The Obama tax deal with Republicans is insane
Tony Wikrent, Real Economics
Wednesday, December 8, 2010, 8:54 PM
If you look under the hood of the industrial economy, you easily see why there is this counter-intuitive relationship between tax rates and economic growth . With high taxes, the only way to retain the bulk of the wealth created by a business is by reinvesting it in the business — in plants, equipment, staff, research and development, new products and all the rest. But if tax rates are low, then there is more incentive to pull the wealth out, by declaring it as profits that are taxed at what turns out to be too low a rate. In other words, low taxes create an incentive for profit taking.
If tax rates are high enough to discourage profit taking – forcing wealth created by a business to be recycled back into the business – then businesses are pushed toward longer-term planning, as they invest in new plant and equipment that will be used for many years. And you do not get the absurd situation you have now, where companies are posting record breaking profits, but are not buying new equipment, nor hiring new employees.
Low tax rates encourage taking wealth out of industrial companies; the wealth taken out must then be “put to work.” That means more money chasing “investment” opportunities, leading to price increases in financial capital or real estate or some other asset. In other words, an asset bubble. The rise in prices of an asset bubble has nothing to do with the creation of real wealth. It all looks like prosperity – until the asset bubble bursts. That’s where we are now.
Is it that simple? Yes, yes it is. It’s just that simple.
I encourage you to read the whole thing which also includes 3 great historical failures of low tax policies and a prescription for a modest financial transactions tax to further encourage investment in capital (as opposed to financial) assets.
Obama is giving the Republicans more hostages.
Just came across CNN
The Democrats are sending Obama a message. Don’t negotiate with terrorists