The Effect of Tax Policy on Market Performance

[jackson33]

iNow; The only response possible is you simply don't understand that dollar saved is NOT in some middle call, well off or wealthy persons mattress, it's in a bank or brokers hand and invested. It's those dollars you wish to cut from the economy, preferring it goes to Government, in turn used for specific and target purposes, or for some experimental purpose. Obama's people know the economy should turn around SOME DAY, as did FDR's and feeling if they can hold on until that time, their policies will be embraced. It won't work and the deficit paths already laid out there could very well destroy our economical system. Correct and sleep well, but IMO your completely lost when it comes to an economic system and I'll now add the markets in general.

 

 

 

Conclusion

 

Under the U.S. tax system inflation produced capital gains are taxed as real gains. This study examined the effect of taxing purely nominal gains on stock prices and on the real rate of return from equity capital. It was shown that due to taxation of such gains stock prices are likely to fall and the pre-tax of returns rise, and that under prevailing tax rates both effects may be substantial, even with moderate inflation....[/Quote]

 

mississippi, the above from your link; Few people are going to download the review and fewer yet would have any idea how to figure in the equations to some conclusion, including myself. Then I remain confused on just what your getting at with regards to "market forces", that which generates gain or losses and do have opinions on those issues.

 

Briefly on the conclusion and I'll use Real Estate as an example for Capital Gains. If a person bought a home in 1960 for 50K$, lived in that home for 50 years, then selling for 300k it can be assumed that person enjoyed years of refurbishing/interest deductions and/or real increased value over that of inflation, the taxes due solely on PG then being 250K and to that person. What confuses this issue are the death taxes, not CG and where the property is passed to another person or persons.

 

On "market forces", I really don't see a connection to CG taxation or in fact any taxes. This being one of those variable and the person can choose anytime to sell and take the profit of loss, losses also not subject to inflation or in fact deflation, which happens all the time in a particulate business, the value of their service/product simply erodes.

 

Then those forces in today's equity markets and those in 1980 are very different. Today, not as was in 1980, all the DOW Stocks and most all the S&P are international Corporations* and subject to changes in the economic environment of any place they either do business or build their product, IMO the major influences for stock value increases/decreases. I can't ignore the investor sentiments or if you prefer what the investor perceives as addition risk (certainty or lack of), but this would IMO be #2. Then there are the speculator (hedge fund/short sellers), day traders, insider trading, charts and hundreds of pundits that can and do influence markets.

 

* In most cases we're talking 50% or more of there bottom line, those listed on the NYSE/NASDAQ, which also do a percentage overseas or the thousands that are listed in other Countries, yet to business in many Countries.

 

If any of this hits on your intended thread purpose, follow up and we might find another couple that are interest in the markets, it's really rare on these "Science Forums"....

[Pangloss]

I think the point is that while some of those $210,000 income families would have to lower spending to meet the raised tax burden, that overall there would be a net-gain in spending instead of a net-loss.

 

And how do we know this?

 

Also, isn't it pretty clear that the reason that families with a combined income of $210,000/yr was chosen was because of the amount of revenue that would generate? I mean, if the reasons were purely moral then surely the bar would have been set much higher. And yet the argument rationalizing the move is moral -- that these people, as a group are rich tax-dodgers. That's the justification being used, and yet it's pretty obvious that many people in this group are not rich at all, nor are all (or any?) of them tax-dodgers.

 

Put another way, the government decides it needs X amount of additional tax revenue. They know they can go after the Bill Gates types with a moral justification, but for whatever reason that won't get them to X. So they lower the bar until it reaches X, and then sell it by talking about why Bill Gates has to pay more, hoping nobody will notice the fact that Joe and Jane Smith also have to pay more. Meanwhile the budget grows in leaps and bounds.

 

Does anybody still wonder why Obama gets labeled a socialist, or why his poll numbers are so low?

[swansont]

And how do we know this?

 

I'm guessing it's the numbers about savings rates of the rich quoted very early in the thread.

