Wednesday, September 22, 2010


In a continuing effort to make some sense out of the "Tax Cuts" "Tax Increases" discussion now going on, I'd like to offer a few points.

First, didn't House Minority Leader John Boehner and, in fact, all of the Republicans then in office (except Rep. Ron Paul of course) vote in favor of the two rounds of the Bush tax cuts? And, didn't those bills contain the expiration date for the cuts? So, let me get this straight, they voted for tax cuts that they knew would expire at the end of 2010 but now scream about how this so called tax increase will ruin the country. To my mind they are either complete hypocrites or, in fact, they always intended to make the cuts permanent and only included the sunset clause to get Democratic votes. I'm pretty sure it's the latter, since during the early years of the Bush presidency there was talk of a permanent GOP majority floating around. Of course they could "fix" that expiration date.

Now, please tell me how throwing the opposition a bone that you never intend to let them eat is any different from offering a Senator, say from Nebraska, the perk of never having that state pay for Medicaid increases in the future? That, folks, is politics. But, it can be argued, that considering the current economic problems letting tax cuts expire now might be a mistake.

But let's at least get serious about it. During the Clinton years the country created 22 million private sector jobs and the government ended up with a surplus. During the Bush years only 3 million new jobs were created and the tax cuts cost the government $1.3 trillion. Any arguments that start with the assumption that maintaining the tax cuts will help create jobs is just a bunch of Republican hot air. It didn't happen under Bush and it won't happen now. And let's not forget that the ever so hated stimulus bill contained $300 billion in tax cuts. Still no big rush to create jobs.

But. you say, won't increasing taxes stifle job creation? If that is true then how do you square that with the fact that corporate America is awash in cash, but still not hiring. What am I missing here? The issue is one of demand on the part of the American consumer. Without increased demand, companies don't, and can't, hire.  And, while it is never said but certainly applies, tax cuts are only felt when the taxes are due and even then only if the business makes money. No demand = no hiring. It really is that simple.

I, personally, have started eight different small businesses in the last 40 years. I've created jobs and made payrolls. I've made money and lost money. Trust me on this when I say: tax policy means nothing when it comes to hiring for new positions. Nothing. In fact, I think I can safely say that any small business owner who makes business decisions based on tax policy is both a fool and a bad businessman. The bottom line issues are how much the particular employee will cost to hire and how much will that labor contribute to profits. We also must assume that companies made financial projections based upon the fact of expiring tax cuts. Or maybe they just assumed that their bought and paid for lawmakers would put the fix in, as usual.

Please remember that it is the duty of publicly traded companies to maximize the returns of the stockholders. Period. Doing good for the country, the workers, the customers, or the planet all take a back seat to ever increasing profits. What has this given us. Enron, AIG, Countrywide and Madoff are just a few examples of the religion of greed. More to the point, it has also given us jobs outsourced to cheaper labor markets, flat or declining wages and the flaunting of even reasonable safety regulations that might interfere with those profits.

I think it's clear that until consumer demand picks up, job creation will be slow and sporadic. But, of course, there are other arguments against allowing the tax cuts to expire for the top 2% of earners. One goes like this: "If we increase taxes on the rich it will stifle investment." But will it really?

I think that there is a popular misconception about investments and investing in our country. Every brokerage firm or online stock trading firm touts its "Investment Opportunities." Heck, stocks are referred to as "Equity" investments. You pays your money and you get a piece of a particular company, right? Well, yes, you do buy a piece or share of a corporation. In the case of mutual funds you buy fractional pieces of many different companies. That's all well and good, but as it relates to higher taxes limiting or diminishing investment, it gets a little more complicated.

If you buy your stock from an Initial Public Offering or I.P.O. you're buying shares of stock directly from the issuer, that is, from the corporation itself. In that case you are, in fact, investing in that company by providing them with capital. But, when you buy stock  in the stock market you're really buying from another, so called, investor who wants to sell his stock. None of the money goes to the corporation. It goes to the seller and, of course, to the broker(s). You are indeed investing, but only into the coffers of those brokers and other stock traders. Sure, some of that money may end up in the hands of venture capitalists who then invest directly to new or growing corporations, but only in a secondary way. It's called "Playing" the market for a reason. It's really just gambling. You put down your "bet" and hope that the price of stock goes up so that you can sell it for a profit.

Now, this is a somewhat new form of investing. In the old days, say 40 years ago, one bought a stock from a seller, by way of a broker, and then held on to it as it, hopefully, increased in value. With the advent of the mutual fund the idea of buy and hold changed. Now when you buy a share of the mutual fund you're actually buying fractional shares of many companies. The trouble is that the fund managers, wanting of course to increase profits for their clients, and themselves, trade the underlying shares at a fast and furious rate in the market. They only need a little gain on a lot of shares to show that profit. Buying and holding isn't sexy and doesn't make them nearly as much money. So how does that figure into our discussion on taxes?

Because what's called investing is, in most cases, really just gambling in the stock market. Increasing taxes on the highest earners may deprive them of some of their gambling funds, but its effect on actual investing by venture capitalists will be much less. Likewise, if the argument is that higher taxes will prevent small business people from starting or growing their businesses, the effect will also be small. Why? Because small businesses are funded primarily through debt, either from banks, friends and family, or credit cards! The new businesses funded by the owners cash are actually rather rare.

Well, I'm now so far off the original topic that I need a review. Here goes. 
  • The lawmakers screaming the loudest about the expiration of the Bush tax cuts voted for that expiration.
  • Tax cuts do not spur job creation.
  • Companies having mountains of cash will not just create jobs as a way to spend that cash.
  • Jobs will be created to fill the need for growing demand.
  • No demand means no new jobs.
  • Increased taxes will not stifle investment in new or expanding companies.
I think that just about sums things up. Enjoy the first day of Fall, ya'll. 

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