# tax system



## 16412 (Apr 1, 2005)

Is the tax system that we have one of the reasons we are in a recession? I tend to believe it has lots to do with it, because business react to tax laws.


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## pt4u67 (Apr 27, 2006)

Every dollar the state takes as a tax is a dollar less that is available in the economy. The multiplier effect of money in the free market is far greater than in the hands of government given the inherent waste in government spending.


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## chatsworth osborne jr. (Feb 2, 2008)

*natural market correction IMHO*

i was under the impression that this was a global recession. It would be a bit vain to claim that a waning superpower's tax policy was responsible. Is there an example of a thriving nation with a more favorable policy?

The government spends our money. Otherwise states, nation wouldn't be broke. Business might spend it more efficiently or wisely...but not always as we've clearly seen.


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## burnedandfrozen (Mar 11, 2004)

Just look at how California is quickly going down the drain. Raising taxes in a recession is plain stupid but thanks to special interests and the unions CA might soon have the highest sales, income, and car taxes in the nation. When Arnold took over after we got rid of Gray Davis (who wanted to triple the already high car registration) the governator promised tax cuts. However, he soon flip-flopped and now all he wants is tax the daylights out of every living person he can. For what I wonder. In the LA news there's always some story about the LAUSD which is without a doubt one of the worst school districts in the nation. Yet instead of looking for ways to lower the drop out rate and improve student performance, they just sit around and whine and threaten strikes if any lay offs or pay cuts occur. Meanwhile, businesses keep moving out of California and the bozos in Sacramento wonder why.


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## ksinc (May 30, 2005)

pt4u67 said:


> Every dollar the state takes as a tax is a dollar less that is available in the economy. The multiplier effect of money in the free market is far greater than in the hands of government given the inherent waste in government spending.


That's true, but that does not address the tax system per se. IMHO the macro problems of recession are the size of the budget and tax revenues as a percentage of GDP for the reasons you suggest. I don't think the tax system itself has much to do with recession in the macro sense, but it certainly has some micro effects.

A lot of these things are so-called "straws." If you pass regulations like SarbOx, raise minimum wage and union participation, have terrorists attacks/fear, and throw in a bad tax system for good measure then you can have a recession, but to say any one alone could cause a recession is really difficult.

Yes; all business reacts to laws, but the one thing to remember is the 'evil, greedy, rich, big business guys' didn't get that way by sitting still. As a whole they will always prevail over any system; and in any environment. Indeed; they may do so only by fraudulent means, but they will do so if the punitive nature of the tax makes it worth the risk:reward. That's why the cosmic search for economic and social justice is nothing but a populist scam.


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## Phinn (Apr 18, 2006)

The government creates all of the money. They have made it illegal to use anything other than the official paper as money. 

As a result, the government does not need your taxes to run. It can make all the money it wants to spend. 

The only thing that matters is spending. Taxation means pretty much close to nothing. Every dollar spent comes from only one of two sources: (1) tax dollars, or (2) printing presses. But printing new money dilutes the value of every existing dollar, so it is just like a tax, only hidden. So, you have to look at spending to know how much you are truly being taxed. 

Since spending is the only monetary function that really matters, what is taxation for? Taxation only serves two auxiliary purposes:

1. To give politicians the power to decide who is going to pay a disproportionately large (or small) amount. This creates a huge economic incentive to suck-up to the government for special tax favors, which they hand out in exchange for "campaign contributions" and votes, but mostly campaign contributions. This bribery/extortion function is the central mechanism of electoral politics nowadays. 

2. To create an artificial demand for the paper currency that they force us to use. Their paper is so close to worthless, the only thing that keeps it from being better used as toilet paper is the fact that the government demands that you pay your taxes with it.


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## 16412 (Apr 1, 2005)

Phinn said:


> 2. To create an artificial demand for the paper currency that they force us to use. Their paper is so close to worthless, the only thing that keeps it from being better used as toilet paper is the fact that the government demands that you pay your taxes with it.


That is funny.

How do you measure your wealth?

Nothing new about bribery/extortion. The greedy can't help themselves- it is a vice.