 

 

Also, isn't it pretty clear that the reason that families with a combined income of $210,000/yr was chosen was because of the amount of revenue that would generate? I mean, if the reasons were purely moral then surely the bar would have been set much higher. And yet the argument rationalizing the move is moral -- that these people, as a group are rich tax-dodgers. That's the justification being used, and yet it's pretty obvious that many people in this group are not rich at all, nor are all (or any?) of them tax-dodgers.

 

Put another way, the government decides it needs X amount of additional tax revenue. They know they can go after the Bill Gates types with a moral justification, but for whatever reason that won't get them to X. So they lower the bar until it reaches X, and then sell it by talking about why Bill Gates has to pay more, hoping nobody will notice the fact that Joe and Jane Smith also have to pay more. Meanwhile the budget grows in leaps and bounds.

 

I have no trouble discussing Joe and Jane Smith. If Joe and Jane's AGI (salary), less deductions, is $300k (meaning they actually made more than $315k), their increased tax burden is about $2000. And Joe and Jane had this same top marginal tax rate a decade ago, but paid more under Clinton, because the rates on their income below $250k haven't been changed from the decrease under Bush.

 

http://taxvox.taxpolicycenter.org/blog/_archives/2009/5/12/4182953.html

http://www.csmonitor.com/Business/Tax-VOX/2010/0923/Obama-tax-plan-Who-gets-hit

 

If Sam and Sally can somehow live on $50k a year, why can't Joe and Jane?

 

Does anybody still wonder why Obama gets labeled a socialist, or why his poll numbers are so low?

 

I personally haven't wondered why Obama gets labeled a socialist for a long while. It's the same reason the inheritance tax gets called the death tax, why there was discussion of "death panels" and why torture became "enhanced interrogation techniques." Republicans love socialism when it helps them — corporate subsidies for corn, ethanol, oil, etc.; placing the burden of environmental cleanup on the government whenever possible. The liked socialized medicine when it got them votes and helps industry (medicare prescription drug). And there's TARP. Obama gets labeled as a socialist pre-emptively so people won't notice how socialist the right is.

[iNow]

I'm guessing it's the numbers about savings rates of the rich quoted very early in the thread.

Post #2, to be precise.

[padren]

And how do we know this?

How do we know that the collected tax revenue would go to programs that would help struggling families stave off total financial collapse, who would spend the money immediately to do so? I could see concern that the money could end up in a senate pay raise, which would definitely tick me off, but are you suggesting that the $210,000 earners have an equal or higher pressure to spend their money instead of saving it?

 

It seems self evident to me that in a time of such uncertainty as we are in right now, that the people most likely to spend money are those who have no choice if they want to keep their landlords from evicting them.

 

Out of the say, half a dozen closest people I know, I can cite two that are homeless (one still on the street, the other at a friend's who is being evicted at the end of this month) and another who is facing getting evicted from both his home and his office and is struggling to collect $4,500 to avoid it and that person just happens to be my business partner in NY. I myself got really lucky and managed to stave off eviction with less than 2 days before I would legally be ejected. It's also worth noting that our business has about $20,000 in "dead beat debt" for completed work that people simply cried about because they wanted to but couldn't pay. Some degree of dead-beat debt is expected, but it got really bad last year and hit about $30,000 where I honestly had to ask if I even had a job anymore, despite working nonstop without a penny to spend. We still get months where we invoice for $15,000 of work and get less than $1500 collected within the timeline terms of our contracts, when our monthly obligations are closer to $6,000-$8,000 minimum when you factor the office, two full time employees and another three part-timers that work on commission.

 

Just yesterday I had to do a quick bit of work for $40 for an associate's advertising service and he honestly had to break it up into two payments. Right now the only reason I can eat is because of that $20.

 

I am happy to be self employed and I consider it my own personal gamble, but I definitely feel like a lot of stress and hardship that this economic crisis has brought about is very visible from my vantage point. It's total financial gridlock where all you hear is "the money really really should be in soon, I'll have it to you as soon as possible please don't shut down my business' website" and all I can do is say to my landlord "the money really really should be in soon, I'll have it to you as soon as possible please don't kick me out" who in turn has his own financial obligations.

