Again With the Trickle Down!?!

If your only tool is a hammer, everything looks like a nail. That's what came to mind this AM when I read that John McCain's plan to address the ailing economy includes a big cut in the capital gains tax rate, from 15% to 7.5% for the next two years.

How wrongheaded is this? Let me count the ways.

First, the McCain folks may have missed this, but asset values have been falling, big time. Remember, John?... That whole financial mess that folks have been talking about? When capital assets, like stocks or bonds, lose value, that's a capital loss, and it's already deductible from your taxes.

OK, but there's probably a few folks out there who've realized some capital gains, or will do so at some point in the next couple of years. What's the point of giving them a tax break? What itch does that scratch?

The vast majority of realized capital gains--that's the money you make, for example, when you sell a stock for more than you paid for it--go the richest families, so they're the ones who benefit from this. The good number crunchers at the Tax Policy Center examined who would benefit from the McCain proposal. The middle fifth of families end up with all of 0.2% of the benefits. That's not a typo. The tax break would lower their annual tax bill by $4.00. OK, that is a gallon of gas, but it's not what you'd call a game-changer.

The top 20% end up with 98.3% of the benefits of the cut, and the top 1%, with income above $600,000 get 75% of the gains, for an average benefit of $37,600. The average tax savings for the top 0.1%--income above $3 mil--is $244,000. In other words, this isn't a recipe for helping families hurt by the financial crisis and the recession. It's a recipe for more income inequality.

So why do it...why cut the rate? You guessed it: good old trickle down. It's yet another example of that supply-side fairy dust that worked so well for Bush that McCain and Co. want to see the Bushies and raise them.

If cutting taxes for the wealthiest households boosted job creation, we'd know it. The Bush cuts, originally opposed by John McCain by the way, were sold on this premise. Yet before we began to shed jobs this year, employment growth in the Bush years was the worst on record.

If you want to provide income and job opportunities to people who are hurting, your best bet is to do so directly, through tax cuts targeted at them, and through infrastructure investment designed to create new, quality jobs. That's what Obama aims for in his recently announced package.

Finally, and this is important, does anyone really believe that this allegedly temporary cut will really sunset in two years? Like Dr. Phil says, "this ain't my first rodeo!" That's the tripwire in the Bush cuts. They end in 2011, but anyone who wants to let them do so is accused of supporting the "largest tax increase in history."

If we're foolish enough to sign onto this cut in the capital gains tax rate based on our understanding that the rate will reset in two years...well, as Bush himself put it, "fool me once, shame on...shame on you. Fool me...you can't get fooled again." In fact, here's a quote from a straight-talking Republican Senator back in 2003 when he opposed Bush's capital gain and dividend tax cuts based on these illusory sunsets: "...the problem with that is it's gimmickry. It makes a mockery out of the whole budgetary process..." Listen to yourself, Senator McCain.

So we are yet again left with John McCain getting it wrong on economic policy. There is absolutely a need to help struggling families right now, but if this is the best he can come up with, we'd all be much better off if he put the hammer back in the tool shed and left the policy construction to others.

Comments

[BQ4]

Only irresponsible freeloaders demand tax cuts while the treasury is going broke.

[ThePeacemakers]

"...They Bush tax cuts) end in 2011, but anyone who wants to let them do so is accused of supporting the "largest tax increase in history..."

That's because the fat cats are looking at some of the largest profits in history.
If their business is bad so what? They put in their contracts these salaries and bonuses....

I remember hearing that you always want to get paid for what you do, not how much time you spent doing it...or something like that.

[Twainiac]

Trickle down is the biggest fattest lie ever!! It has always been trickle up and always will be. THAT is the Amercan Dream! It's what everyone aspires to. BUT.. it all depends on the majority of the people having enough income and confidence to go out and buy a toaster, a microwave, toys for their kids, TV's etc. at the Target, Walmart or wherever. There has to be demand for goods and services or none of it works. Increasing the wealth of those who already have most of the money to the exclusion of everyone else doesn't help that. Let the flame war begin...........

[olephart]

The Republican economic game plan was to keep the minimum wage the same for 10 years causing a 33% loss in purchasing power from the bottom up. They lowered tax rates from the top down. They encouraged and gave tax incentives to business to shift production overseas and destroy middle class jobs. Their success can be measured by the increased disparity in wealth between the top 1% and the median income. The top has risen by 20% while the median has fallen by 8%.

