Wednesday, April 16, 2003

Tax Day

This year was much less painful than last year. I used a different computer program, and it worked like a charm, without any of the idiocies that I ran into last year. Well, it did take a bit of effort to get around the "interview". But not too much. Suffice it to say, I plan on using it next year.

Nobody likes taxes. However, the vast majority of folks don't mind paying "their fair share". The majority of complaints are simple grousing; not at all the symptoms of an incipient rebellion. People also like to feel they're getting something for their money; European countries have sky-high tax rates, but the citizens feel that they're getting their money's worth.

So what's with the Bush administration's tax cuts? $350 billion last time I looked; the Republicans think they should be at least twice as much. Targeted at the rich to super-rich; most of the money will go to people making more than $300,000 per year. How much of your tax bill was due to taxes on dividends? The White House says that the tax cuts are to "increase productivity". This is the "supply side argument". To see what this means, we need to look at the economics of recession.

A Descent into Economics

The "classical" recession is now called a "demand-side" recession. Basically, people don't have enough money. Stuff piles up unsold, prices go down, suppliers go out of business because nobody is buying stuff. Cure is to pump money into the consumer economy. People use the money to buy stuff, business recovers, and Bob's your uncle.

The "supply-side" recession, popularized by the Reagan administration, is caused by the opposite problem. People have money, but businesses aren't making enough stuff. Prices go up and the economy stagnates. Cure is to pump money into business; they use it to increase production, people buy the new stuff, and, again, we be cool.

If you remember the supply-and-demand curves from Econ 102, a "demand stimulus" moves the demand curve to the right, while a "supply stimulus" moves the supply curve to the right.

So What's Going On Now?

The official Republican position is that the current, uh, slowdown, is a "supply-side recession", to be fixed by giving money to businesses, as represented by rich people. Idea is that, if you give money to poor people, they spend it, thus stimulating demand. If you give money to rich people, they invest it, thus stimulating supply. Unfortunately, this simply doesn't wash. Problems:

  • The Fed is practically giving away money. If they try to lower the discount any further, the Federal Reserve will have to start giving away toasters.
  • Assume that the rich folks "invest" their tax savings. How does that help productivity? Remember the Internet bubble? How does investing in a company that promises the computer equivalent of perpetual motion help anybody except con artists?
  • A current economic fad among the rich and the corporate world is "offshore tax shelters". If Joe Rich Guy moves his wad to the Cayman Islands, how does that help anybody?
  • Remember how this tax cut business got started? We had a budget surplus. The tax cuts were to "give back the surplus". Then the economy went into the toilet and suddenly we need the very same tax cuts to "stimulate the economy". Hmm.

What's really going on is a "crisis of confidence". After the bursting of the Internet bubble, we got hit with, in close succession, the Global Crossing, Enron, and WorldCom bankruptcies. All had engaged in practices that were at the very least unethical and very possibly illegal. All had boosted stock prices by "creative" accounting and growth estimates that are now seen to have been wildly optimistic. Aided and abetted at all points by greedy investors, of course. Don't expect them to admit any responsibility.

This sort of thing is simply not supposed to happen. The stockholders and the Board of Directors keep the CEO on the straight and narrow track of profits, the accountants make sure that Management has an accurate picture of the company finances, the auditors keep things honest, and the SEC steps in if anybody gets seriously out of line. However, here, every point has been compromised.

  • The concept of "profitability" seems to be obsolete. The focus is on the stock price, at the expense of everything else. More and more, "profit" is simply the part of your cash flow that you have to pay taxes on.
  • The accountants helped Management to build up the rosiest picture possible. Lotsa "paper money"; no "grocery money".
  • The auditors were the same as the accountants. Essentially, they were auditing themselves. Arthur Anderson went out of business because of this. Good riddance.
  • The SEC is drastically underfunded and staffed by refugees from the companies that they're regulating. Mainly, they seem to spend their time coming up with mindbogglingly complex regulations for things like "insider trading". Explain to me again what Martha Stewart did wrong. Her broker told her to sell. She sold. She's in trouble. Hunh??
  • Doesn't help one little bit that one of the most influential people in the early Bush administration (especially before Bush took office) was Ken Lay, the "mastermind" of Enron. "Common wisdom" for the reason VP Cheney doesn’t want to release the notes on the development of the Administration's energy policy is that it was actually written by Ken Lay. Why isn't Lay in jail?

Basically, people are scared. Before we see any movement in the economy, we have to convince the people with the money that the things that they're investing in are not con games. Even more difficult, we have to convince them that things are going to be stable for long enough for them to make a reasonable return on their investments.

And right now, that is precisely what we are not getting. The SEC is even more toothless. Arthur Anderson is gone, but there is no assurance that other accounting firms aren't doing the same thing. CEOs and directors are still getting mindboggling salaries and bonuses. Explain to me why the CEO or the directors of a company that isn't making money, or that is actually shrinking, should get any bonus at all. And, of course, there's the "elephant in the living room", that causes a great deal of trouble but that no one will talk about: the war. We are sinking a serious hunk of cash in the Iraqi desert. It's gotta come from somewhere. And check out how much of it is going to Halliburton or its subsidiaries.

So Who Benefits from the Cuts?

I normally try to hedge my statements. There's very little absolute in this world. Remember up at the start, I said that "the vast majority of folks don't mind paying 'their fair share'"? Well, turns out that the people who don't want to pay their fair share are the ones getting the cuts. Of course, there's always room for debate on what "fair share" means. Practically everybody thinks that a graduated income tax is about as fair as you can get. Just about everybody has to pay something, but those who have more money pay more. We can argue about details essentially forever, but almost everybody agrees on the basic point. Those who disagree tend to be members of fringe groups, or rich. The fringe groups write blogs, the rich give big contributions to political groups. Guess who gets listened to?

The old fashioned term for the Bush tax cuts is "looting the treasury".

Weblog Commenting and Trackback by