 

I am seeing people collapse around me. I had two homeless friends stay on my couch for about 4 out of the 10 months I was at my last rental, which was foreclosed on and sold, which promptly left me near homeless because the new landlord had to raise the rent by 20% (post-lease, month to month) to justify the investment when I was already struggling. Luckily I was able to find a place but it did involve a lot of luck. The two moved to find work and eventually had their phone disconnected, I have no idea what happened to them.

 

Another friend stayed with me at my new place, but I had to pay my landlord/roommate (the one with whom I was 2 days away from legal eviction) a few hundred dollars so she could sleep on my floor for 3 weeks, and even then it was only because he felt bad she had been sleeping in the city parks for over two weeks. When the 3 week limit arrived I was about 10 days from being evicted so she went to stay with the friend in a nearby city, who himself is now being evicted at the end of this month due to his roommate bailing on him.

 

I'm not listing all these things for a big "boo hoo" and I don't feel wronged in any way, but I want you to understand where I am coming from and what I see when I look around this economic catastrophe.

 

 

Also, isn't it pretty clear that the reason that families with a combined income of $210,000/yr was chosen was because of the amount of revenue that would generate? I mean, if the reasons were purely moral then surely the bar would have been set much higher. And yet the argument rationalizing the move is moral -- that these people, as a group are rich tax-dodgers. That's the justification being used, and yet it's pretty obvious that many people in this group are not rich at all, nor are all (or any?) of them tax-dodgers.

I don't think it's about tax dodgers. It's about how we all get through this without the bottom falling out with so many surviving on benefits that are expiring and no prospects to hold things together. If you want to go after tax dodgers, you need to refine tax law. Right now we need a means to get the financial traffic jam moving and a key factor in it's slow recovery is that a lot of people can't pay even the basic financial obligations that keep a roof over their head.

 

In the current climate of triage, I think taxing families with a combined income of $210,000/yr who will not be put on the street by it to fund programs to help those most impacted by this crisis who are mentally, physically and emotionally exhausted and still headed for the street is a rational move. It's not something I like, and it's not something I want to happen, but I can see it as both necessary and far far more likely to increase a net-gain in money spent within the economy.

 

Put another way, the government decides it needs X amount of additional tax revenue. They know they can go after the Bill Gates types with a moral justification, but for whatever reason that won't get them to X. So they lower the bar until it reaches X, and then sell it by talking about why Bill Gates has to pay more, hoping nobody will notice the fact that Joe and Jane Smith also have to pay more. Meanwhile the budget grows in leaps and bounds.

 

Does anybody still wonder why Obama gets labeled a socialist, or why his poll numbers are so low?

 

I will agree that anyone that tries to bundle families making $210,000 in the same "well off" category as Bill Gates is disingenuous. I thought the issue was "we don't have enough revenue to pay our bills" and taxes is the only way the government really can pay our bills. We can and do borrow (can't call that paying a bill really) but frankly the only thing I ever hear from the "non-socialists" er, conservatives is that when we have a budget surplus, we need to cut taxes, and when we have a deficit, we need to cut taxes, and when we have a recession, we have to cut taxes, and when the economy is good, we need to cut taxes, and even when we have a $13 trillion dollar debt saddled on the next generation that has bought us everything from our infrastructure to our Cold War nuclear deterrent, we have to cut taxes.

 

We have to deal with our debt, we have to deal with our deficit, and we have to deal with our economy. Right now though, I don't know how to deal with the record number of people subsisting on food stamps and unable to find jobs without some sort of social program funding, and while I suppose we could "just borrow more" I really think the responsible thing is to raise taxes a little. I don't think that makes us socialists.

[Pangloss]

I'm guessing it's the numbers about savings rates of the rich quoted very early in the thread.

 

I appreciate the reply, but I understand that many people save more money when they're given a tax cut. I was asking padren how we know that the overall gain (e.g. government programs) would be a net positive instead of a net loss. Sure, they might use the money they saved during the tax cut to pay for their newly-higher taxes, but as iNow said in post #14, we don't really know. Nor do we know what the specific impact of the loss of the tax cut will be on families that earn right around $210k/yr -- we're generalizing everything from 210k on UP.