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## 16412 (Apr 1, 2005)

chatsworth osborne jr. said:


> i was under the impression that this was a global recession. It would be a bit vain to claim that a waning superpower's tax policy was responsible. Is there an example of a thriving nation with a more favorable policy?
> 
> The government spends our money. Otherwise states, nation wouldn't be broke. Business might spend it more efficiently or wisely...but not always as we've clearly seen.


The way countries are interconnected and the US influences all the others, so a domino effect. It has been clear for decades how much other countries are interconnected with the US. So, when the US stumbles so do the rest. When other countries, such as Japan stumbles, parts of the US stumbles (just look at WA apples).


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## 16412 (Apr 1, 2005)

pt4u67 said:


> Every dollar the state takes as a tax is a dollar less that is available in the economy. The multiplier effect of money in the free market is far greater than in the hands of government given the inherent waste in government spending.


One of the reasons why this country took such a dive is because companies depend so much upon borrowing money and the banks of loan money kinda crashed. This dependence of borrowed money has to do with how the tax system is, I believe. Indeed, gov. has to much say in how companies run, at least for somethings, like how companies manage money where they need to borrow instead of something else they might have done.


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## 16412 (Apr 1, 2005)

ksinc said:


> raise minimum wage and union participation


Minimum wage is so low it is a joke. Your belief in the joke doesn't help you.

Union participation has certainly made this country a better place. Not perfect by any means. People get walked on by all sides. I don't like unions, but they have given many people a better life. And economically the more people have money the more times, or faster, it goes around- any business that understands that wants it, because the money is coming back to them faster, which is more money. Most greedy people will never figure that out.


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## norton (Dec 18, 2008)

Our tax system is not the cause of the recession, but it could be a contributing factor. The United States has a relatively high tax burden and is the only country that taxes its citizens on their world wide income. Our politicians, both state and federal, haven't yet realized that businesses, and economic development are more likely to move to low tax jurisdictions.

The complexity of the tax system is an inefficiency in the economy. Businesses and individuals spend billions each year to comply with tax law, money that could be put to more productive uses. Further billions are spent in ways that make economic sense only because the tax law is more designed to influence economic and social behavior than it is to raise federal revenue.

Congress decides its a good idea to reward a certain behavior, such as saving for retirement. To do so they make IRA contributions deductible and have been gradually raising the amount that can be contributed and deducted. At the same time they set limits so that the very people who could afford to contribute the maximum to an IRA are unable to take the deduction. Our entire tax code is schyzophrenic. The alternative minimum tax is totally insane.

We have traditionally had a very high compliance rate, but I can see that changing. As taxes get higher and compliance becomes more complicated people will start to cheat and the underground economy will grow. Seeing how high ranking politicians and bureaucrats cheat on their taxes and only come clean when caught will hasten the process.

I am sure that the fact that both individuals and businesses are unable to make economic decisions due to the extreme uncertainty about Washington's future actions and Obama's government by fiat is both deepening and prolonging this recession. The estate tax goes away in 2010 but comes back at pre 2001 levels in 2011. The alternative minimum tax is modified on a year to year basis, usually retroactively, to keep it from hitting too many voters. Bond holders can't rely on bankruptcy law to protect their interests if Obama decides to nationalize the company. How can one make rational investment decisions if the return can't be calculated?

My solution is a constitutional amendment to allow only one kind of tax, a personal income tax, to be capped at 10 % of income. Congress could screw with the tax code all they liked, but they couldn't afford to put in too many deductions and they couldn't make anyone pay more than 10% of their income. When you consider that the social security/medicare tax is currently 15.3% you can see that congress would really have to prioritize spending and government would have to shrink. When I suggested this to my congressman a couple years ago he laughed, but the way things are going I can see that eventually there may be enough people fed up enough to make this a more mainstream idea.


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## PedanticTurkey (Jan 26, 2008)

The tax code is a tremendous mess, no doubt about it. Have you ever seen it reduced to paper? You couldn't stack the thing in a room with 9' ceilings.

IIRC, the federal government also produces more laws (or, properly, regulations with the power of laws) every month than we did in the 150 or so years before FDR took over.


