Wednesday, November 26, 2008

Word of the Year......"Bailout"...and a little on Taxes

The word of the year as per Merriam-Webster’s online dictionary is "Bailout", as they said it was easily the most looked up word of the year.....

Now I wanted to address a comment recently by The Lonely Trader.
He wrote, "Am I the only person in this country who thinks we need to *raise* taxes, then?"

I think it is a very good point and I wanted to give my thoughts on it. Let me begin by saying that I am not an economist and all my ideas and opinions are usually brought about by breaking things done to its simplest level. With Taxes I like to look at what is going on around me. I work in an environment where most of the people make "decent" money. Most of these people are in the 35-45 year old age group, have a wife and a couple of kids and a house in the suburbs. Most have a landscaper, a cleaning lady and possible a nanny. A landscaper (to cut your grass and trim your bushes) and a person to clean your house once a week might cost $125-175 per week depending on what you want them to do and how big your house is.

These are the people who are directly in the cross hairs of President Obama's tax increase. Now some (ok most) would argue that this is ok, they should be paying more taxes if they can afford all these things, and you might be correct but recently the discussion on the desk has been about cutting back on these things. Maybe the cleaning lady comes once every other week or the personnel trainer is no longer coming to the house. Now these may seem like extravagances to the average person but think of it from the perspective of the worker. They are no longer receiving an income (or at least not as much of one). As with most people when you are fearful of losing an income (due to lose of a job, bonus or increased taxes) you cut back on the "extras". By increasing taxes on people making about $250,000 I believe that this negative "trickle down effect" will occur. Waiting and increasing taxes when stocks have rebounded (they will eventually) and the job market has improved is a wise thing (people will feel the effects less), I think doing that now will only put the economy further in the hole.

Also on taxes, I think it is important to figure out the correct level at which to increase the tax rate. $250,000 seems to be the number the Obama camp is looking at. I personally think it is to low. I really believe that this is the income group that drives the economy. This bracket can have a nice home, a car that they turn over every few years. Hire the Gardener, housekeeper and a Au-pair. They can go out to dinner once or twice a week, basically put the money back to work.

I am not sure of the level that would make the most impact with least residual effect (Obviously Obama thinks 250,000) but I think that is the key to getting the Tax situation right in this country. These are real simplistic thought and would like to hear what others are thinking.

Good Luck and Good Currency Trading.

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Anonymous Anonymous said...

Agree 100%. To increase taxes in a down economy will do nothing to lift it or shorten its duration. Obama seems to have this right. Good for him (and us).

9:19 AM  
OpenID thelonelytrader said...

B, the issue is complicated and demands that we make unpleasant choices. Like you and many of your friends, my wife and I have made our own -- although we aren't in what I assume is your tax bracket. But we have cut back significantly and we have more than doubled our monthly savings rate.

Services like nannies and personal trainers and landscapers are not making a real contribution to a robust, innovative and growing economy for people on the clock. I can see where it might optimize one's time if they were running their own business or if they were truly being paid for their time. I totally get your argument that the tax increase may price the services these people offer out of their markets and adversely impact their own economic situations. I get that, but I think at this juncture our priorities as individuals and as a nation are all screwed up.

I would rather redirect that discretionary income to something productive / creative. Back in the good old days, middle class Americans instinctively kept their consumpion realistic and those with means were usually prudent. Nowadays the preponderance of our people consume durable goods and "services" such as those mentioned here to an excessive degree -- I would say, to a decadent degree and in many if not most cases to the detriment of themselves and to their own families.

I honestly think that the opportunities afforded by increasing the tax burden on conspicuous consumers are far more desirable -- profitable, if you will -- in the long term than the costs of the consequences you allude to here. And I don't think they will impact our core economic engines. We have other factors to consider in that department. The tax increases might stop your friends from having a personal trainer, but it certainly won't stop them from financing a business out of pocket if they believe enough in the idea, or from investing in an idea from someone else. On the back end of that, while the personal trainer and nanny might have to cut their rates or find another job, they will likely be replaced in the economy by a builder (not necessarily of the Tito variety), a fiber optic cable splicer, a public health nurse, or a city planner. (They are all making about the same here in SoCal.) And besides, I think the tax increase won't even be close to the catastrophe that Kudlowian pundits are hinting at. That's rediculous and so are they.

Materially, the redirected / redistributed income will have the effect of a public investment -- something the free market couldn't give two shites about, as you know. And we know how incompetently the free market organizes the provision of public goods.

We have neglected our civic and public obligations for decades. And by any statistical measure, we are worse off for the wear. Those who are unaware of this impact or who disagree with this assessment, I believe, are disconnected from reality. In effect, they are acting like parasites in this society -- not much different in their material effect than their ideological opponents they fondly refer to as "welfare mothers", illegal immigrants, and the like. (Since the vast majority of them don't really produce anything of substance or real value.)

What I'm advocating isn't socialism, by the way. That's another rediculous claim made by the demagogues and the miseducated. I think we need to get away from the recently fashionable idea that pleasure is the ultimate form of utility in economic thinking. If not, then we should just chuck government out the window and revert to a socio-political pre-Enlightenment Europe. Gee, the farmers back then were just so happy to grow food and provide their prepubescent daughters and sons to their Lords and their armies. (I can only imagine what the lords and their armies did with farmgirls back then.)

We are, indeed, on the road to serfdom. And all for want of a half-baked ideology frought with internal contradictions. Then there is the matter of globalization and the problem of how to stay competitive with cheap but highly skilled labor, particularly in India, China and Southeast Asia and increasingly. And, I might add, in many Latin American countries, which have already lost their middle classes at least twice in the last fifty years.

So to sum up:

I think the public invests in the public better than markets do. I double dare anyone to say that the public good, or the commons, is unimportant. In fact, I think markets are destructive to public spaces. The organizing principles of the two are almost inherently in conflict. If this weren't true, then why would anyone want to tax in the first place? I would rather tax discretionary income that is spendt on conspicuous goods and services than tax what is currently defined as discretionary income -- which is today spent on what I consider to be the essentials. (This is what it has come to for most of the middle class, and is likely where it will stay for the foreseeable future.)

Okay, this is just me barfing on your comments page. I'm sure I could put something much more coherent to paper. But the basic idea is there. And of course, it's just my opinion. This time, however, I "voted my opinion" and I'm confident that my vote has counted.

8:38 PM  

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