 

So the answer I'm apparently getting here (thus far) is that we DON'T know. Which if that's the answer is perfectly fine by me. The Obama administration is certainly entitled to its opinions, and they won the election so they should be allowed to try their preferences. And if it works he might even rescue my rapidly fading 2012 re-election vote.

 

 

If Sam and Sally can somehow live on $50k a year, why can't Joe and Jane?

 

So you agree, then, that the Obama administration is generalizing families who earn $210,000 per year as "rich"? If so that's fine, more power to you.

 

I, too, have stopped asking why Obama gets labeled a socialist. As have quite a lot of Americans, I believe. The label may not be entirely fair or accurate, but there's an old saying in politics: If it swims like a duck and quacks like a duck, it doesn't matter if it is a duck, because it's going to do the same thing a duck would do. And three weeks from Tuesday we're going to find out exactly what Americans think about that.

 

 

(BTW, I'm also kinda curious what the split is amongst families making $210,000/yr between Democratic and Republican voters. Bet the White House knows. Anybody wanna take that bet?)

 

 

How do we know that the collected tax revenue would go to programs that would help struggling families stave off total financial collapse, who would spend the money immediately to do so?

 

No, I'm asking how we know that the benefit of the increased tax revenue to all taxpayers will outweigh the effect of any reduced spending from the group that lost the tax cut. I'm not asking for what's likely, or a moral or ethical judgment, I'm asking what data we have that clearly shows, objectively, that this will be the case.

 

I agree with you that some benefits are realized from government programs, and I agree with you that some of the new tax revenue could be logically applied to that "column" on our virtual spreadsheet, if you will. No argument here.

 

 

I could see concern that the money could end up in a senate pay raise, which would definitely tick me off, but are you suggesting that the $210,000 earners have an equal or higher pressure to spend their money instead of saving it?

 

No, I agree that families who make more than they really need on a day to day basis, which may include this specific income level, probably tend to save it during a time of economic upheaval such as this.

 

 

I will agree that anyone that tries to bundle families making $210,000 in the same "well off" category as Bill Gates is disingenuous.

 

Indeed.

 

 

I thought the issue was "we don't have enough revenue to pay our bills" and taxes is the only way the government really can pay our bills.

 

Not to get too far off subject, but IMO the issue for many Americans is whether all those bills are necessary, or if in fact some (most?) of them are luxury items that we can and should be doing without. I don't think most people support entitlement spending, I think most people tolerate it. And their tolerance is reaching a limit.

 

Thanks for the reply.

[padren]

(BTW, I'm also kinda curious what the split is amongst families making $210,000/yr between Democratic and Republican voters. Bet the White House knows. Anybody wanna take that bet?)

Honestly, I don't think the taxes are going to be a large line-crosser, I think the embarrassment (for both sides) that has been legislative action in the last two years will have a much larger impact.

 

I also don't think most people will be thinking about the budget - the budget is seen as something malleable, where we can go from a deficit under Bush Sr, to a surplus under Clinton, to a deficit again since, and while it does cause a lot of concern the view is it can be dealt with later.

 

The key concern in November, is who the public trusts to get us out of economic crisis and back to low unemployment. Since these elections also depend highly on district-by-district personalities and issues even the economy may take a back seat in some cases. Some of these people are so unappealing you just can't vote for them no matter what the party implications are. I'm sure it'll prove interesting.

 

No, I'm asking how we know that the benefit of the increased tax revenue to all taxpayers will outweigh the effect of any reduced spending from the group that lost the tax cut. I'm not asking for what's likely, or a moral or ethical judgment, I'm asking what data we have that clearly shows, objectively, that this will be the case.

I don't know what that data would look like, and I'd expect the diversity in variables tracked or otherwise contains a high enough volatility it could never be said conclusively.

 

The logic behind my thinking is that people need a certain amount of stability to be productive, and a lot of people are strained to the breaking point whereby loosing their home, or vehicle to disrepair would push them from "almost but not making it" to "completely not making it" for a long time. They are so close to the "red line" that a little help is cheaper than helping them after they end up at a shelter.