So now that the economy is just where they wanted it everyone can now see that it is falling apart. Their new plan is to double down on the policies that got us here. Apparently Joe the Plumber and millions like him can't seem to pry their heads from the nether regions of their anatomies and want more of the same! It is too bad that they can't be herded together so we could allow them to have it. Imagine a place with no corporate regulations, no minimum wage, no employer or Government health insurance, no Social Security, no unemployment insurance, no safety, health or environmental restrictions in the workplace and taxes levied from the bottom up. A Republican utopia for all those Joes.

[DuganS1]

Most states have minimum wages much higher than federal minimum wage. The lower and middle classes also received an income tax cut. About 50% of workers don't even pay federal income tax anymore. Also, there have been no government incentives to encourage corporations to shift production oversees. Last, don't forget that George W created Medicare Part D to get old folks free medications and he increased the schip program rather substantially.

[LeftRight]

WAY more than 50% of WORKERS still pay income tax. about 50% of AMERICANS might now be, whether because they don't make enough or they are children...... But the number of WORKERS who don't pay income taxes is far less than 50%!

[funkalicious]

what isn't deductible from your taxes as a capital loss are the losses in your 401K.
so if you have any gains outside of your 401k it would be a good idea to churn those accounts and reapportion and redeploy capital.
If for instance you want capital to flow to important sectors of the economy .a new capital expenditure for th e grid build out alt energy. public transportation rail light rail and investment in promising alt energy technology like algae bio diesel etc. One would think lowering the capital gains taxes would be a good thing.
Moving money from say financial's or safe haven investments to a capital improvement project will stimulate growth.
Kennedy lowered Taxes as president and stimulated a huge increase in tax collection.
Free flow of Capital will be needed to rebuild our country in an efficient way, if you want the stagnant bureaucracy of Bombay have at it and you can wait 30 years to move the credit markets bowels.

[handyallen1]

dont piss on me and tell me its raining troll

[Yermammy]

When is impeachment going to be put back on the table? I'm marching on Washington on the 10th of November. Anyone want to go? AfterDowningStreet will tell you how. You'll probably be arrested, so it's not for wimps.

Barack/Joe 08.

[leftLibertarian]

Don't put your hopes on the spineless Democrats.

[rooneypg]

My thoughts on the capital gains tax are simple:

Why not eliminate the capital loss limitation of $3000 for individuals? There is a $3,000 per year maximum capital loss allowed for offset against other forms of income. This means if you liquidated holdings and suffered huge losses in 2008, you will not recover the tax benefits for years, or maybe ever, depending on your future capital gains. This is a simple way to provide tax relief to millions of small investors in the current market collapse.

Also, reducing the capital gains tax rate in a down market is actually a great way to decrease the tax benefits of such losses, thus adding to the net after tax loss. In a down market, such policy is counter productive to rebuilding capital for future investments.

Can our elected officials not grasp simple math? Lowering tax rates in a market with millions of loss transactions costs investors the tax rate reduction? And capping annual capital losses at $3K makes no sense if you want people to see some tax benefits for their losses?

[DuganS1]

I completely agree with your plan. It is ridiciulous that we have to pay tax on an unlimited amount of capital gains but can only write off $3k of capital losses.

[research]

Agreed. Also the basis needs to be adjusted for inflation. I ended up paying 15k$ on my house, that was just inflation over 15 years.

[sposton]

Tax cuts work well as a one time boost only when the tax rates are relatively high. The system then finds a new equilibrium. If you continue with tax cuts you will get a rapidly decreasing effect. Once tax rates are relatively low, tax cuts do nothing but needlessly reduce governmental revenues. If tax cuts are always such a great idea why not eliminate taxes all together?

[DuganS1]

While true, Tthat really doesn't apply here. The point is two-folk. First, to create incentive right now for people to get back into the equity market. Second, so less money is taken out of the stock market down the road because people hav to pull out money to pay cap gains or use personal money to pay cap gains that they otherwise would put into the market.

[redpepper]

Here we go again, condemning the American Dream. By cutting taxes all around the economy will grow and jobs will come forth. Doesn't anybocy study economics anymore????