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## ksinc (May 30, 2005)

WA said:


> Minimum wage is so low it is a joke. Your belief in the joke doesn't help you.
> 
> Union participation has certainly made this country a better place. Not perfect by any means. People get walked on by all sides. I don't like unions, but they have given many people a better life. And economically the more people have money the more times, or faster, it goes around- any business that understands that wants it, because the money is coming back to them faster, which is more money. Most greedy people will never figure that out.


As you remain poor and bitter, perhaps consider that your ignorance doesn't help you.

Lots of contract pay in this country is factored off the base minimum wage, including union contracts. Federal minimum wage increases = *mandatory/automatic* union minimum wage increases in most cases.

This does not help the people supposedly living on the minumum wage, but it also doesn't help the union people as it eventually (in the case of GM) makes the company uncompetitive on labor costs and all employees lose their jobs. Maybe people who have never hired anyone will never figure that out.

While the turnover of money increases taxable revenues, most businesses have far higher ROC/ROE than most individuals. Most individuals don't know what ROC is, much less how to calculate it or to think in terms of what their own is.

Do you think more people invested in themselves or more employers invested in their employees last year? Who do you think received the higher return? Why is that?

It's not merely the passing around of the money that creates economic value; assets have *future* economic benefits.

This is the issue of "if you give a poor person a stimulus they spend it so that's better than tax cuts for business." Yes; they do spend it, but they do not create anything with it. They don't produce anything with it. They don't increase GDP because that money was extracted via taxes or debt in the first place. A "greedy person" gets a $1 and tries to turn it into $10.

Perhaps if you quit trying to instruct us all you would learn something? No joke.


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## 16412 (Apr 1, 2005)

ksinc said:


> This does not help the people supposedly living on the minumum wage, but it also doesn't help the union people as it eventually (in the case of GM) makes the company uncompetitive on labor costs and all employees lose their jobs. Maybe people who have never hired anyone will never figure that out.


I knew you would pick this one out, because you are like the same union- greedy greedy greedy- you judge as you are.

You can hide behind business as usual in figuring cost, but that has been going on for thousands of years, anybody can do it, so you really don't have any bragging rights. Competition has been around for thousands of years with all kinds of problems, such as low pay elsewhere. It is a tough world to stay in business sometimes and a number go out no matter how smart they are, though usually the smarter have seen the future and moved on. Who wouldn't look at the cost and the competitors cost before spending a penny in investing?



> This is the issue of "if you give a poor person a stimulus they spend it so that's better than tax cuts for business." Yes; they do spend it, but they do not create anything with it. They don't produce anything with it. They don't increase GDP because that money was extracted via taxes or debt in the first place. A "greedy person" gets a $1 and tries to turn it into $10.
> 
> Perhaps if you quit trying to instruct us all you would learn something? No joke.


Where did I say tax money for the poor?

Tell me something, which would you rather have. One person with $10,000,000 and nine competitors, or ten people with $1,000,000, or one hundred people with $100,000? Or, two hundred people with $50,000? Do not your odds increase with one hundred potential customers instead of one? Or, ten? But, if you have one thousand people with $10,000 they probably won't have enough money to come into your store. Indeed you have a business mind that can't see beyond the tip of your noise, as most business owners don't seem to. I guess that is one difference between business thinking and economic thinking, and then there is accounting. There are three properties to a musical note, as in a pipe organ. If you make one of the properties perfect the instrument will sound terrible. If you get two half and half it will sound better, but not very good. But the best sound is no three parts is perfect, but a compromise. And each part maybe different from one pipe to another. And further more, each room would change the compromise. So, rather complicated to get the best sound. I think your knowledge in one part or two is very good, but you sound kinda funny because the third part is missing. As far as instructing and learning, maybe I have forgotten a lot that you do know, and made some errors in past threads, but you still don't take the cake when it comes to economics, punk!


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## Howard (Dec 7, 2004)

They are taxing everything from cigarettes to cell phones and now bottles of water.


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## Beau (Oct 4, 2007)

chatsworth osborne jr. said:


> i was under the impression that this was a global recession. It would be a bit vain to claim that a waning superpower's tax policy was responsible. Is there an example of a thriving nation with a more favorable policy?
> 
> The government spends our money. Otherwise states, nation wouldn't be broke. Business might spend it more efficiently or wisely...but not always as we've clearly seen.


