Category Archives: Economics

Miscellaneous economy stuff

A Misapprehension

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This one is, surprisingly, on the part of The Wall Street Journal‘s editors. In an otherwise cogent editorial with several sound points regarding former President and Republican Party Presidential candidate Donald Trump’s offers of specially targeted tax cuts, the editors closed with this mistake:

Mr Trump is now proposing to narrow the base, so [tax] rates will have to be higher.

Not at all. Alternatively, and far more optimally, with a narrower tax base, spending will have to be lower. That’s universal, too. With reduced (tax) revenues for any reason, spending would need to be lower. With current government spending, in fact, even with flat revenues, spending badly wants reduction.

It seems the august editors have lost sight of the cause of our nation’s deficits and debt, the cause extant throughout our history.

Tax Deductions

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Progressive-Democrat Vice President and Party Presidential candidate Kamala Harris wants to expand the start-up business tax deduction from $5,000 to $50,000 [sic].

However, in typical Party duplicitous fashion, she gives with one hand and takes away far more with the other. She wants to raise taxes on us citizens and our businesses so much that that deduction increase would disappear in the flood.

  • Increase the corporate income tax rate from 21% to 28%
  • Increase the corporate alternative minimum tax introduced in the Inflation Reduction Act from 15% to 21%
  • Quadruple the stock buyback tax implemented in the Inflation Reduction Act from 1% to 4%
  • Make permanent the excess business loss limitation for pass-through businesses
  • Further limit the deductibility of employee compensation under Section 162(m) [currently limiting public companies’ tax deduction for compensation of covered executives to $1 million per individual]
  • Increase the global intangible low-taxed income tax rate from 10.5% to 21%, calculate the tax on a jurisdiction-by-jurisdiction basis, and revise related rules
  • Repeal the reduced tax rate on foreign-derived intangible income

How about cutting out the intrinsic contradictions of deductions here and tax rate increases there to pay for them? How about, instead, simply lowering tax rates across the board—begin, say, with a rate reduction equal in effect to the sum of all the subsidies and credits—Harris’ latest small business “deduction,” for instance and both Harris’ and Trump’s child tax credit, along with the myriad welfare subsidies?

Let the resultant vast growth in activity in the private economy pay for the tax rate decrease. The Jack Kennedy large tax rate deduction, the Reagan nearly as large tax rate reduction, and the Trump tax cuts all led to economic expansion that produced a net increase in revenues to the Federal government—all those cuts were paid for by the responding expanded economic activity.

But Progressive-Democrats are incapable even of saying the words “tax rate reduction.”

Mistaken “Tradition”

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It is a Federal Reserve “tradition” to not adjust its benchmark interest rates in the final months before an election.

The Federal Reserve has historically left interest rates alone in the months before a presidential election. …
Since 1990 the Fed has cut rates in the final two months of a presidential campaign only three times. Each case shows why rate cutting in the homestretch of the political season is exceptional.

Call it two elections, since two of those three cuts occurred during the same election end game. Still, in these 34 years there are nine Presidential elections. Twice in nine opportunities works out to be a skosh under a quarter of the time, or a skosh over a fifth, depending on one’s perspective. That’s a pretty weak tradition.

More important is this remark by then-Dallas Fed chief Robert McTeer:

[W]e’re within a month of the election…it was conventional wisdom we weren’t supposed to act so close to an election.

Except that a decision to not act is an action itself, and choosing not to act on interest rates when the situation otherwise calls for action has its own influence on an upcoming election.

The Fed should make its interest rate moves when the economic environment says it should, regardless of the politics of the moment. Otherwise, the Fed isn’t acting independently on economics, as its DOC requires it to do, but in active response to politics.

Fed Rate Cut

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The Federal Reserve is at a fork in the road, and a great American philosopher once said that, having arrived at one, it’s necessary to take it. Unfortunately, the Fed is at the wrong fork, so no matter what it does, it’ll be in the longer term counterproductive, even if it’ll near-term benefit stock or bond traders, depending on which fork it takes.

