The Tax Cut

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Looking beyond the "Facts" Blog Home The Blackout.

The tax plan itself has several facets: Removal of the “Marriage penalty” – Almost a total non-issue. The “Married, filing jointly” option was designed for the “traditional” family, where the father made most of the money and the mother made little or nothing. If both made significant income, they got screwed on the deal — which they invented the “Married, filing separately” option years ago. This change is mostly for couples too lazy to file separately. (Note that it mostly helps DINKs and not the real working class)

Then there’s the increase in the deductions for children. This is a purely good idea. It helps those that need it, who happen to be those mostly likely to spend the money in a way that will help the economy. (This almost had to be the Democrats contribution to the plan….)

Finally, there’s the keystone of the plan, the dividend tax cut. This is an INCREDIBLY bad idea, because, it’s intended purpose is to create new jobs, and it hasn’t a chance in hell of succeeding. Let me explain.

The President’s plan goes like this:

  • With lower tax, more companies will offer dividends.
  • Now, with some extra cash from their dividends, small business owners will rush out and hire workers for their small businesses, moving the economy along.

So, what’s wrong with this? Everything!

Why would companies be more willing to offer dividends just because the recipients will get to keep more of it? What’s is it to them? OK, the tax cut might encourage more people to invest in dividend offering companies, raising their stock, which might encourage more companies to offer them, so he’s not completely off the mark here —but this is not really a good thing, as we’ll get to in a moment.

The next step in this scheme jumps to “small business owner”, as if they are the only ones likely to benefit from this. Actually, they are the least likely.

  • Most dividend producing stock is owned by mutual funds.

    Most shares of mutual funds are owned by middle-class people – but for their retirement accounts, where they have no effect on the current economy, and aren’t taxed anyway. The next largest group of mutual fund owners are the very rich.

  • Similar, the next largest group of stock holders is also the very rich – founders of major corporations and their heirs, and their corporate executives. None of these people are in a position to use a few extra dollars in their personal pocket to hire additional people (except possible household servants)

  • Finally, some really tiny percentage of this money goes into the pockets of small business owners (the very few that didn’t liquidate their stock holdings to raise funds to start the business)

But these people will be using it to hire new workers right?
Well, No… almost certainly not…. Think about it….

Say you run a struggling business and suddenly you get, say, an extra $10,000 dollars from your stock investments ($10,000 is ridiculously high for this amount, but we’ll go with it). Now what would your thoughts be?

A) Now I can finally take a vacation…

B) Why am I wasting my time on this struggling business when I could be making big buck in the stock market?

C) Let me spend this money hiring more workers for my business to stand around next to the other workers who also have nothing to do because my business is failing…

I’m guessing that (A) and (B) come to you long before (C) does. The big problem here is that it expects the money to cross the gulf between “personal assets” and “company assets”. If their company’s already on the ropes, not many will throw “good money after bad”

The basic idea here (as with most of the completely discredited, but still widely favored by Republicans, “trickle down theory”) is that companies hire people out of charity – they have a couple extra bucks, so why not hire some people?

This, of course, is nonsense. Companies hire workers when they need workers. If you want to create jobs, you must create the need for jobs.

Which is the next reason why this plan is disastrous. For kick start a sluggish economy, money must be spent. The idea of a tax cut is that if the people have more money to spend, they will go out and spend it. On the whole, a good idea, but it overlooks a very important point – the economy doesn’t care who’s spending the money. It could be people, or the government. It doesn’t matter, as long as money is spent. The point is, that if you have to cut government spending to pay for the tax cut you’ve completely negated the effect of the tax cut itself, which is exactly what Bush has done.

So, what would work?

We must increase to total amount spend in the economy. This means to increase government spending plus increase the amount of money available to those who have none to spend now. A tax cut won’t work, because, even if properly targeted (fat chance under a Republican administration) would necessitate reduced government spending. So, we need to raise the minimum wage. This increases the spending money for the common worker, PLUS increases tax revenue. Ignore the myth that it increases layoffs — again, this is based on the faulty notion that companies hire expendable workers as charity (which they let go when they get too expensive). Nonsense, companies hire the workers they need. If a company needs workers it can’t afford to pay, then it’s mismanaged, and should go out of business.

Next, we could try putting this “hire workers as charity” thing the Republicans insist happens, into practice. To do this, we must encourage companies to spend whatever extra cash they have on hand to hire new workers, instead of wasting it on, say, paying dividends! In other words, we should be making the divided tax rate as high as possible!