Geez Hitler, maybe the "State" will tell us how these businesses can spend/invest their money more wisely. the Obama administration has already shown itself on the brink of lawlessness by violating the terms of the contracts of the financiers who previously loaned money to Chrysler.

Will you hold my place in line for toilet paper, while I go forage for some moldy bread?

Our nation has the sencond highest corporate tax rate on a global scale. We are second to Japan, and you can see they are in a 15 year slump.

Waning Superpower my arse! Show me who is going to take us down. Not the Chinese. Their nuclear bombs are probably full of melamine, just like their young children. They are a burgeoning economy fueled by slave labor. When we finally free these masses and they are part of a FREE economy, then we will have an alliance instead of a socialist/communist adversary.

Our greatest fear for the destruction of our country lies with that man who is now our president.

Are you always tearing down the US? Why do you still live here?


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## ksinc (May 30, 2005)

WA said:


> I knew you would pick this one out, because you are like the same union- greedy greedy greedy- you judge as you are.
> 
> You can hide behind business as usual in figuring cost, but that has been going on for thousands of years, anybody can do it, so you really don't have any bragging rights. Competition has been around for thousands of years with all kinds of problems, such as low pay elsewhere. It is a tough world to stay in business sometimes and a number go out no matter how smart they are, though usually the smarter have seen the future and moved on. Who wouldn't look at the cost and the competitors cost before spending a penny in investing?
> 
> ...


WA, you expose yourself. You repeatedly demonstrate that you are the one that picks and takes things out. By comparision, I respond to the entire post, and all points. I have intellectual integrity with my stated positions. You do not. You do not address the questions posed to you; yet you demand that others answer your queries which are really just your stated confusion. Perhaps if you were responsive at an elementary level which showed you actually understood my position. I showed I understood and disagreed with yours. You were simply non-responsive and repeating rhetoric. Do you or do you not understand investing vs. spending? Can you or can you not respond intelligently to my post based on your understanding of economic principles?

You are the one that clearly is demonstrating he has no understanding of the topics at hand (whether you do or not is not discernable.) Beyond that error, You assume to understand My education, experience, motives, or positions. Please quit embarrassing yourself and wasting _our_ time. Or not. Your 7th grade economic education is not serving you well. You think you know, but you do not. It's not even close, really. No joke.

I hide behind nothing. If you can't even figure that out you really are obtuse.


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## ksinc (May 30, 2005)

Howard said:


> They are taxing everything from cigarettes to cell phones and now bottles of water.


True; and to further emphasize the point that is not a change in the "system." The system has long consisted of both production and consumption taxes. These are changes in the application and marginal rates of the current system. Not that you made this error, Howard, I realize that.:icon_smile_wink:


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## ksinc (May 30, 2005)

Beau said:


> Geez Hitler, maybe the "State" will tell us how these businesses can spend/invest their money more wisely. the Obama administration has already shown itself on the brink of lawlessness by violating the terms of the contracts of the financiers who previously loaned money to Chrysler.
> 
> Will you hold my place in line for toilet paper, while I go forage for some moldy bread?
> 
> ...


I'm all for ridiculing ideas that deserve such, but #1) the "Hitler" label is a bit much perhaps and #2) Chatsworth's ideas are clearly not only within reasonable assumptions, but largely correct.

I think our greatest economic threat is the system of entitlements itself, and not of any one man in a particular office. Although I don't use such a label myself I will borrow your system of measure for illustration; hatred of the man itself is what strikes me as "_Hitleristic_."

And the answer to your question is: We are taking ourself down.


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## Beau (Oct 4, 2007)

ksinc said:


> I'm all for ridiculing ideas that deserve such, but #1) the "Hitler" label is a bit much perhaps and #2) Chatsworth's ideas are clearly not only within reasonable assumptions, but largely correct.
> 
> I think our greatest economic threat is the system of entitlements itself, and not of any one man in a particular office. Although I don't use such a label myself I will borrow your system of measure for illustration; hatred of the man itself is what strikes me as "_Hitleristic_."
> 
> And the answer to your question is: We are taking ourself down.


