http://www.nytimes.com/2010/12/02/opinion/02hoenig.html?hp
Tom Hoenig had some strong things to say about the bank bailout which did little to modify greed on Wall Street and which has made our largest banks even bigger and still too big to fail.
Thursday, December 2, 2010
Bush Tax Cuts and Small Business
I have been requested to comment on GOP claims that the expiration of the Bush tax cuts will harm small businesses and the jobs that they create. First lets examine what happens if the Bush tax cuts expire and then consider the implications for small businesses and jobs. Then we will look at the real reason why the GOP wants to extend the Bush tax cuts.
If the Bush tax cuts expire there will be several changes to the tax code. Under the Clinton administration, the top tax rates for ordinary income from wages were 36% and 39.6%. The Bush tax cuts reduced the top marginal rates to 33% and 35%.
More importantly, the Bush tax cuts reduced taxes on capital gains and dividends. The capital gains tax was reduced from 20% under Clinton to 15% under Bush. Dividends under Clinton, were taxed as ordinary income and subject to the rates presented in the paragraph above. Under Bush they are taxed at the capital gains rate of 15%
Lastly, the estate tax was eliminated in 2010 and returns in 2011 if the Bush tax cuts expire.
The change in the marginal tax rates on ordinary income should have no affect on small business. In the first place only 2% of small businesses have taxable income that would place them in the top income bracket. The top tax rate applies to taxable income greater than $369,000 this year and would be closer to $400,000 in 2011. ( Taxable income is different from gross income. It is the income that remains after deductions and exemptions.) Consider a household with taxable income of $500,000 in 2011 under the Clinton and Bush tax rates. The household would pay an additional tax of $4,600 on its ordinary income above $400,000. This is hardly the kind of thing that should affect the decision to hire additional labor. Businesses hire additional people when they have an opportunity to produce enough new revenue to cover to cover the cost of the additional labor. On the other hand, a corporate executive with income of $1.4 million would pay an additional tax of $46,000 on the million dollars above $400,000. They are the real beneficiaries of the cut in the marginal tax rate on ordinary income.
Small businesses are not affected by the changes in the capital gains tax or the tax on dividends.
Of course, they may trade some assets that produce a capital gain but generally these assets are not part of the business. The real beneficiaries of the capital gains tax cuts are corporate executives who receive the majority of their income in stock options. They pay 5% less on their capital gains under the Bush plan than they do under the Clinton tax plan. For example, an executive who sold stock options that produced a gain of $1 million would an additional tax of $50,000. A top executive who realized a gain of $10 million would pay an additional tax of $500,000. That would make a campaign contribution to the GOP worthwhile if they could retain the Bush tax cuts. Moreover, since they are also the ones who own most of the stock in dividend paying companies, they benefit enormously from the much lower tax rate on dividends under the Bush regime.
The elimination of the estate tax benefits a very small number of households with estates over $4 million. Very few small businesses are in this category, and it is hardly a consideration that would affect their decision to hire additional labor.
To summarize, tax policy under Bush was not really about tax cuts. It was about shifting the burden of taxation from taxes on capital to taxes on wages. Taxes as a percent of national income have been relative stable over the years at around 20% of national income. When the taxes on capital are reduced, without a cut in government expenditures, the tax burden is shifted elsewhere. It has been shifted to those who are taxed primarily on wages.
We should also recall that the US economy grew at a 2.39% rate between 2001 and 2007 under Bush. His shifting of the tax burden from capital to wages did nothing to stimulate growth. Under Clinton, with higher taxes on capital, the economy grew much faster, and even in the 70's when the highest tax rate on income, equivalent to $1 million today, was 70%, the economy grew at 3.21%.
If the primary beneficiaries of the Bush tax cuts are not small business owners but corporate executives who are in a position to fund election campaigns, one might ask why the GOP claims that the expiration of the Bush tax cuts will hurt small businesses. The answer is simple. It is a much stronger campaign slogan than defending a shift of the tax burden from the wealthiest Americans to middle and upper- middle class wage earners.
If the Bush tax cuts expire there will be several changes to the tax code. Under the Clinton administration, the top tax rates for ordinary income from wages were 36% and 39.6%. The Bush tax cuts reduced the top marginal rates to 33% and 35%.
More importantly, the Bush tax cuts reduced taxes on capital gains and dividends. The capital gains tax was reduced from 20% under Clinton to 15% under Bush. Dividends under Clinton, were taxed as ordinary income and subject to the rates presented in the paragraph above. Under Bush they are taxed at the capital gains rate of 15%
Lastly, the estate tax was eliminated in 2010 and returns in 2011 if the Bush tax cuts expire.
