Tax

This is supposed to be a non partisan blog, but the debates for what ever reason do not deal with issues that count, either strategically or economically. My position politically, if you care to know, is that both sides are both conniving and wrong headed most of the time. This week takes the cake, however. The Democrats talk only about their baggage and trivia. What about the issues of energy and the hush hush neoconservative doctrine that justifies preemptive war? What about hunger if oil plays out? And, what about the environment, not the polar bears, but the acidification of the oceans with devastation to a major portion of our food supply? There is a big elephant or 3 in the living room and nobody wants to talk about it.

Meanwhile Senator McCain proposes eliminating the gasoline tax to stimulate the economy. The only thing that will stimulate is his wife. McCain also proposed lowering corporate taxes from 35% to 25%. Maybe corporate tax relief will work, but it is small business that needs stimulation.
Hello, the only way we will defuse the middle east is to stop buying crud oil. Never mind the critical CO2 build up in the atmosphere. Oil is financing an endless asymmetric war against us. If we want to win, we cut them off from oil revenue right now -- all of them! How? with a Manhattan Project that immediately produces massive clean, cheap, exploitable electricity, not for the benefit of the monopolies but for the whole economy. That is hard thinking for the "Daddy Warbucks" economists and dare I say today's Republican leadership.

About the tax relief for corporations, lets look at the graduated tax scale for corporations: Zero to 50,000 15%, 50,000 to 75,000 25%, 75,000 to 100,000 34%, 100,000 to 335,000 39%, 335,000 to10m 34%, 10m to 15m 35%, 15m to 18.33m 38%, and over 18.33m 35%. So who benefits from reducing the 35% to 25%? The beneficiaries of such a cut would be corporations with annual earnings above 10 million. Who carries the burden of corporate taxes? You guessed it the young innovative competitive enterprise with the technology that fuels our economy and thus our productivity, the very thing that drives our standard of living. Take a fast growing 100,000 company who's management invests all of their earnings in inventory; we are taking 39% of them now! This does not make sense. The tax breaks need to accrue to the small business of our country, businesses that drive technology -- and not target the relief towards the giant cartels that may in fact make the juiciest campaign contributions. Ah, but this is politics as usual, is it not -- down K Street and inside the beltway -- a little two-step shuffle.

Well, the Senator does have a point. Certainly at the 39% level he does, and for some inexplicable reason that rate is directed at the smaller corporation; probably it is so targeted because that size earnings category is the largest. Mathematically such exploitation of small corporations' earnings with excessive taxation amounts to choking the golden goose. This is not political thinking; it is pure math. For example: reduce the 39% to 29% that's 10% which adds directly to a company's earnings, x an average P/E of 22 and we have increased the company's capitation (market value) by 220%!!

(P/E = price/earnings ratio. This ratio tends to move with a companies growth-rate and perceptipn of quality, so when an earnings report disapoints expectations the price of the stock moves imediately and almost exactly by the number suggested by the existing P/E, thus for a stock with a P/E of 22, a 10% disapointment would theoreticly reduce the price demand by a multiple of 22. A 2 cent earnings shortfall thus = a 44 cent drop in price and visa versa.)

That added price resulting from a 10% tax cut is all on paper of course, but it is negotiable paper that presumably corporations make the best and most productive use of. Arguably a business will turn over that added wealth with further investment in human capital and other factors of production which in turn generate further tax revenue. Given a reasonable productivity factor of say 5 that extra wealth creates an economic product of about plus 1,100% -- taxed at 29% -- not so bad a deal for the tax payers and maybe new jobs too. So, as I see it you loose 10% but gain upwards of 300%. Even if the added wealth earns only its own weight, the tax payer wins.

Theory has it that cutting individual tax does not create the same level of productivity as cutting business tax. What has people steamed, is what they see the monopoly do with the stimulus, i.e. obscene executive salaries, engineered scarcity, price increases and so forth. Government spending gets criticised too for investment in non-productive ways that reduce the velocity or turnover rate of the capital input. I could go on and on, but sufice it to say, this multiplying effect of capital, is an important concept for the all of us -- who generally believe and think we know, but know only the political spin the polititians feed us.

The Senator has a point, but politicians don't get it. Well maybe they do, but can't pass up the opportunity to make sound bites that mislead the population into thinking the strategy of tax relief only benefits the wealthy. (Another subject altogether)

To show the extent of the political thinking, which is not thinking at all, I heard a popular talk show host on AM radio claim that gasoline prices were based nearly all on taxes. He claimed that if you took away the government tax on gasoline, then gasoline would cost only 83 cents a gallon. When crude oil sells for nearly $120 a barrel, it does not take an economist to divide $120 by the 42 gallons in a barrel of crude and see that we are lucky to buy gasoline for $4.00 a gallon. No, the only way out is to stop the political posturing and get us off of gasoline sometime yesterday.