Yes, the Hitler referrence I made to Chattsworth was too vile. My apologies. I stand against class envy and hatred. I love this country and all that it used to be and could be again someday. We are the greatest country in the world. Why else would so many who have so little try with every fiber of their being to immigrate here?

What did Hitler do? He vilified a a group of individuals and sought their elimination. Our president vilifies the banking and investment industry, and practically every other industry that seeks to make a profit. His goal is to gain government control over every aspect of our society.

Our government creates many different types of entitlements. Two are easily identified: the welfare class who look to the government for subsistence and the special interests who seek corporate welfare, tax breaks, or leverage. I agree with you that entitlements are bad for everyone.

Those of us who respect and understand the "Rule of Law" see the transparency of our new president. He is not doing anything to improve or correct the problems our society faces. He is pushing us towards socialism. His aims and rhetoric are "Hitleristic".


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## ksinc (May 30, 2005)

Beau said:


> Yes, the Hitler referrence I made to Chattsworth was too vile. My apologies. I stand against class envy and hatred. I love this country and all that it used to be and could be again someday. We are the greatest country in the world. Why else would so many who have so little try with every fiber of their being to immigrate here?
> 
> What did Hitler do? He vilified a a group of individuals and sought their elimination. Our president vilifies the banking and investment industry, and practically every other industry that seeks to make a profit. His goal is to gain government control over every aspect of our society.
> 
> ...


Small quibbles. We may agree.

My understanding (which may be wrong) is that Hitler merely rode the wave - he did not create the wave. In the same way, I don't think Obama is 'doing it' anymore than Hitler did. Do they see the wave? Are they positioning themselves via rhetoric based on the inevitable tide? Do they occasionally guide the weak and the gullible into the under toe? Sure, but they are less powerful/persuasive individuals then many give them credit for and also smarter than many give them credit IMHO. They understand better than both their followers and their opponents that they are merely recognizing and guiding existing sentiment to accumulate power. "Pushing" would be too much like actual work! :icon_smile_wink: As we see with WA; the populist, economic/social justice rhetoric sustains itself in the heart and mind like a virus even among those who think they are conservative. Once the forbidden fruit of legal plunder is tasted the rationalizations have only just begun ...


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## Liberty Ship (Jan 26, 2006)

WA said:


> Is the tax system that we have one of the reasons we are in a recession? I tend to believe it has lots to do with it, because business react to tax laws.


Yes it is a big reason. American corporations have about $15 trillion overseas that they can't or won't bring home because of our tax policies.


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## ksinc (May 30, 2005)

Liberty Ship said:


> Yes it is a big reason. American corporations have about $15 trillion overseas that they can't or won't bring home because of our tax policies.


GDP vs. GNP?


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## Beau (Oct 4, 2007)

ksinc said:


> Small quibbles. We may agree.
> 
> My understanding (which may be wrong) is that Hitler merely rode the wave - he did not create the wave. In the same way, I don't think Obama is 'doing it' anymore than Hitler did. Do they see the wave? Are they positioning themselves via rhetoric based on the inevitable tide? Do they occasionally guide the weak and the gullible into the under toe? Sure, but they are less powerful/persuasive individuals then many give them credit for and also smarter than many give them credit IMHO. They understand better than both their followers and their opponents that they are merely recognizing and guiding existing sentiment to accumulate power. "Pushing" would be too much like actual work! :icon_smile_wink: As we see with WA; the populist, economic/social justice rhetoric sustains itself in the heart and mind like a virus even among those who think they are conservative. Once the forbidden fruit of legal plunder is tasted the rationalizations have only just begun ...


We have within our U.S. society a certain percentage of the population who believe that gonvernment is infallible and can take care of everything and everyone. Obama did not create that class. He is empowering it and helping to build this wave of government control. This type of party has always been with us; however, their has always been a large enough conservative group in power to keep it at bay. We don't have that now, and this is why everything is on the downward spiral.

We had a financial crisis in 2008 before the election. Bush #43 did not help the conservative cause. His compassionate conservatism was just a guise for some Johnsonian initiatives furthering entitlements. Now Obama is president and he has grasped the opportunity before him to take as much power as he can for the central government. Soon you might find that you can't make the same wage you made before, or you won't be able to get the same level of medical treatment as was available just a year ago; all this because the government will mandate what you can have or to what you are entitled.