 

Not only is the money spent straight into the economy, but done so in a manner liable to save all of us money. Instead of looking for a stable couch for their kids to stay on, these people can be looking for stable jobs and when they come they'll be supporting the businesses that pay the $210,000 earners who helped them in the first place a lot faster. It strikes me as a pretty consistent logical conclusion, but I definitely welcome your input if I missed some important flaws.

 

If you are curious if I think it will hurt certain individual families in that tax bracket I think it undoubtedly will. It could be the tipping point in expenses where a family decides they can't afford to send their kid to the school they want. I believe it would prevent more collapses than it would cause in disruptions, but I can't argue that everyone individually will net-benefit. If a large enough number of people are at risk of collapsing and did without support I think the costs would be higher than the cost of the tax, but certainly don't have hard numbers on that, and that if done poorly it could be basically wasted.

 

The other thing though is how we think about taxes. I see taxes like a utility bill - I don't always like it and I am often suspect of how much of my money pays people to sit on their butts, but I can't argue with the fact that I can't work in the dark, nor with the fact that unless I move away I am obligated to pay it. If I count my total money before expenses like basic utilities I am doing it wrong. From the first hour of burning electricity on the new bill I am receiving benefits for services rendered, with a differed payment at the end of the month.

 

Taxes pay for our utilities. I don't like all of what they go to, and especially didn't like it during the Bush years, but being able to drive on roads, use the internet, engage in electronic commerce, and simply live in relative peace and security are things I really like. We have a frigg'n wall of nuclear missiles that we acquired during the Cold War to keep the world's only other, largely psychotic superpower at bay so we could live in relative peace while they slowly imploded. We have such an unmatched conventional military we actually get to consider whether or not we are going to just knock down and rebuild other countries that bother us.

 

I personally think a lot of those benefits can be cut back, but the sum result has been a pretty remarkable period of peace and prosperity (from Cold War to Afghanistan) in the face of some pretty huge obstacles.

 

Not to get too far off subject, but IMO the issue for many Americans is whether all those bills are necessary, or if in fact some (most?) of them are luxury items that we can and should be doing without. I don't think most people support entitlement spending, I think most people tolerate it. And their tolerance is reaching a limit.

I agree entirely, but honestly I wouldn't even want to cut back on the "crazy Republican" spending right now, not until unemployment drops to the level where it can absorb some momentary turbulence. If we cut back on aircraft carriers (we do have as many as the rest of the world combined) we put a ton of the support industry and contractors out of work. If we don't need them doing those jobs, we should cut them and we do need to. Unemployment is like a toxic build up, say alcohol in the blood stream - normally small jumps in the percent don't do a lot of damage and filter out quickly, but when high levels persist for some time the system gets strained additional brief increases can push the system to failure.

 

The horrible thing is when things are going well no one wants to cut spending - but I do hope this time that people's tolerance has reached a limit. The second we can I do hope we focus on balancing the budget and getting spending under control. I guess it's easy to want to when you can't and everything seems broken, the trick will be if we still want to when we can.

[swansont]

I appreciate the reply, but I understand that many people save more money when they're given a tax cut.

 

Yes, precisely. They don't spend all of it. Whereas the government will spend all of it.

 

So you agree, then, that the Obama administration is generalizing families who earn $210,000 per year as "rich"? If so that's fine, more power to you.

 

 

If I had to guess, it's because of the tax brackets that are already in the tax code. But the line has to be drawn somewhere; if it was $250k or $300k, we'd be having the same discussion. In the context of taxes, though, it's not a sharp divide, because of marginal tax rates — income under the divide aren't touched. The additional tax is $3-4 for each hundred dollars of income above that level.

 

edit: Thinking about this further, I think that it's a misnomer. "Rich" is a statement about wealth more than income. A $200k income doesn't make you rich, because you can spend it all and have nothing left if you do so foolishly. But it gives you options that a lower income lacks, and though there are always going to be exceptions, it is generally far easier to become rich. IOW, if you have such an income for a period of time, and do not become rich, it's probably due to your lifestyle choices, i.e. not sufficiently differentiating between "want" and "need" in choosing your standard of living.