[LeftRight]

Haven't you read any of this?? When taxes are this low, cutting them does NOTHING except increase the debt (which in itself slows the economy!) When you raise the taxes on the rich, the companies pay the rich less and jobs are created because the money is then used as an investment tool IN the company!

[leftLibertarian]

Haven't you read any of this? Cut the Federal Government spending including the military budget by closing all US military bases overseas. Shut down the DEA, legalize all drugs, shut down the Commerce Dept and Dept of Education. That;s just for starters.

[billw8017]

Some genuinely believe all people can be put in two classes: Horses and riders. The riders are splendid people. The horses should do as they are directed. These people believe in trickle down economics. Not that it works, but that it serves their interests, and that's all that matters.

As we love our country and wish the best for it, we might examine such theories. If they are true, opposition is selfish and short sighted. If they do not work, opposition is NOT selfish or short sighted. Let us say, there is some truth in the theory: Production can be more efficient with a touch of planning and discipline. Yet, there is an obvious and opposite extreme: Does it improve efficiency if the workers are surly, ill, and ignorant? What exactly is the point of an economy that does not serve the interests of all the people whom it depends upon?

Can we say that a country like Haiti where the people stretch their diet by mixing dirt into the food is better than the United States because it has some very wealthy people at the top? The ordinary people are cyphers in such a society and only the rich are real people; it is a very sparsely populated state and has all the weaknesses of a desert community. Illness trickles up, and the real people recoil in horror thinking the cook has spat into their food.

[DuganS1]

This tax cut is being looked at to support equity prices. Horseback riding won't support equity prices and this is not about being selfish or being short-sided. When equity prices go down, people can't retire, people spend less, companies can't issue more stock to expand, companies lay people off and cut costs to support equity prices, companies stop buying equipment, etc. etc.

[Bladernr1001]

"Trickle Down" is not really a government policy, it is a characteristic of capitalism. Money and wealth tends to flow to those who are willing to work hard or smart or are willing to take risk. No money will flow to you otherwise in any system. You have to be able to offer something of value.

The difference between here and Haiti is that there is no trickle down. Markets are largely controlled by the few at the top. There is little or no free market operating in Haiti and so very little wealth is created there. If you do not have a growing economy....that is business creation and private investment you do not have a growing economy. And when your economy does not grow you end up with a situation like Haiti.

[jesaisquoi]

The difference between here and Haiti is that there is no trickle ...no trickle down, no trickle up...no trickle

While Haitians are good people, they live in one of the largest environmental ghettos in the world. Last month, they lost several years of GDP growth in one hurricane.

When remittances from relatives in the US and other countries is one of your sources of income, you truely are in trouble.

Maybe my relatives in Canada could help out a little

[shakker]

the rich have enjoyed pissing on the rest of us for 30 years and it just gets better now that the taxpayer is providing the beer (ammunition) and they don't even have to go to the effort of ripping us off directly any more

Unfortunately, many still think that economics actually works like the trickle down (piss on you) crowd spouts over and over again. The refusal of people to take note of the conditions they experience and believe the babbling of corporate puppets amazes me.

[DuganS1]

The taxpayers? Do you know that the top 5% of income earners in the US pay 65% of all the federal income tax. The top 25% of earners pay 86% of the federal income tax. Don't forget that these folks you criticize are the same folks who pay the vast majority of the taxes - they are the taxpayers.

[LeftRight]

And AGAIN you bring up this useless statistic. The ONLY way to measure the amount of tax that a person pays is to look at what they pay as a percentage of their INCOME! In the case of the upper middle class/general middle class they pay anywhere from 25-35% of their income in taxes. In the case of the uber rich/hyper rich they pay less than 15%!!!! THEY ARE NOT PAYING MORE THAN I AM, THEY ARE PAYING LESS THAN I AM!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[JustMyWords]

Yes, I read that article, too. Did you also read the part of the article, though, that mentions how much of the total reported income those earners have? And what percentage of that income is paid in taxes? Or the part about how the top 1% have 19% of all the income, while the bottom 50% only have 13% of the reported income?

Newsflash, rocket scientist. If what you're looking at is just the number of dollars, OF COURSE the people making the most money will be paying the most. What those top income earners aren't paying is a larger percentage of their money as taxes. And don't spout tax brackets to me - those upper tax brackets also benefit from a ridiculous amount of tax breaks that aren't available to the majority of Americans.

