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Monday, April 17, 2006

The Post Gets It Wrong

The Washington Post lead editorial "Tax Gimmickry, Paying for tax cuts for the wealthy with . . . more tax cuts for the wealthy!" gets it wrong, as usual when it comes it issue of taxes.

First off, there is only one "tax cut" in the proposal, not two. The one in the proposal in the Senate they refer to is making permanent the extention of the capital gains cut. The other tax cut they refer to as "being for the wealthy" is a increase in the amount that can be put into Roth IRA's.

They get it wrong because they insist on using static numbers for calculating the cost of the tax, even though the last 10 years has proven that theory wrong twice (1997 and 2001). When Congress pushed through the 1997 cut, liberals claimed it would wreck the economy, and cause huge deficits. Then we ran a surplus for the next 3 years until the 2000 recession.

When the rate was cut from 28% to 20% in 1997 the income from capital gains went UP from $69 billion in 1996 to $79 billion in 1997, and to over 109 billion in 1999! A large amount of that growth came from venture capital investment, which exploded when it became "tax friendlier" to be in that business.

A 48% rise in capital gains income to the government was also seen from 1981-1983 when the rate was cut from 28-20%. Revenue from the tax grew much more modestly from 1983 to1997 when it was raised again.

The biggest misconception is that the money does nothing if it doesn't go to Congress to spend. In 1996 2004 businesses received venture capital funding, nearly 6000 received it in 2000.

Would those 4000 more businesses per year received the same amount of funding in those years? Probably not, since the number had been flat since the early 1990's. How many people were employed in those start ups who then paid income taxes, social security and medicare taxes and state taxes on the money that was spent?

The second misconception is that Roth IRA's, where taxes are paid now on deposits, but not on withdraws in the future are "for the rich". I'd say that if you make under $70k per year, have a mortgage, and a couple of kids, a Roth is probably a better choice than a traditional IRA. (I'm not a tax advisor, consult a professional).

I say this because the deductions for mortgage interest, child tax credits, and dependents will probably lower your tax bracket enough that the traditional IRA isn't a huge help. And, when retirement comes around, you keep more of your money, when you'll probably need it more.

Even if Roth's were only for the rich, a Roth isn't the equivelant of putting money in a mattress. It's invested by whoever is managing the acccount, meaning more investment by an individual has implications for more than just them. It ends up in the markets, fund more businesses, and generating more capital.

The Post's article goes straight to the heart of the liberal misconception that Government knows best how to use our money. However, by ignoring the history of the capital gains cuts, it ignores the truth, that investors have done more for us with that cash than the government.

A lot of information in here came from "A Capital Gains Tax Cut: The Key to Economic Recovery" I suggest that liberals who believe government to be the best stewards of our money not read this, it will ruin your day.

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7Comments:

Blogger ablur said...

A while back ago I read an article that explained the use of capital rather well.
The government is like a financial black hole where 20% of the money that goes into it is completely lost. Private investments also suffer some loss but the net effect is usually under 3%. These facts offer insight to all those who wish to have a return on their money.
If you know where to get the biggest bang for your buck, and you can prove it over and over, why do we insist on doing it wrong? I'm not advocating that no money should go to government, it has its place as well as tasks that can only be accomplished through such. The founders may not have understood all the economics in play but limited government has quite a few benefits.

9:06 AM  
Blogger Praguetwin said...

An excellent post here.

The benefits of reduced capital gains taxes on the economy are clear. It is very important for a government to provide a healthy environment for investors to attract capital.

By all accounts, the current bull market extention is a result of increased liquidity in the system. The idea that a tax cut would somehow "ruin the economy" are alarmist and misinformed. Quite the contrary is true, and as you point out, we have seen that repeatedly. However, in the case of the 2001 tax cut, and it's future, one has to consider what has actually happened. It probably averted a recession, and the stock market has gone way up. But the debt has threatened to destabilize the currency, and even if it doesn't, it is a problem that continues and will have to be brought under control.

My point is that light taxes are great if you can afford it. Unfortunately, the current system is breaking the bank, and that problem must be weighted into tax policy.

The current track is unsustainable, in my view, and should be remedied sooner rather than later.

1:18 PM  
Blogger Crazy Politico said...

Praguetwin, the problem with the idea of fixing it through higher taxes is that it's been a proven nonstarter every time it's tried. When we raised the cap gains rate in the 1980's it accelerated that recesssion, and didn't increase cash flow to the government, it decreased it.

The folks that get hit hardest on those tax increases are the most likely to be able to afford to avoid the taxes. They'll just hold investments longer so they don't pay the tax at all, it's been done everytime we change that rate.

If you look at how much tax income has gone up since 2001, you see that spending, not taxing is the issue. The GOP controlled congress has failed to control that, and that is the issue.

When Gingrich and Co. required offsets on spending equal to any tax cut, we were fine. Since we suspended that we've been going down hill on the deficit. Again, I blame the GOP in congress for it, and the earmark growth in the last 5 years.

And if Bush would actually veto something, that might help too.

3:26 PM  
Blogger Tim said...

What's worse Tax and Spend Liberals or Borrow and Spend Republicans? Answer:They are both killing this country by taking away from the producers. Unfortunately, as more of our jobs leave, we will have less and less people producing tax money and more and more recieving it in welfare.

4:43 PM  
Blogger Crazy Politico said...

You are right, neither is worse, I'd rather have the "don't spend" crowd back.

Unfortunately, even if they did come back, there is so much money in "mandatory spending", and so much coming down the pike it wouldn't matter.

In 2030 we'll need a 30% tax rate on social security to keep it solvent. Then we'll be France.

5:44 PM  
Blogger shoprat said...

We have the problem that we have two parties, the GOP says the right things but doesn't do them while the DEMs won't even pay lip service to lower taxes and less spending. There is no good answer and you just do the best you can.

5:46 PM  
Blogger Rebekah said...

I'm with Shoprat; it's very irritating how both sides are working now. Hey, I thought Republicans were for less spending. Not that I'm against Bush's tax cuts, but it's counterproductive to have spending through the roof.

And the alternative is even worse.

But, I am with you on this - the spin on Bush's tax cuts is just that: spin.

8:09 PM  

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