Signs of the Times - and a question
 

In Michigan, the recession has been going on now for years. Probably since the dot-com bust, with a brief spike of activity around 2002 - 2005 or so. There was another pretty healthy stretch during the 1990's, so its fair to say that we've not really recovered much from the early '90's recession.

What really gets to me sometimes is driving through my city - Livonia, which is still ranked as a pretty favorable place to live - and seeing the for lease / for sale signs on building after building. Driving one mile on a stretch of light industrial and retail buildings, I counted 23 for lease or for sale signs. Some of the buildings were partially occupied, but many were vacant and in search of tenants.

It wasn't all that long ago that most of these buildings had tenants. That means that there were employees earning wages, paying taxes, spending their earnings supporting their families and the community. This has to change soon.

Blame cannot be placed fully on the current White House occupant for originating this stagnant economy. I don't even want to get into a political "blame game" for how we got to this point in my city and state. However, there are some things that can be done to spur economic growth, get folks working again to produce earnings and tax revenues, and support this community again.

Politicians love to talk about "Enterprise Zones". These are areas specifically targeted for re-invigoration of the business climate, and such plans are (probably for political reasons) typically reserved for urban areas where economic distress is wide-spread. The zones are created typically by state/local legislation. The centerpiece of such strategies is typically a reduction in local and state taxes designed to encourage business activity by making the zone "more competitive" than other areas.

This suggests that there is recognition that the strategy of reducing taxes spurs business activity, and the increase of activity is deemed to be good for the community. Also, Michigan wanted to try to shave off some film-making business and create "Hollywood East", so the state offered targeted incentives to film-makers and studios. The program met with some moderate success. So, here's the question:

If there is some agreement that the business climate can be made more favorable for business by reducing tax rates, then why does the current administration and many members of this board steadfastly oppose this strategy as a method of jump-starting the economy? In fact, there seems to be a recurrent mindset that such activity is essentially amoral? Why is this?


Not really trolling here, though I suspect some might take it that way. I'm just trying to understand the rationale for opposition to a strategy which, in other contexts, has been successful.

Read your post with interest and have given some thought to your question.

First, with respect to the 'Enterprise Zone' question: They can be successful (I've seen limited success with them) on a limited basis when the tax reduction/abatement/limitation is restricted to property tax (from what I've seen). When such a reduction extends to business income tax it appears to be a different matter which I will address below.

Across the board corporate tax reductions, in theory, encourage entrepeneurial activity. The problem with that is that when Reagan pressed for and got it through Congress in the 1980's big business did not engage in such activity. They engaged in business acquisitions with the cash gained.

Moreover, and I'm not trying to get into a point/counterpoint debate either, as was demonstrated in the 1980's a massive tax reduction balloons the deficit. Yeah, the 80's were a boom but 1) it was done on a credit card and 2) much of it was as a consequence of a massive defense build up.

My 2 cents, adjusted for stimulus.

There are a few problems with reducing taxes to attract businesses. First, the businesses that come tend to leave after the tax incentive expires. They leave behind the mess of abandoned buildings which blight neighborhoods, reduce property values, and increase crime rates.

Second, the reduced tax revenues must be made up in other areas or the citizens must do with fewer services. What usually happens is workers are taxed more either by income tax, sales tax, or property tax. Nothing is free.

If you are genuinly interested in this topic you might enjoy researching the subject of "race to the bottom".

LMAO!!!

Ya' think?

Do you have an example of where this has happened?

I can't tell if you are kidding.

For my part it is not so much that tax reductions are bad, (They not, per se.), it's how they are targeted and what we are told must be cut to pay for them.

I wouldn't mind seeing tax cuts for struggling businesses. I would not have a problem with government truly reducing waste and corruption to free up the funds to pay for for said cuts.

The problem is, this is usually not what we get. With Dems we seem to get higher taxes with no reduction in waste and fraud. Republicans always seem to suggest reductions in benefits for working folks and the poor while protecting tax cuts for the top earners, and no reduction in fraud and waste.

These two models make no sense to me. In one, we keep throwing money into a bottomless pit of corruption. In the other we give taxcuts to people who have no need of them and cut benefits to those most in need*,....while continuing to throw money into a bottomless pit of corruption.

So, like the rest of the country, I struggle to discern the lesser of the two evils.

