percent of all money is controlled by four percent of the population, as some say, does that fact alone not say something about the real problem?

When average Americans work for minimum wages, does that fact not say something about what is needed to spur the economy?

When half of the children in the public schools of my community are on free and reduced lunches because their parents earn minimum wages or less, does that fact not say something about the problem as to why too many Americans are struggling?

It seems to me the golden rule, as taught by Jesus, is do unto others etc., so where does that concept stand in the world of business and the mind set of the corporate world? And, no wonder there is a need for unions when without them too many workers are forced to live on minimum wages and no benefits?

Posted August 9, 2010 at 1:10:38 PM


B.B.

Gene, I hope you will notice that unions have NOT saved us from minimum wage jobs. If anything, unions have driven the costs of production up so high that companies have simply removed it to other countries. What's left are minimum skill jobs which, like most other things that have become commodities, have their prices set by the competition. And to the extent that this newly communist government of ours is also allowing the illegal aliens to swarm in, the competition has driven the labor prices further down the ladder. Unions are no different than everything else: too much of a "good thing" is ABSOLUTELY NOT a good thing.

Posted August 9, 2010 at 2:17:29 PM


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