That is a bad deal for everyone.

It can be stopped and should be stopped. We are not Rome (although damn near close).


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## 16412 (Apr 1, 2005)

Back to the main question, but not so vague. When the housing market fell many businesses around the Seattle area that had nothing to do with the building industry found that there was no money for them to borrow so people were getting laid off or not hired, which would contribute to the recession. Many of these businesses were established business that is seems to me were spending there profits and then borrowing money for normal business instead of keeping some money on hand for regular normal business. Is it the tax codes that pushed businesses to do so much unnecessary borrowing? This question is for tax accountants, being that is their job.


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## 16412 (Apr 1, 2005)

ksinc said:


> Your 7th grade economic education is not serving you well.


My economic education began long before 7th grade and didn't end there. The reason why I mentioned him several times is because, unlike others, so much of what he said has come to pass 2-3 times. For that to happen means he has some knowledge right. There are a number of theories I have heard from others that are suppose to be right. They are very pursuasive and many believe them. But, I'm still waiting for what they say to come true. So, they are rather unbelievable. Hot air is not enough. I like to see reality. One of Nixions advisors or cabinet members was worth listening to and read whatever he wrote, because of so much of what he said came true. What do you think an economist is? Somebody who can talk many theories, debate and use big words, or, somebody whose predictions come true 70-80% of the time?


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## eagle2250 (Mar 24, 2006)

Gentlemen, these days I feel myself rapidly aging and feeling far more fatigued than I ever thought possible, even just a few short years back. After spending most of my adult life in the service of our Nation and living an oath to "defend Her, against all enemies, foreign and domestic", for the first time in my life I find myself doubting the ethical and moral character of pretty much the entire body of our elected leadership and I'm really not sure that the Institutions are all that we perceived them to be. I have always loved and always will love this Nation of ours but, there are times these days, when I feel such a fool for having had such blind faith in Her! 

Perhaps the saddest reality is, that as may be illustrated by the answer to the question posed in the OP (The problem is not the tax code per se. Rather, the problem is us!). It seems in our time, the average American routinely expects something for nothing; spends beyond their means, assuming debts that they know they will never be able to afford; and we elect and send to Washington, DC, fools who are similarly inclined...and then we feign outrage when they take take these slovenly financial perspectives and 'hooray for me' attitudes and apply them in the execution of their elective responsibilities. We are the ones who elected these fools to office; we are the ones who keep re-electing them, as they continue to fund pork barrel projects that offer no value beyond putting funny money back in the pockets of their constituents; and in short, gentlemen, we are the problem...not the tax code! We should never spend money, we don't have!


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## ksinc (May 30, 2005)

WA said:


> Back to the main question, but not so vague. When the housing market fell many businesses around the Seattle area that had nothing to do with the building industry found that there was no money for them to borrow so people were getting laid off or not hired, which would contribute to the recession. Many of these businesses were established business that is seems to me were spending there profits and then borrowing money for normal business instead of keeping some money on hand for regular normal business. Is it the tax codes that pushed businesses to do so much unnecessary borrowing? This question is for tax accountants, being that is their job.


The short answer is; No. You are in the right field, but have latched onto the wrong villian. Try drilling-down on your intuition and thinking like a Greedy Capitalist Pig. Intuitively you seem to know that IF your theory was correct that would be because the Cost of Debt was cheaper than the Cost of Equity to the Pig; right? So, how are those costs calculated? If you know the equation then it should be more meaningful to you. It's Finance 101 - Mo&Miller. Most CPAs have to take the first 2 or 3 Finance courses; so they will know this as well, but it's really a CFA question not a CPA one.


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## ksinc (May 30, 2005)

WA said:


> My economic education began long before 7th grade and didn't end there. The reason why I mentioned him several times is because, unlike others, so much of what he said has come to pass 2-3 times. For that to happen means he has some knowledge right. There are a number of theories I have heard from others that are suppose to be right. They are very pursuasive and many believe them. But, I'm still waiting for what they say to come true. So, they are rather unbelievable. Hot air is not enough. I like to see reality. One of Nixions advisors or cabinet members was worth listening to and read whatever he wrote, because of so much of what he said came true. What do you think an economist is? Somebody who can talk many theories, debate and use big words, or, somebody whose predictions come true 70-80% of the time?