Dave

*(To my mind, reducing benefits to the poor and working classes in order to give cuts to the top of the economic strata----IS a form of corruption.)

No desire here to debate the 80’s, as that will only lead to a pointless, polarizing discussion. I'm trying to scrupulously avoid that in this thread. I will say that while consolidation / buyout activities did occur in the 1980’s, such activity continued into the 1990’s and beyond. Also, unemployment decreased from 1983 onward across all industries, not just defense related industries. So, while some increase in economic activity can be tied to defense, such activity only accounted for a portion of the increase in GDP during that time.

More to the point, the Michigan example I cited was trotted out under a Democrat governor, and was a reduction in business taxes.

This has happened across the country, Noone. For a time we even had states building industrial buildings at taxpayer expense and offering to let businesses use them rent free, on top of tax incentives----to no avail. It was a complete waste of huge sums of money.

I agree with much of this, believe it or not. To me, the nature of our current tax code is such that the government is picking winners and losers with targeted tax breaks and loop holes. Protecting that structure is what the debate about "taxing the rich" is really all about. It's not about the rich. It's about protecting the tax system that keeps politicians in a position of power, able to elicit "tribute" in the form of campaign contributions from beneficiaries of certain tax treatment.

There is so much state specific it's difficult to address one area.

We in the rust belt states have tended to over regulate as well.

That said I agree, there's talking about how raising taxes would be good but bottom line both parties end up cutting them for growth.

Btw, ny city has been pretty aggressivve in tax breaks, and the business has mostly stayed.

Pete

Republican and Democrat stereotypes aside, it is still bad practice for a city to lower their community standards in order to attract business. The unavoidable problem is that once someone does it then others have to do it to compete. That's when the dominoes start to fall.

I'm guessing they stayed, Pete, because it was NYC.

LOL!

ebacon, we could enforce uniform standard countrywide. Then they would just move offshore.

Pete

The governor of Kansas and the Republican legislature have passed a tax plan that makes almost all business income exempt from taxation, but leaves the taxes on wages in place. It takes a huge chunk out of the state budget. The theory is that the lost tax revenue will be made up when the low taxes induce enough businesses to relocate to Kansas. The tax cut comes at a time when the state is already struggling to meet its obligations, and it will result in drastic cuts in among other things, education. As far as I am concerned, that is counter-productive, at least here in Johnson County. One way JC has been able to compete for businesses is by having a top-flight public school system. The cuts put that advantage at risk.

Beyond the practical objection to the plan, it seems to me to be extremely unbalanced against the working folks. Wages earners will now carry a significantly higher burden of funding the state's obligation, while the "job creators" get a free ride. I suppose we will see if the plan actually works or not, because the primaries put more tea party types into the general election (removing the more moderate republicans), so it is likely that the plan will remain in place.

BTW, Whell, I should mention that I appreciate the effort at maintaining the tone of this thread (particularly after I gave you a little poke in the welcome thread ;)).

Regards,

D-Ray

Don't be a dick. I'm just saying that there are known causes and effects.

One of the biggest games politicians play after they make a big mess is shrug and say well, no one could predict such an outcome. That's bullshit. History has repeated itself so many times that's it not even funny to hear the excuse any more.

Sarcasm like yours lets the sh*tsticks get away with it.

Starting with the Lewis Powell memo to the Chamber of Commerce corporations have gradually taken over the government. Oh there are still a handfull of Congressmen and Senators who are not for sale. Given this sstate of affairs it seems rather pointless to say the government is anti business when it is business.

At least here in MI the practice has been "managed" to a great extent. A community must petition the state legislature to creat the zone, and if approved, favorable tax treatment is bestowed by local and state government. A zone is only created if it is deemed in the best intetest of many stakeholders, public and private. In this manner, the issue you've cited is not avoided, but reduced or controlled.

However, I'm still wondering why an "across the board" reduction in taxes - yes, for business and capital gains taxes - would or would not have a similar positive impact.

With a name like mine what do you expect? ;)

Btw, I'm dead serious, no sarcasm. There is only so much tax percentage sustainable.

Peter

Beyond the philosophical objections, what have been the results of the legislation?

Yes, I saw that poke. I was honored. :p;)

Under the current set up, IMHO, the interests and objectives of politicians and business are quite different, though both are ultimately in the game for self-interest and self enrichment.

