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US Taxes and the Economy
Old 08-31-2011, 06:29 AM   #1
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US Taxes and the Economy

I was listening to a political commentator discussing the economy the other day.

The nature of the discussion was the economy. The specific issue was how to get it going. There were two ideas being debated.


  1. Stimulus Spending - Basically Bridges and Roads in hopes of getting the sputtering economy going.
  2. Tax Cuts - The notion cut taxes and leave the money in the hands of tax payers... they will spend it.
  3. There was a 3rd idea... more of what might go wrong... any cut in government spending right now might not be matched by private spending in the short-term and cause a recession.

The proof that was presented for cutting taxes was that the Reagan Administration tax cut in the 80's. We had a pretty nasty recession and some have attributed tax cuts as pulling us out of it.

But in the 80's. The spending levels were maintained... maybe even increased because of the defense build up at the time. The funding was just shifted to spending FICA. IOW - General taxes reduced and FICA was increased and spent. It seems to me that the out of pocket funding remained the same... the only thing that changed was whose money was being used to fund government programs like defense, etc. (but not SS or Medicare... since they were fully solvent). The expense was shifted to the middle class.

But go forward to today. Workers are one of the biggest group of investors (DC plans and IRAs).


It seems to me that the net effect of any sort of tax cut would be, in effect, neutral to most people that earn a wage and are preparing for retirement or are retired and living off the resources they have paid into and acquired.

I think we are all going to be asked to give up something (take on SS and Medicare cuts). Basically that $2.1T in FICA trust debt.

Anybody have any thoughts about this.

In effect, when it is said and done, who is going to get that tax cut?
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Old 08-31-2011, 08:01 AM   #2
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Quote:
Originally Posted by chinaco View Post
I was listening to a political commentator discussing the economy the other day.

The nature of the discussion was the economy. The specific issue was how to get it going. There were two ideas being debated.


  1. Stimulus Spending - Basically Bridges and Roads in hopes of getting the sputtering economy going.
  2. Tax Cuts - The notion cut taxes and leave the money in the hands of tax payers... they will spend it.
  3. There was a 3rd idea... more of what might go wrong... any cut in government spending right now might not be matched by private spending in the short-term and cause a recession.

The proof that was presented for cutting taxes was that the Reagan Administration tax cut in the 80's. We had a pretty nasty recession and some have attributed tax cuts as pulling us out of it.

But in the 80's. The spending levels were maintained... maybe even increased because of the defense build up at the time. The funding was just shifted to spending FICA. IOW - General taxes reduced and FICA was increased and spent. It seems to me that the out of pocket funding remained the same... the only thing that changed was whose money was being used to fund government programs like defense, etc. (but not SS or Medicare... since they were fully solvent). The expense was shifted to the middle class.

But go forward to today. Workers are one of the biggest group of investors (DC plans and IRAs).


It seems to me that the net effect of any sort of tax cut would be, in effect, neutral to most people that earn a wage and are preparing for retirement or are retired and living off the resources they have paid into and acquired.

I think we are all going to be asked to give up something (take on SS and Medicare cuts). Basically that $2.1T in FICA trust debt.

Anybody have any thoughts about this.

In effect, when it is said and done, who is going to get that tax cut?
Not sure what your question is, but your first line isn't a good sign.
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I was listening to a political commentator discussing the economy the other day
Political commentators don't discuss economics, they torture and abuse it.
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Old 08-31-2011, 08:28 AM   #3
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Not sure what your question is, but your first line isn't a good sign.

Political commentators don't discuss economics, they torture and abuse it.
+1 I can't parse out enough of anything from all those words to even begin to think of any response.

What are you saying? What's the point? What's the question?


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Old 08-31-2011, 09:44 AM   #4
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Not sure what your question is, but your first line isn't a good sign.
Political commentators don't discuss economics, they torture and abuse it.

Guilty as charged.

I am in the middle politically both in a fiscal and social sense.

I do tune in sometimes and listen to ideas. But when the rhetoric gets too thick I tend to tune out.


It is complicated so I tried to provide some background.
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Old 08-31-2011, 12:14 PM   #5
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The nature of the discussion was the economy. The specific issue was how to get it going. ...
  1. Tax Cuts - The notion cut taxes and leave the money in the hands of tax payers... they will spend it.
Since the principal parties seem to agree on tax cuts, at least in the near term, though for different reasons, I think I see tax cuts coming soon. And more debt.
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Old 08-31-2011, 12:23 PM   #6
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There's really some question about how effective the stimulus was. Yes, there's evidence that the economy picked up and the unemployment situation eased while the stimulus was in full effect. But in reality, my gut feeling is that the primary "stimulus" was caused by temporarily cheap oil which mostly coincided in time with the stimulus package.
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Old 09-01-2011, 07:05 AM   #7
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There's really some question about how effective the stimulus was. Yes, there's evidence that the economy picked up and the unemployment situation eased while the stimulus was in full effect. But in reality, my gut feeling is that the primary "stimulus" was caused by temporarily cheap oil which mostly coincided in time with the stimulus package.
I am not sure we will ever know exactly. It was a motivated out of desperation.


One thing is for sure... spending is the life blood of our economy. Any near-term reduction will have an negative affect. That is a point no one would disagree on.


Businesses have horded cash.... individuals have cut back spending. It would not take much to cause another panic. We can see it in the markets.

One thing I can say for sure... if I were given a tax credit or tax cut.... it would not affect my spending. The people who would spend it don't pay taxes.

People (including people that run businesses) are making fear based decisions right now.
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Old 09-01-2011, 08:57 AM   #8
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Isn't the deficit essentially the same as a formal stimulus package? Semantics...
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Old 09-01-2011, 09:41 AM   #9
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Supposedly the CBO said the stimulus did have positive effects. Not positive enough but still positive. Of course 1/3 of the stimulus consisted of tax cuts and for the past 10 years, we've had the lowest marginal rates in history and job creation has been poor.

CNBC interviewed a Fed governor this week, a guy named Evans from Chicago. He may be one of the most dovish members of the FOMC. He said 9% unemployment is unacceptable, that the Fed must be more accommodative, that without QE2, the situation would be worse, that QE2 isn't responsible for rises in commodity prices.
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Old 09-01-2011, 09:52 AM   #10
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Perhaps... and the debt the accumulation of several of them.

But perhaps not targeted at a specific problem.

I suppose one could look at a macro level characterize all spending or taxes one way or the other... and be somewhat correct in the observation.

While all of this transfer of wealth hyperbole is going on... I think it is important for us (the middle class) to understand... there was indeed a huge transfer of wealth that did occur. $2.xT from the middle class to businesses and the wealthy. In effect businesses may have been somewhat offset (increase in FICA and reduction in taxes).

Why does that matter. Why let some political operative get away with that sort of deception. I don't have a problem with the idea of shared pain... But I do have a problem with being mislead.

We will be hearing more of this type of thing as we go into the fix and the election.
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Old 09-01-2011, 10:06 AM   #11
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There is another approach that isn't mentioned, and that is to start printing money to spend.

The options really are limited, there is no clear choice to be made.

The stimulators - point to Roosevelt and how all that stimulus worked. They usually forget that our debt load is as high (right now) as at the peak of WWII. At some stage (eg, Greece) others stop lending money.

The tax cutters also forget how deeply in debt we are, and how obligated to Boomers we are and how much all that will cost.
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