The change in the marginal tax rates on ordinary income should have no affect on small business. In the first place only 2% of small businesses have taxable income that would place them in the top income bracket. The top tax rate applies to taxable income greater than $369,000 this year and would be closer to $400,000 in 2011. ( Taxable income is different from gross income. It is the income that remains after deductions and exemptions.) Consider a household with taxable income of $500,000 in 2011 under the Clinton and Bush tax rates. The household would pay an additional tax of $4,600 on its ordinary income above $400,000. This is hardly the kind of thing that should affect the decision to hire additional labor. Businesses hire additional people when they have an opportunity to produce enough new revenue to cover to cover the cost of the additional labor. On the other hand, a corporate executive with income of $1.4 million would pay an additional tax of $46,000 on the million dollars above $400,000. They are the real beneficiaries of the cut in the marginal tax rate on ordinary income.
Small businesses are not affected by the changes in the capital gains tax or the tax on dividends.
Of course, they may trade some assets that produce a capital gain but generally these assets are not part of the business. The real beneficiaries of the capital gains tax cuts are corporate executives who receive the majority of their income in stock options. They pay 5% less on their capital gains under the Bush plan than they do under the Clinton tax plan. For example, an executive who sold stock options that produced a gain of $1 million would an additional tax of $50,000. A top executive who realized a gain of $10 million would pay an additional tax of $500,000. That would make a campaign contribution to the GOP worthwhile if they could retain the Bush tax cuts. Moreover, since they are also the ones who own most of the stock in dividend paying companies, they benefit enormously from the much lower tax rate on dividends under the Bush regime.
The elimination of the estate tax benefits a very small number of households with estates over $4 million. Very few small businesses are in this category, and it is hardly a consideration that would affect their decision to hire additional labor.
To summarize, tax policy under Bush was not really about tax cuts. It was about shifting the burden of taxation from taxes on capital to taxes on wages. Taxes as a percent of national income have been relative stable over the years at around 20% of national income. When the taxes on capital are reduced, without a cut in government expenditures, the tax burden is shifted elsewhere. It has been shifted to those who are taxed primarily on wages.
We should also recall that the US economy grew at a 2.39% rate between 2001 and 2007 under Bush. His shifting of the tax burden from capital to wages did nothing to stimulate growth. Under Clinton, with higher taxes on capital, the economy grew much faster, and even in the 70's when the highest tax rate on income, equivalent to $1 million today, was 70%, the economy grew at 3.21%.
If the primary beneficiaries of the Bush tax cuts are not small business owners but corporate executives who are in a position to fund election campaigns, one might ask why the GOP claims that the expiration of the Bush tax cuts will hurt small businesses. The answer is simple. It is a much stronger campaign slogan than defending a shift of the tax burden from the wealthiest Americans to middle and upper- middle class wage earners.
Wednesday, December 1, 2010
Wiki Leaks May Force Resignation of Central Bank Head
http://www.guardian.co.uk/commentisfree/2010/dec/01/mervyn-king-bank-of-england
The leaks showed that M. King, who is the head of the Central Bank in England, which is a job like that held by Ben Bernanke at the Federal Reserve, made comments that has brought calls for his resignation. The leaks reveal that he has a poor opinion of the knowledge and ability of the new coalition that is responsible for fiscal policy. His views are also shared by several leaders in the Tory government that is leading the coalition. Furthermore, he has acted as an adviser to the coalition on fiscal policy.
In theory, the head of the Central Bank, or the US Federal Reserve, is supposed to maintain political neutrality and not comment on fiscal policy which is reserved for elected politicians. This is often a hard position to maintain since it is important that monetary policy, which is the responsibility of the Central Bank, and fiscal policy should be coordinated to achieve a common goal.
More on Wall Street Social Value's
http://blogs.reuters.com/felix-salmon/2010/11/22/why-wall-street-wont-get-shrunk/
Another article critical of Wall Street's contribution to the economy (Via Manan). I will have some comments later.
Another article critical of Wall Street's contribution to the economy (Via Manan). I will have some comments later.
Noah's Ark Lands in Kentucky
http://www.msnbc.msn.com/id/40445249/ns/us_news-life/from/toolbar
Sometimes, its easier to laugh at things than to get upset about a country that may provide tax dollars to appease groups that contribute to our ignorance.
Sometimes, its easier to laugh at things than to get upset about a country that may provide tax dollars to appease groups that contribute to our ignorance.
Pros and Cons of Short Selling
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/30/AR2010113007755.html?hpid=news-col-blog
Very insightful article by Richard Pearlstein, who is one of the better writer on the financial markets who is able to find a platform in the Washington Post. He used one of the more successful and more public spirited hedge fund operators for his analysis. He agrees that short selling can make some contributions but he points out several of the fallacies of short selling, and he raises the question raised in an earlier post by John Cassidy about the social value of certain financial markets, and especially about the relationship between that value and the outsized compensation of many participants.
Pearlstein agrees that shorts and longs are equivalent but he argues that shorts do not create value for the company that is sold short. He then asks, rhetorically, whether value creation is the purpose of markets.
He then describes how influential short sellers can impact a market by spreading negative information about firms that have been sold short. The information may be true or false but it can affect the market and produce large profits for the short seller in either case.
