Archive - Jan 3, 2013


Fiscal cliff non-sense

Now we're supposed to congratulated Congress for doing what they should have done long ago. All they did was avert a disaster of their own making. 

The tax increases agreed to are so very minor they barely make a difference. Even so, the House Republicans were ready to scotch the deal and let taxes go up on everybody rather than allow tax increases on those who clear over $250,000 per year. In the end, they settled reluctantly at $400,000 per year. Sorry folks, but we need a lot more revenue than that. We need a full return to the Clinton era tax rates, which were perfectly reasonable. I think the economy did fine those years, as I recall. 

I am a firm believer in steeply progressive marginal tax rates. That is, as you make more, you pay a higher percentage. Far from decreasing business activity, a steeply progressive rate encourages reinvestment rather than savings. I have said it here in this space very often: High marginal tax rates (we had up to 91% rates on the highest incomes in the 1950s, when we prospered and built the interstate highway system, funded the Marshall Plan, and paid off World War II debts) encourage businesses to re-invest in their business rather than squirrel the money away. If you save 50% on what you spend, you're more likely to do it!

Of course, it is stupid to buy a new pickup just for the deduction if you don't need one. A lot of people were buying machinery and cars and other toys at the end of last year to avoid taxes. Foolishness. But if it is an authentic investment in building your business, it is wise. 

We had a good year at the nursery this year. Did we squirrel the money away? No, I didn't want to pay the tax. Instead, we dumped $47,000 into tarring our yard, and improvement in our business which will last for decades. Why was I so happy to spend that money? Because the tax on that money would have been about $20,000, so that brought the cost of the tar down to $27,000. No bargain, but you can understand how the higher tax rate on the last money I earned in profit encouraged me to reinvest and keep the tar guys busy. They spend that money again--in fact, a lot of the guys who helped tar the yard have already ordered trees for next year!

A high tax rate on higher incomes keeps the money going around as people avoid that tax. 

A flat tax is insane, and a recipe for economic stagnation. If you lower Joe Mauer's tax rate so he has an extra $2 million per year to take home, what will he do with it? Build another house? Hire a new maid?  I doubt it. He has all he can do to spend the $12 million or more he takes home already out of his $20 million salary. 

Our existing tax policy is not all that bad. All we need to do is revert to a few years back. What is really crazy are some of the ideas, particularly the ideas which are accepted as dogma by the House Republican caucus. 

I wish I could say it is fun to watch the Republican party implode. However, they seem intent upon bringing down the country in the process, which nobody should wish for.