The fork: cut rates tomorrow by a quarter point or a half. Greg Ip favors the latter, without recognizing where the Fed, or he, is.

The case for a bigger cut starts by examining why the Fed’s short-term rate target is now 5.25% to 5.5%, the highest since 2001. The Fed pushed it there last summer because underlying inflation was well above 3% and, with the labor market overheated, the Fed was afraid it would get stuck there. It was willing to cause a recession to prevent that.
Fast forward to today, and some key underlying measures of inflation are below 3%, some within range of the Fed’s 2% target. The labor market is cool, if not actually cold. A recession now serves no useful purpose.

The Fed’s rationalization for boosting its benchmark to 5.25% to 5.5% ignores the fact that ever since the dotcom panic and especially the Panic of 2008, the Fed has artificially suppressed interest rates—all the way to nearly 0% after the Panic, only allowing them to rise slightly off that low. It’s been only in the last couple of years that the Fed has raised its benchmark to its current level. For all of those 20+ years, including the last couple, the Fed has ignored market forces regarding the cost of money (interest rates lenders charge businesses in the latter’s quest for operating capital and capital for other uses) and continued to try to manipulate those forces.

That’s entirely appropriate when our economy is in extremis, as it was immediately after the dotcom bust and again in late 2008 through early 2009. After those two brief periods, though, with those suppressed interest rates, our economy was denied its normal rapid recoveries, with declining real wages, slow growth, and high unemployment that only slowly recovered to pre-Panic (much less to pre-Wuhan Virus Situation) levels. Those re-Wuhan Virus Situation levels, in fact, were the first time our economy was growing soundly, with increasing real wages, even a narrowing wealth gap, since that prior bust.

The fork the Fed should be taking is the decision whether to lower its benchmark rates at all or to stand pat.

With the Fed saying that its target inflation rate is nearly reached (I argue that the difference between current inflation and those 2% is just the noise of normal market fluctuation), it’s time for the Fed to say further that it’s going to leave its benchmarks in their current 5.25%-5.5% range, that it’s going to leave its benchmarks there for the foreseeable future, and that it’s then going to sit down and be quiet.

The current benchmark levels are historically consistent with 2% inflation, albeit it’s a noisy relationship. That noisiness, though, is the normal operation of an open and free market, and it’s time for this instrument of the Federal government to get out of the way of our open and free market. Inflation will bounce around in a range, and interest rates, if left alone, will bounce around commensurately as the two, along with other forces in the market, all work to correct each other back to this rough level.

Wrong Response

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As usual. And as usual, the wrongness of the response is due to mischaracterizing the problem.

The Treasury Department on Thursday released 603 pages of proposed rules for the corporate alternative minimum tax, or CAMT, reaching a milestone in this exceptionally complex endeavor for regulators and corporate tax executives. The proposal comes more than two years after Congress passed the law creating the tax and more than 20 months after it took effect.

The rationalization is offered by the Biden-Harris’ Deputy Treasury Secretary Wally Adeyemo:

This is about tax fairness. The ability to use accountants and lawyers to reduce tax bills down to zero gives billion-dollar corporations a competitive advantage over smaller businesses.

They don’t understand what’s fair. Here’s what’s fair: make the problem irrelevant by simplifying the corporate tax code, rather than complexifying it, by reducing the corporate tax rate to that paid by those ill-treated small businesses. Even fairer, and not just for businesses, would be to reduce the corporate tax rate to zero for all businesses. That way, large corporations, with their accountants and lawyers, won’t have any “unfair” advantage over smaller businesses.

And there’d be no need to write 603 pages of regulation to implement a simple-sounding and wrong-headed tax rule. Which would reduce the need for all those Treasury bureaucrats whose jobs center on writing arcane, excessively complex regulations.