Some short sellers, especially of derivatives like credit default swaps, argue that they add liquidity to markets. Many believe that liquidity is good thing for markets. That is, the easier it is to sell an asset the better it is for the market. That is true to a point but supposedly liquid markets can dry up very quickly in panics. When everyone tries to sell an asset at the same time the number of sellers are greater than the number of buyers and the once liquid market freezes.
Pearlstein comes down particularly hard on the credit default swap (CDS) market. In this market one can make money by purchasing insurance against the default on an asset that one does not own. For example, if one believes that Greece will default on its sovereign debt one can purchase insurance against that default even if one does not hold a Greek bond. If the market comes to believe that the probability of default has increased for Greek bonds, the price of insurance against default increases and the holder of the CDS can earn a profit by selling CDS at the higher price. This is a sum zero game. For every winner there are an equal number of losers. Social value in sum zero games is nil. The billions of dollars wagered in this market produce no social value but the winners can earn billions of dollars. Moreover, the market for the side bets on CDS's distorts the market for the real asset since the change in CDS prices influences the prices that purchasers are willing to pay for the bonds. We have also learned that when the sentiment in a market changes the subsequent meltdown in the value of underlying asset will be magnified. The notional value of the CDS market is in trillions and many times larger than the market for bonds.
Very insightful article by Richard Pearlstein, who is one of the better writer on the financial markets who is able to find a platform in the Washington Post. He used one of the more successful and more public spirited hedge fund operators for his analysis. He agrees that short selling can make some contributions but he points out several of the fallacies of short selling, and he raises the question raised in an earlier post by John Cassidy about the social value of certain financial markets, and especially about the relationship between that value and the outsized compensation of many participants.
Pearlstein agrees that shorts and longs are equivalent but he argues that shorts do not create value for the company that is sold short. He then asks, rhetorically, whether value creation is the purpose of markets.
He then describes how influential short sellers can impact a market by spreading negative information about firms that have been sold short. The information may be true or false but it can affect the market and produce large profits for the short seller in either case.
Some short sellers, especially of derivatives like credit default swaps, argue that they add liquidity to markets. Many believe that liquidity is good thing for markets. That is, the easier it is to sell an asset the better it is for the market. That is true to a point but supposedly liquid markets can dry up very quickly in panics. When everyone tries to sell an asset at the same time the number of sellers are greater than the number of buyers and the once liquid market freezes.
Pearlstein comes down particularly hard on the credit default swap (CDS) market. In this market one can make money by purchasing insurance against the default on an asset that one does not own. For example, if one believes that Greece will default on its sovereign debt one can purchase insurance against that default even if one does not hold a Greek bond. If the market comes to believe that the probability of default has increased for Greek bonds, the price of insurance against default increases and the holder of the CDS can earn a profit by selling CDS at the higher price. This is a sum zero game. For every winner there are an equal number of losers. Social value in sum zero games is nil. The billions of dollars wagered in this market produce no social value but the winners can earn billions of dollars. Moreover, the market for the side bets on CDS's distorts the market for the real asset since the change in CDS prices influences the prices that purchasers are willing to pay for the bonds. We have also learned that when the sentiment in a market changes the subsequent meltdown in the value of underlying asset will be magnified. The notional value of the CDS market is in trillions and many times larger than the market for bonds.
Destruction of a Birther with Facts
http://tpmmuckraker.talkingpointsmemo.com/2010/11/anderson_cooper_shellacks_texas_birther_with_torre.php?ref=fpb
It's hard to imagine that this post is even necessary, but unfortunately, we all have acquaintances who get their facts over the internet from hate groups. The birther in this video is a state rep from Texas who proposed a law that any future candidate for president must submit proof of citizenship to the Texas legislature. This of course puts Texas in a rather peculiar position of usurping federal jurisdiction over national law. I guess this just shows how they think in Texas. After all they have the oil companies and America's football team in Texas. In any case, Anderson Cooper gets this guy to expose us to all of the nonsense that he believes to be true and then he confronts him with facts that would embarrass any normal person. I doubt that this will affect this birther. He will just retreat back to his district in Texas where ordinary folks who prefer rumors to facts reside. You, however, may have
birther acquaintances who might not to move to Texas or Alaska. Show the video and watch them squirm.
It's hard to imagine that this post is even necessary, but unfortunately, we all have acquaintances who get their facts over the internet from hate groups. The birther in this video is a state rep from Texas who proposed a law that any future candidate for president must submit proof of citizenship to the Texas legislature. This of course puts Texas in a rather peculiar position of usurping federal jurisdiction over national law. I guess this just shows how they think in Texas. After all they have the oil companies and America's football team in Texas. In any case, Anderson Cooper gets this guy to expose us to all of the nonsense that he believes to be true and then he confronts him with facts that would embarrass any normal person. I doubt that this will affect this birther. He will just retreat back to his district in Texas where ordinary folks who prefer rumors to facts reside. You, however, may have
birther acquaintances who might not to move to Texas or Alaska. Show the video and watch them squirm.
Subscribe to:
Posts (Atom)