It's not hard to tell a 7th grader something he doesn't know that will come true. I would consider 70-80% a complete miss out of a population of knowledge a 7th grader doesn't know. Honestly, you yourself couldn't tell a 7th grader 100 things with 99% chance of certainty of coming to pass? How hard would that be; really?

Sorry to be brutal, but you need to update your previous appraisals. Maybe you are missing basic fundamentals because you are holding onto your 'hero worship', but you are certainly missing them. We call it the 'silver bullet' approach. It sounds like this guy didn't teach you very much in order to think for yourself, but he gave you some predictions some of which came true and you have drawn an unsupported conclusion from that evidence.

Perhaps you could focus on what predictions he made that didn't come true? And that would give you some insight into his blind spots.

Con artists and charlatans use the same approach, you know? :icon_smile_wink:

Would I say the definition of an economist is somebody whose predictions come true? No; I would not (except maybe on CNBC.)

You should read this:


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## ksinc (May 30, 2005)

Well said, Eagle.


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## Nerev (Apr 25, 2009)

To answer the OP simply, technically, yes the tax system is one of the reasons why we are in a recession, but is a tiny fraction of a whole other problem. It really has to do very little with taxes, and while all business react to tax law, they react a lot more to consumer demands, trends, and a thousand other factors.

My 2 cents on our taxes, it isn't a problem. We pay taxes for the greater good of society. Things from defense, health care, benefits, pot holes, everything that the state and government is normally done with tax money. While many people here on this thread have said US taxes are high, I believe 38% at the _very top_ (dividends cap at 15% still I believe), other countries have a lot more. Taking a quick look online, it looks like Belgium (55.1%), Germany (52.5%), Hungary (51.0%), France (50.2%), and Austria (48.1%) are the top 5. Why do these countries have higher taxes? One thing is universal health care. Why do we joke that Canadians get free health care for everyone while we do not? They pay higher taxes, much higher taxes. Traditionally, you've had two thoughts on government. 1) Government should be large, tax a lot, spend a lot. 2) Government should be small, tax less, and spend less. We are currently in the first type, Democrat's style. While it isn't the greatest for people with $1,000 suits and $300 shoes, it does help those that can't buy $10 shirts. It is unfortunate that some abuse the system, but I believe in helping those in need so I do not mind paying taxes.

As for the recession, I found that "This American Life" made a really good explanation and examples out of some of the complex technicallities that were happening. https://www.thisamericanlife.org/Radio_Episode.aspx?episode=355. You can listen to the whole thing for free.


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## norton (Dec 18, 2008)

WA said:


> Back to the main question, but not so vague. When the housing market fell many businesses around the Seattle area that had nothing to do with the building industry found that there was no money for them to borrow so people were getting laid off or not hired, which would contribute to the recession. Many of these businesses were established business that is seems to me were spending there profits and then borrowing money for normal business instead of keeping some money on hand for regular normal business. Is it the tax codes that pushed businesses to do so much unnecessary borrowing? This question is for tax accountants, being that is their job.


As a tax accountant, I'll jump in here. The tax code is full of incentives for companies to spend, such as accelerated write-offs for purchasing fixed assets. Many companies will look at their tax situation toward the end of the year and, if it looks like they will be owing significant taxes, purchase assets that will be needed in the near future.

That said, most people who haven't owned a business overestimate the profitability of most businesses. Companies cannot afford to have idle cash sitting around and some types of companies (personal holding companies) are penalized in the tax code if they hold too much cash for too long. But most companies just don't enjoy the level of profits necessary to just sock it away. Competition sees to that.


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## 16412 (Apr 1, 2005)

ksinc said:


> Finance 101 - Mo&Miller.


I looked on the internet and can find nothing about this book. Perhaps you can give more info on it?


