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ilar tax advantages focus on interest costs we ll talk about dividends later i don t know if alvin warren says any more about relieving corporations of the burden of paying tax on their profits jstor provides only the first page of his paper also in my four o clock i looked at pete davis s post just double checked it now he doesn t say anything that sounds to me like he s trying to get another tax break for corporations he s got a good clean statement on the problems created by a tax code that allows deductions for interest costs here s the link again and that leaves waldman my 8 am post i have trouble reading waldman because his paragraphs are too long to fit the space between my ears after the part that i quoted yesterday from his first paragraph waldman writes here s the case in brief see i thought the case in brief was the part i quoted yesterday and then he presents us with four long paragraphs and some medium length ones besides wading through that i get the impression waldman is making the case for the corporate interest cost tax deduction creditors and equityholders are fundamentally the same large scale investment is crucial to a modern economy and getting investors to trust strangers enough to give them their money is hard to overcome some of the trust issues the most nervous sort of investor bondholders are given the business equivalent of a doomsday device to enforce their claim on timely payments if of malice or misfortune a firm fails to pay out as promised bondholders can force a firm into bankruptcy fundamentally the right of bondholders to enforce their claims via bankruptcy is a legal convention we ve developed to encourage socially useful risk taking that partially externalizes the downside risks for some investors the existence of enforceable debt financing is a very good thing it s an essential element of the constellation of institutions by which we are able to fund large scale capital intensive projects without coercion thankfully waldman also says but any state meddling in capital structure ought to tilt the scales towards equity rather than debt financing oooh and this i like well said when firms pay stockholders every dollar an investor receives drops off the firm s balance sheet but when a bondholder receives the same dollar a us firm pays as little as 65 the other 35 is paid for by uncle sam in the form of a tax deduction again that s not altogether on point not for this post but i can t resist including it it s just that good and so we arrive at waldman s last paragraph thankfully a short one and the note that follows it so here s my proposal waldman writes put payments to stockholders and payments to bondholders on a level playing field eliminate the tax deduction for business interest payments i m not sure how much extra revenue this would net the treasury but by ending a perverse incentive for firms and eliminating a large subsidy to the wizards of debt it would pay off hugely in the form of a more stable corporate and financial environment stop after the second sentence here s waldman s proposal put payments to stockholders and payments to bondholders on a level playing field eliminate the tax deduction for business interest payments you might think that eliminating that deduction would bring extra revenue to the treasury but that s not our topic is it anyway the point here is to look at how the interest cost deduction twists and skews the natural economic forces and helps produce an economy burdened with debt an economy whose most successful industry is finance an economy that cannot avoid the crisis that comes when everyone suddenly realizes we have just too much debt i don t care about bringing extra revenue to the treasury plus it s off topic the topic is not how big to make government nor is the topic the federal debt and deficit not whether those are beneficial or harmful the topic is the corporate interest deduction and how it skews the economy so waldman says eliminate the tax deduction for business interest payments and then in the note waldman says another way to level the playing field between debt and equity financing would be to eliminate corporate taxation entirely i d be cool with that too see now he s writing in favor of the corporate interest cost tax deduction he is willing to trade the debt bias for an enhanced supply side bias perhaps waldman doesn t really understand that accumulating debt is the problem he s cool with accumulating debt and rather than focusing on the debt bias he drifts again to revenue considerations as long as it was accompanied by a tax increase elsewhere and then he complicates matters raising a veil of confusion whose incidence is at least as progressive as the corporate tax he ends his note by skewing the reader s heart and really if we are going to socialize the costs of our financial meltdown shouldn t we socialize it disproportionately to the people who gave it to us if you want to understand the economy keep your damn feelings out of it but anyway i m with waldman on this eliminate the tax deduction for business interest payments posted by the arthurian at 4 00 am 4 comments wednesday october 26 2011 and one from page five from the fifth page of google results see my two previous posts how the tax code encourages debt the new yorker the article is the debt economy by james surowiecki it starts with a quote from john kenneth galbraith one i think i recognize from a short history of financial euphoria so i felt like i had an in with the author and i liked the article before i got past the first sentence oh well here s just a small piece of surowiecki s article debt didn t get dangerously out of scale because the system was broken it got out of scale in part because the system worked the government doesn t make people go into debt of course it just nudges them in that direction individuals are able to write off all their mortgage interest up to a million dollars and companies can write off all the interest on their debt but not things like dividend payments this gives the system what economists call a debt bias agreed but this excerpt seems to hint that maybe corporations should be able to write off both their dividend payments and their interest payments no leave dividend payments as they are that s not the problem and make corporate interest payments taxable that will reduce the accumulation of private sector debt and that is what must be done in order to restore growth posted by the arthurian at 12 00 pm 2 comments and third in the google search results third on the list returned by google see my earlier post for numbers 1 and 2 was interfluidity eliminate the business interest tax deduction steve waldman writes eliminate the tax deductibility of interest payments by businesses debt financing externalizes the risks of business activity and magnifies social costs while equity financing concentrates risk among stockholders who signed up to bear it yet under current rules taxpayers literally pay firms to get rid of stockholders and take on ever more debt well said sir posted by the arthurian at 8 00 am 0 comments financial crisis was rooted in the corporate income tax interest deduction good title i borrowed it from capitalgainsandgames pete davis here s what davis wrote the corporate income tax deduction for interest produced a 6 4 tax rate on debt financed investments while the double taxation of equity income dividends and capital gains produced a 36 1 tax on equity financed