Wouldn't one answer be that, as you mentioned, the tax abatements are carefully targeted to areas where there otherwise would not be investment. It is presumed that there are plenty of areas where the infrastructure and other market conditions make investment a reasonable business proposition without a subsidy. Bottom line is that we really can't afford to subsidize business across the board, any more than we already do with the investment in infrastructure, police and fire protection, and education.

Regards,

D-Ray

It hasn't been implemented yet. It's brand spanking new.

Regards,

D-Ray

I can see it now;

"Welcome to Pig Knuckle, Arkansas!

Pop. 1,312

Motto;

Pride is NOT an issue,
we'll do anything for a Buck!"

Dave

How is it a subsidy, rather than reducing the cost of capital and the cost of engaging in business activity? And if that reduction in cost results in an increase in GDP and in increase in employment (and a resulting increase in payroll tax revenue) doesn't that make the exercise pay for itself?

On the contrary, of what economic value - and what economic benefits are generated - value are all of the empty or half empty buildings, all of the idle production equipment, and all of the idle workers? The "For Lease" signs represent an economic cost all by themselves.

Would you be open to a stipulation that the decreased taxes are only available to those who can document new investment in productive activity? Our experience of the past few years have been that despite the protection of these "job creators" from any increased tax burden, they have been sitting on piles of money. I don't have any reason to believe that a further reduction in taxes would result in putting the additional capital to work instead of simply adding to the pile.

Regards,

D-Ray

Except that's not the case exclusively.

A reduction in capital gains would also benefit the nation's increasing population of retirees. Many of them have retirement nest eggs invested in mutual funds, conservative stocks, bonds and money market funds. Some of these create capital gains tax liability for them. Reducing that would give these folks more disposable income resulting in greater purchasing power and likely additional spending (stimulative).

I am by no means rich, but we have been able to squirrel away some savings, much of which is invested in mutual funds. I pay capital gains taxes any year that these investments produce a positive ROI. Speaking selfishly, it would reduce my taxes, increase our savings and help out our rainy day fund.

Assuming for the moment that there's an economic benefit to cities and states to lower taxes and create economic activity, there's also the other side of the equation that goes something like this: those buildings with the For Sale and For Lease signs right now are generating no tax revenue for the cities and states where those buildings sit. If, for example, the capital gains rate was reduced from 15% to 10%, and such a change resulted in an increase in business activity, wouldn't the revenue generated - even though its 5% less than would have otherwise been collected - be better than the $0.00 in revenue that is collected currently?

Or, if the MI business tax was reduced from the current 4.95% to (for example) 4.95%, and this attracted investment and business activity to the state that did not previously exist, wouldn't the benefits outpace the cost? Sure, you'd ultimately need to generate enough activity to make the benefits worth the cost to the business tax, but in the meantime, the state is also collecting increased revenue from sales tax, income tax, and (possibly) property tax due to the increased activity.

A couple of things. If we tax capital gains as any other income, those retirees would probably be paying a rate lower than the current capital gains rate.

Second, the example you have been giving of vacant buildings and for lease signs - if you are talking about economically depressed areas where there is a need for a subsidy to attract investment - I think we have been in agreement that a subsidy is probably warranted. That does not, however, justify an across the board tax cut for the purpose for the purpose of stimulating investment where there is considerable evidence that such investment is not taking place despite significant cash reserves.

Regards,

D-Ray

What you speak of is true of course. This is a big part of the political system we have. Businesses are granted sweetheart deals and kick backs fly right back.

However I have seldom heard of enterprise zones reverting back to non enterprise zones. This is what I requested a link to learn about.

Out here in NJ, the same urban enterprise zones enjoy the same sales tax break which really only benefit the new construction on the outskirts of the city. They never drive new business to the really blighted parts of town.

really? :cool:

Depends on their tax bracket of course. But a married couple filing jointly pays 15% in regular federal income tax between roughly $18000 and $70000 in income. At $71K and above that couple would pay 25%. The rates would be roughly the same for short term capital gains taxes, but 10% or 20% respectively for long term gains.

OK. I guess this is where the rubber hits the road. Where evidence are you using to draw your conclusions? Are you looking back at the reports from a year or two ago about businesses not investing cash? With the pending increase in capital gains taxes that will occur in 2013, what is the incentive to invest if the value of that investment will be diminished by future tax law?

