The Tax Shell Game

GOP Reaches Deal on Tax Cuts:

“Middle-income households would receive an average tax cut of $20 from the agreement, according to the joint Urban Institute-Brookings Institution Tax Policy Center, while 0.02 percent of households with incomes over $1 million would receive average tax cuts of $42,000.”

More tax shell games by the GOP. Pandering to the base in an election year. Nothing more really.
Treasury Secretary John Snow asserted that the tax breaks that would be extended have ushered in a period of rising business investment and strong economic growth. “When you get investment occurring and strong GDP growth, you get jobs,” he said. The “investment” on dividends and capital gains mostly goes to those in the secondary market: investors trading shares with each other. When I sell GE stock, the firm doesn’t get a dime. Now if they extended or even lowered taxes on IPO’s or secondary offerings, Snow’s claim would be more believable as that money is directly invested in firms which hire people. If the goal was to increase savings, I could see a tax credit on cap gains and dividends inversely related to income, but that wasn’t the goal here.

Republicans say those tax cuts were crucial to spurring economic growth over the past three years, by persuading more corporations to offer larger dividends and by sparking new business investment. A new report by the Republican staff of Congress’s Joint Economic Committee notes that from mid-2000 to early 2003, nonresidential business investment plunged at a rate of 5.6 percent a year. From mid-2003, when the investment tax cuts were steaming toward passage, to early 2006, such investments grew by 9.2 percent a year.

I’m extremely skeptical of any tax cut leading to jobs in a globalized economy. If you want domestic jobs created, cut taxes on investment in small, domestic businesses which create the vast amount of jobs in this country. They are largely private so a revenue cap, say $150M in gross revenues, and focusing on LLC’s, LLP’s, etc. should do the trick. Reducing taxes on investment in these firms promotes job growth which is a social good and progressive one at that. Because these firms are in the growth stage of the business lifecycle and they are less like to be heavily globalized, they hire real people here in America. An across the board tax cut rewards the firms that are outsourcing jobs, i.e. large multinationals, at a frightening clip as well as those that actually increase the domestic job base, i.e. smaller firms.
Another real world problem with this tax cut is it doesn’t address GDP growth and the national share each family has in it. A good measure of prosperity dispersion(wealth?) distribution in this nation is the distribution of income relative to national income (which is equal to GDP). The incomes of the top 10% of earners in 1970 with average income of $119,249 was 33% and rose to 48% in 2000 with an average annual income of $224,977. This group went from earning a third of the wealth to half of the wealth that this country generates. What’s even more interesting is that within this 10% the 90 to 95 percentile group share was essentially flat, but as you move up to higher and higher percentiles their income growth shoots up. In fact, the top 1% in 1970, saw their incomes rise to 5.1% share (!!!). In short, the top dog, super rich households are making much more of the national income pie. Meanwhile, The average income of the bottom 90% saw their average income go from $27,060 to $27,035. Yep, that’s a 25 dollar decrease in real dollars (adjusted for inflation). All through the years of Reaganomics and Clinton GDP growth, the middle class hasn’t made more money in real dollars (actually less!), while more people became millionaires in our country’s history.
Cutting taxes that largely go to wealthy individuals and institutions makes them more able to invest, but not nearly enough of the investment that creates jobs. Tax cuts that invariably favor our more wealthy citizens at a time of irresponsible spending is also unconscionable. But you can’t really blame the GOP, they are playing to their base in an election year. We are far more likely to see pandering than anything else. As for the Democrats, they had nothing better to offer than tax cuts that also pander to their base and bash the GOP. Quick to say we shoudn’t give tax cuts to the wealthy, but what they really should be talking about how to increase the real dollar incomes of “the bottom 90.”

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