Friday, September 07, 2007

looking out for the fat cats

First here's the depressing economic news that has sent the Dow into a tailspin this morning:
Employers sliced payrolls by 4,000 in August, the first drop in four years...
The latest snapshot of the employment climate, released by the Labor Department on Friday, also showed that the unemployment rate held steady at 4.6 percent, mainly because hundreds of thousands of people left the work force for any number of reasons.
Job losses in construction, manufacturing, transportation and government swamped gains in education and health care, leisure and hospitality, and retail. Employment in financial services was flat. The weakness in payrolls reflected fallout from the deepening housing slump, a credit crisis and financial turbulence that has made businesses more cautious in their hiring.
It sure is a great time to graduate and be looking for a job! So what does $250 Millioniare Willard Mitt Romney propose to help stimulate the economy?
Posted: 7:18 AM- CONCORD, N.H. - Republican presidential candidate Mitt Romney is filling in the blanks in his proposal to eliminate taxes on interest and dividends for families earning less than $200,000 a year.
Romney, who previously has talked about his desire to eliminate such taxes, said the plan would encourage saving. He was explaining the details during an appearance Friday in New Hampshire.
"You're creating a dramatic new incentive to save, which is savings will be tax free. ... Your interest, dividends and capital gains will be tax-free, which will allow people to establish pretty substantial nest eggs," said Romney, who previewed his speech in a telephone interview Thursday with The Associated Press.
"Any tax reduction means more money in our pockets to invest in our country, and tax reductions stimulate our economy in general," he said.
Romney spokesman Eric Fehrnstrom, said the proposal would cost $32 billion, to be paid for through economic growth, and by holding non-defense discretionary spending to inflation minus 1 percentage point.
I love the magical presidential candidate "paying for it" by making assumptions that will never ever happen. Could the press please stop asking how a candidate "is going to pay for that?" We all know it is a sham, and I would love it if some candidate would just admit that whatever plan they are proposing is a mere outline of what might someday become law. And that they have no intention of really balancing the books and no way of doing so other than cutting popular programs or defense spending, neither of which are politically possible to do.

But let's get to the larger point, that Romney's plan for cutting dividend and interest taxes will magically eliminate the looming recession is lie to cut taxes for plutocrats like himself.

While nearly half of all American families own stock, they do so in their pensions (AKA IRA's or 401(k)'s). This means that at worst, the own tax deferred stocks (you aren't taxed until you start to access the portollio, which is hopefully when you are retired--which should be decades from when you first started putting your money into the investment vehicle). So the marginal tax rate will provide no incentive for a middle class worker to plunk down more money into their retirement plan. Even assuming he knew what the marginal tax rate was now and knew it went down, it wouldn't matter because the tax rate that matters is the one that exists when that worker retires. For me, that is in the 2040s or 50s. For my parents (who are roughly speaking baby boomers), that is in the 2010s or 2020s.

Now let's turn to the tax on interest...which I assume is taxing money one has in a normal bank savings account.
The Commerce Department reported Monday that the savings rate fell into negative territory at minus 0.5 percent, meaning that Americans not only spent all of their after-tax income last year but had to dip into previous savings or increase borrowing.

The savings rate has been negative for an entire year only twice before — in 1932 and 1933 — two years when the country was struggling to cope with the Great Depression, a time of massive business failures and job layoffs.
The Commerce report said that consumer spending for December rose by 0.9 percent, more than double the 0.4 percent increase in incomes last month.

A price gauge that excludes food and energy rose by a tiny 0.1 percent in December, down from a 0.2 percent rise in November.
So in short, Americans are happier to plunk down money for a flat screen tv, a new iPod (I am guilty of this one), a new car, etc. rather than put money in the bank. And since the interest rate on savings accounts is low--Zions for example is .20% for a checking account, according to lack of savings has more to do with consumerism and low interest rates than the tax rate on said interest. And how could average Americans save more when they are earning comparatively less, what with the skyrocketing cost of health care combined with flat-to-negative wage growth?
Both hourly and weekly earnings of production non-supervisory workers—the vast majority of workers—increased by 0.3 percent in August before inflation is accounted for. It remains to be seen if these growth rates are enough to let wages rise even after accounting for inflation. After all, in the first seven months of 2007, inflation-adjusted hourly earnings dropped by 0.6 percent and weekly earnings by 0.9 percent.

Thus, Romney's tax cut plan is more Bushonomics. Help the rich, and shift the tax burden to the poor.

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