[Pangloss]

I personally think a lot of those benefits can be cut back, but the sum result has been a pretty remarkable period of peace and prosperity (from Cold War to Afghanistan) in the face of some pretty huge obstacles.

 

I agree, and nice post all-around.

 

 

 

So you agree, then, that the Obama administration is generalizing families who earn $210,000 per year as "rich"? If so that's fine, more power to you.

If I had to guess, it's because of the tax brackets that are already in the tax code. But the line has to be drawn somewhere; if it was $250k or $300k, we'd be having the same discussion.

 

True enough, I'm sure we would be. For the record, the Obama administraion did draw a new line, essentially halfway between 28% and 33% brackets. (source) So a 210k fam goes from something like 30% all the way up to 39.5% (I believe that's the top % being discussed). That's pretty dramatic, but if memory serves some very large deductions have recently been introduced by the Obama administration that probably affect families in that range.

[swansont]

 

True enough, I'm sure we would be. For the record, the Obama administraion did draw a new line, essentially halfway between 28% and 33% brackets. (source) So a 210k fam goes from something like 30% all the way up to 39.5% (I believe that's the top % being discussed). That's pretty dramatic, but if memory serves some very large deductions have recently been introduced by the Obama administration that probably affect families in that range.

 

No, that's not how it works — the 33% tax bracket becomes 36%, and that's the threshold that moves up from ~$171k to ~$190k, so the 28% bracket has a much higher ceiling. The 35% tax bracket increases to 39.6%, but it starts at just under $375k, according to your link.

[Pangloss]

No, that's not how it works — the 33% tax bracket becomes 36%, and that's the threshold that moves up from ~$171k to ~$190k, so the 28% bracket has a much higher ceiling. The 35% tax bracket increases to 39.6%, but it starts at just under $375k, according to your link.

 

Yes, I see the two brackets, though I don't see where you got 190. The quote below says that the threshold becomes 200k for individuals and 250k for families.

 

As of early 2009, the plan for the future was to leave the lower tax brackets alone, and raise the top two brackets to where they were during the 1990s. The cutoffs for the top brackets were to be raised, so that singles making above $200,000 annually, or families making above $250,000, would be the ones affected by the higher rates.

 

It does look like they (the 210 crowd) would only increase from 33 to 36%. In conjunction with what you were saying earlier (the numbers), that doesn't seem so bad.

 

Either way, they're obviously drawing a new (and pretty clear) line, saying those over the line need to pay more. If in fact they think that those in the 200-375 range need to pay more for a different reason (not because "they're rich"), then IMO they should articulate what that reason is, instead of lumping them in with Bill Gates and Warren Buffet in the rhetoric.

 

Of course, it's possible they have, and it's just gotten lost in the noise.

[swansont]

Yes, I see the two brackets, though I don't see where you got 190. The quote below says that the threshold becomes 200k for individuals and 250k for families.

 

 

It was in my links a few posts back. Add to that that standard deduction and personal exemption, and you have to have at least $200k in income to end up in that tax bracket. And even then your tax actually goes down, because the 28% ceiling went up and there's $20k of income that used to be in the 33% bracket. I think that's the reason why some are reporting the $210k (or $250k) number as the cutoff for seeing a tax increase.

[mississippichem]

Correlation [math] \ne [/math] Causation, yet that is EXACTLY what you are suggesting. Hey... Look at that... Everyone is carrying umbrellas again while it's raining... Umbrellas must make it rain.

 

Did you read the article!? the article establishes causation to some degree. Even if it didn't, can you not concede that there is a negative correlation between capital gains tax and market value of an equity? You can't dismiss the math in the article just because you don't like its implications. Economics and finance are studies of correlation anyway, causation is extremely hard to pull out of highly complex systems. If you want to use that argument, I'll answer by saying all your strawman GDP arguments also do not imply causation, no matter how pretty the graph.

Give me something tougher to defend against than a pun. I enjoy the debate more than the end result, seeing as how neither of us are likely to change our opinions as a result of our innate confirmation bias.

Edited October 11, 2010 by mississippichem