[handyallen1]

the top 5% have 90% of the wealth and yet pay only 65% of the taxes i would say thats where the real deficiency in our tax system is

[DuganS1]

The tax cut has nothing to do with investors not taking capital gains this year. It has to do with creating an incentive to want to buy stocks, and knocking down long term gains for stocks sold next year, the year after, and many years after, is a good way to do just that.

[LeftRight]

No, it has to do with giving the rich more money while taking it from the hands of both the current middle class and the next several generations of the middle class!

[DuganS1]

No, it has to do with supporting equity prices. How do you figure this would translate into "taking money away from the current middle class"?

[JohnnySacks]

That door needs to swing both ways, couple it with an equal and opposite desrease in the capital loss writeoff. The howls of protest would be deafening, case closed, it's another giveaway.

[jesaisquoi]

Unfortunately this does not help the average American who has most of their "investments" in retirement accounts where there are no capital gains or losses.

True, mutual funds investors may receive some capital gains when managers realize long-term gains. They, however will not get the tax writeoffs or balancing from capital losses.

Finally, if investors had capital to buy mutual funds and sold their funds while there were still gains (months ago), they probably held the funds less than two years and any gains were considered ordinary income which will not be helped with a reduction of capital gains.

The main beneficiaries will be business owners who took their gains and moved to Dubai.

[DuganS1]

"The main beneficiaries will be business owners who took their gains and moved to Dubai."

Huh? One beneficiary will be private investors (like me) who need some motivation to take their money out of treasuries and put it into stocks.

[JustMyWords]

What, exactly, is the benefit to the country by encouraging people to buy stock?

[DuganS1]

It keeps up the value of peoples retirement accounts, particularly 401Ks. Do you not have a 401K?

[zjr909]

For those who think "trickle down" is such a good deal, I have a question: why do the super, hard-working, greatly creative entrepreneurs tolerate the rest of us bozos who have no job skills, no ambition, no sense of values - those of us who can only stand there with our little mouths open demanding to be fed? Why don't they get rid of all us workers - who needs us? Oh, wait a minute, I think I've answered my own question: they need to create a surplus so they can become rich; which means they need lots of workers (be they American men and women or Chinese toddlers) whose labor produces more than they take in wages. Now I see. This "wealth" supposedly created by "the rich" is actually created by lots of people working together to create a surplus. So if these great entrepreneurs got rid of us useless hangers-on, they would very quickly join the ranks of the poverty-stricken themselves. Because, in the real world (as opposed to the "trickle down" world), no one person can perform every task needed to get a business started and keep it running. If they could, they wouldn't need employees, now would they? So maybe it really is a two-way street - and maybe it's something more than charity for those at the bottom to receive what's due them. Maybe they're entitled to decent wages because they earn them. What a radical concept!

[WhitneyKyle]

zjr909 is the only honest thinker on this thread. The rich do not create wealth, they horde and consume it. Wealth is created by those who work, not those who hang out in Monaco. Suggesting that working people are entitled to a little more of the wealth they create is not radical, it is deserved and fair. It is not spreading the wealth, it is rewarding those who work over those who play. Why should income aquired by someone else's sweat and toil be taxed less than income earned by one's own sweat and toil. That is theft by definition and discourages work and leaves little for savings, thereby decreasing the total amount of wealth created. Trickle down is rewarding those who don't work while penalizing those that do. Trickle up rewards all. If the super rich didn't take so much of the nation's wealth, they wouldn't be paying so much of the nation's taxes. If the working classes received more of the wealth they create, taxe revenues would climb, not fall. We need more millionaires and the only way to achieve that is to not have billionaires, not by increasing the number of working poor, who don't pay income taxes and have little to spend into the economy and generate taxes. Trickle down worked in the middle ages, but failes in a modern economy. Witness the state of affairs today.

[mamacat]

I can't figure out whether Mac really believes all of that trickle down nonsense, or if he thinks we are all so dumb that we don't know the difference? Either way, he's the wrong man for the job.

[PT6]

He believes in fighting fire with fire!

Why after that 10 days (a litetime ago) when he was the Change agent would he revert to this Bush Tactic?

This may be all he has left - the BASE!