The more I speak to business owners - and these are small and medium sized businesses - they are very risk averse right now. Between the changes in health care law and the impending changes in tax law, they are very much playing a "wait and see" game right now.

Between the mushrooming "for sale / for lease" signs, and the feedback that I hear and see frequently, it would seem that these folks would be encouraged by a more favorable / predictable business climate.

When a business decides where to go it takes much more into consideration than taxes. In fact taxes are probably the least concern. That's not to say that taxes can't make a difference. They certainly can when all other things are practically equal.

Other factors that businesses consider are:
Market
Utility costs
Shipping costs for supplies and finished goods
Real estate costs
Political climate for issues such as zoning, easements, and environmental issues
Local employee pool
Quality of living to attract employees
Airports
Traffic
Crime
Construction/reconstruction costs
etc.

Where we see tax incentives come into play is when a business has narrowed down to two or three final locations. At that stage of the process we see local and/or state governments start to bid incentives.

I don't disagree with your points when it comes to starting a business or site selection for a new location. However, expansion of a current business (sometimes called organic growth) can be just as stimulative to the economy. It's that kind of growth, as an example, that I'm hearing frequently from owners that is difficult to justify given the current business climate.

Good deal. At least we are close to the same page.

Cheap imports are one of the challenges to organic growth. The marketplace is saturated with things that people need from day to day.

As phucked up as our tax code is, it's not tax policy holding back business expansion. It's lack of demand, plain and simple. Folks' net worth evaporated with the collapse of the housing and stock markets. Folks can't spend what they don't have.

You do realize that the Republican answer to any and all economic conditions is to cut taxes, don't ya? If we have a surplus, cut taxes. Same goes for a deficit. Need to fund a trillion dollar war in the Mideast or pay for Medicare Part D? Cut taxes.:p

Reducing taxes on the wealthy would only see a very slight improvement
if at all. Raising taxes in this economy would only make things worse.
If we completely stripped the top 50% of all wealth and divided it out
equally among the lower 50% the economy would boom for about 6 months
to a year and then all the money would be right back in the same hands
for the most part minus about 75% of it which would find it's way to
China mostly, which brings us to the real problem.
No amount of tax or regulation, high or low, changes the fact that we
have little demand for any products or service that would require anyone
to hire anyone.
Fixing the economy starts at the bottom with jobs, a demand for products.
We the people, have to declare war on China, it's the only answer.

But tariffs are an anathema to the free trade acolytes of Ayn Rand like Ryan Jack. Voting those corrupted sumbitches out of congress is the only answer that I can see that will move our economy back to looking out for the American working stiff from who all business and spending flows.
Being pro-union is a good move, bro. The unions are the only folk that have the workers best interests at heart. The dipshit followers of the Tea Party would have us sell out to the lowest bidder for a suitcase full of campaign contributions. Get rid of the corrupted and reinstate campaign finance reform is the only way to turn it around.

Ahhhhh, but how do we do that when made in China has become so ubiquitous?

I agree, Jack, but I think the problem has gotten to the point that the only way is to convince the producers to begin producing here, again. Simply refusing to buy Chinese made goods won't work, in all too many cases "Made in China" is the only choice you have left.

You're absolutely right, fixing the economy does start at the bottom, with jobs. And, I would add; Jobs that actually pay well enough for people to afford to consume durable goods...........cars, homes, appliances, furniture, etc., etc..........

Now, try to tell that to the folks who refuse to hire unless they see that rise in demand first and bitch that the minimum wage is too much.

Good luck with that.

Dave

To your first point, I agree in large part. But there is one sure way to get money back in folks hands - job creation. Lack of demand and 8% unemployment go hand in hand.

To your second point, I was really trying to keep this thread from devolving along party lines and keep it in the realm of economics. Therefore, I'll leave that comment alone. This time! :eek:

Unions and "well paying" jobs are a blessing to those few who still, for
whatever reason, manage to hold one down. For everyone else they are
a curse and a plague on the economy. Higher salaries mean less
quality and jobs with little chance to compete against imports and their slave
labor. And don't give that crap about 10-12 year old Fords and GM
being great cars. They are a pile of shit compared to Toyota and Honda
of the same year.
Not Ford or GM's fault BTW.