investments according to this 2005 congressional budget office study borrow and spend to grow your business and you make money by paying your taxes use equity to grow your business and taxes cost you more than 36 something like that i can be sloppy as hell with the numbers and you can still see the difference oh there was something else from the yale law journal july 1974 jstor makes the first page available here a paper by alvin c warren jr alvin warren writes while interest expense is currently deductible in full from corporate income no deduction whatsoever is permitted for dividend payments the unlimited deduction for corporate interest payments originated in 1918 as a temporary measure designed to equalize the effects of the world war i excess profits tax before 1918 only limited offsets against corporate income were granted for interest payments just to point it out the deduction for corporate interest payments is not something that was created by the federal reserve it was an act of congress skewing the playing field ironic isn t it that congress did the study pointing out the problem that congress created the more so since congress never bothered to fix the problem i guess they are too busy pointing the finger at the fed googling corporate interest deduction brought up these links posted by the arthurian at 4 00 am 1 comments tuesday october 25 2011 the skills shortage and reading a graph i absolutely agree with billy that the skills shortage is a ruse let me condense a piece of his post billy quotes the skills gap report think of it this way as many as 600 000 well paying jobs are going unfilled while the national unemployment rate hovers around 9 well i would think about it this way billy says 600 000 thousand workers at the current productivity level in manufacturing would create a lot of output that output apparently is not being produced but could be if there were workers available if the skills gap report is to be taken literally that would represent a very large volume of unfilled orders sitting on the companies order books if there was that frustrated demand some firm would work out a way to satisfy it and thus gain market share the fact is that no survey reveals that level of unmet demand that is consumers or firms with cash to spend who systematically cannot purchase goods because the firms have said they cannot supply them because of labour shortages i thought that was really good on an unrelated note billy presents this graph of us manufacturing employment thousands since 1939 graph 1 if you were to look for overall trends in his graph what you see might look like this graph 2 these trend lines clearly put the problem some time around 1980 however when i look for overall trends in billy s graph what i see looks like this graph 3 i see the problem starting well before 1980 in the mid or late 1960s posted by the arthurian at 12 00 pm 2 comments the economics of the past 40 years driving to work i stop at the tee and make the left but there is a pothole right there that s hard to miss so i got in the habit of looking for the edge of the pothole and staying to the left of it every morning and then one morning i didn t see the edge i thought it odd that i missed it the next day i noticed they patched the pothole so the odd thing was not that i didn t see the pothole but that it was gone and i didn t even notice but i wasn t looking for the pothole you know i was looking for the edge that minor event reminded me of the darwin story related by lionel ruby in how the scientist thinks i wrote of it before darwin and a fellow scientist were searching for fossils in the north of england they were not aware of the glacial theory at the time years later darwin revisited the area and he was now astonished to discover how clearly marked were the glacial ridges on the rocks he had not noticed them on his earlier visit because he was not looking for them darwin was able to appreciate the glacial markings only after he became aware of the glacial theory we see or maybe don t see what we re looking for but we can easily overlook things we re not looking for we know there is a relation between money and inflation so that s what we see that s what we see even when it isn t money that is causing inflation that s what we see even if we have to jigger the numbers like friedman did to see it but if for example there is also a relation between credit use and inflation and we are not looking for that relation then we are very likely to overlook it posted by the arthurian at 4 00 am 7 comments monday october 24 2011 big v velocity velocity is the miles per hour of the economy it is spendings per dollar or how many times the average dollar was spent easy right but which money and what spending let s start with mzm money fred says velocity is a ratio of nominal gdp to a measure of the money supply and for mzm they figure it as gdp divided by mzmsl the ratio of quarterly nominal gdp http research stlouisfed org fred2 series gdp to the quarterly average of mzm money stock http research stlouisfed org fred2 series mzmsl graph 1 shows percent change from year ago for the velocity of mzm money for the quantity of mzm money and for gdp in other words for the velocity ratio and the two components of that ratio graph 1 mzm velocity and components graph 1 shows a big red spike in the quantity of mzm money immediately after the 1982 recession which pretty well mirrors a major down spike in the velocity of mzm money why s that because velocity is how many times the average dollar is spent and if the spending is relatively constant as the green line is then an increase in the number of dollars will calculate out as a decrease in the number of times each of those dollars is spent after the tall red spike there are five more significant peaks by my count each red line peak is matched by a sag in the blue line as the quantity of money rose the velocity of money fell this graph shows the pace of those changes the same mathematical fact the quantity of money is the denominator of the velocity ratio holds true before the 1982 recession though it is less clear from the graph but you can see between the 1974 and 1980 recessions an up and down in the red line corresponding to a down and up in the blue same thing between the 1970 and 1974 recessions and again though smaller one can see the same thing between the near recession of 1966 and the recession of 1970 before 1966 we seem to lose it but those numbers are all made up anyway mzm is a fairly recent invention still for a brief span in the 1960s mzm growth appears as a flat red line so the velocity of money the blue line varies in proportion to spending the green line during those years the blue line and the green line move in parallel graph 2 is just like graph 1 except based on m1 money rather than mzm graph 2 m1 velocity and components in the years after 1980 it is again very clear that the red and blue lines tend in opposite directions there is no magic to it only simple arithmetic the money number is the denominator of the ratio so the money number and the ratio value tend to move in opposite directions i should point out that if there is any difference between the red uptrends and the blue downtrends that difference must be because of the changes in gdp the green line note that in the years before 1980 the green line is the highest of the three on graph 2 that was not so obvious on graph 1 thus before 1980 the green line 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