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## 16412 (Apr 1, 2005)

norton said:


> As a tax accountant, I'll jump in here. The tax code is full of incentives for companies to spend, such as accelerated write-offs for purchasing fixed assets. Many companies will look at their tax situation toward the end of the year and, if it looks like they will be owing significant taxes, purchase assets that will be needed in the near future.
> 
> That said, most people who haven't owned a business overestimate the profitability of most businesses. Companies cannot afford to have idle cash sitting around and some types of companies (personal holding companies) are penalized in the tax code if they hold too much cash for too long. But most companies just don't enjoy the level of profits necessary to just sock it away. Competition sees to that.


Thanks for your answer. It seems better to make 5% interest than pay out 7% interest. I've read of embezzling that has happened around here into the hundreds of thousands $ from small companies. A couple of companies I didn't even know that made that much in a year, much more than to be embezzled that much and the owners not even know about it except the accountant caught it. I know the taxes are set up to push for more work by write offs and penalties. Anyway, it looks to me like the gov. has it's hands in companies in ways it really shouldn't, so breaking the law. I think gov. steam rolls over small companies who really can't fight back. Not only do people get walked on, so do companies.


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## Howard (Dec 7, 2004)

ksinc said:


> True; and to further emphasize the point that is not a change in the "system." The system has long consisted of both production and consumption taxes. These are changes in the application and marginal rates of the current system. Not that you made this error, Howard, I realize that.:icon_smile_wink:


About how long has this system been around?


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## Asterix (Jun 7, 2005)

eagle2250 said:


> Gentlemen, these days I feel myself rapidly aging and feeling far more fatigued than I ever thought possible, even just a few short years back. After spending most of my adult life in the service of our Nation and living an oath to "defend Her, against all enemies, foreign and domestic", for the first time in my life I find myself doubting the ethical and moral character of pretty much the entire body of our elected leadership and I'm really not sure that the Institutions are all that we perceived them to be. I have always loved and always will love this Nation of ours but, there are times these days, when I feel such a fool for having had such blind faith in Her!
> 
> Perhaps the saddest reality is, that as may be illustrated by the answer to the question posed in the OP (The problem is not the tax code per se. Rather, the problem is us!). It seems in our time, the average American routinely expects something for nothing; spends beyond their means, assuming debts that they know they will never be able to afford; and we elect and send to Washington, DC, fools who are similarly inclined...and then we feign outrage when they take take these slovenly financial perspectives and 'hooray for me' attitudes and apply them in the execution of their elective responsibilities. We are the ones who elected these fools to office; we are the ones who keep re-electing them, as they continue to fund pork barrel projects that offer no value beyond putting funny money back in the pockets of their constituents; and in short, gentlemen, we are the problem...not the tax code! We should never spend money, we don't have!


A 5 star response that is absolutely true!


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## ksinc (May 30, 2005)

WA said:


> I looked on the internet and can find nothing about this book. Perhaps you can give more info on it?


I apologize for the lack of clarity. It's the Modigliani(Mo) and Miller Theorem (the leveraged vs. unleveraged firm) https://www.jstor.org/pss/1809766; therein lies the answer to your question. Google will be your friend here.

https://www.econ.uiuc.edu/~avillami/PalgraveRev_ModiglianiMiller_Villamil.pdf



https://www.econ.uiuc.edu/~avillami/PalgraveRev_ModiglianiMiller_Villamil.pdf said:


> The Modigliani-Miller Theorem is a cornerstone of modern corporate finance. At its heart, the theorem is an irrelevance proposition: The Modigliani-Miller Theorem provides conditions under which a firm's financial decisions do not affect its value. Modigliani (1980, p. xiii) explains the Theorem as follows:
> 
> &#8230; with well-functioning markets (and neutral taxes) and rational investors, who can 'undo' the corporate financial structure by holding positive or negative amounts of debt, the market value of the firm - debt plus equity - depends
> _only _on the income stream generated by its assets. It follows, in particular, that the value of the firm should not be affected by the share of debt in its financial structure or by what will be done with the returns - paid out as dividends or reinvested (profitably).
> In fact what is currently understood as the Modigliani-Miller Theorem comprises four distinct results from a series of papers (1958, 1961, 1963). The first proposition establishes that under certain conditions, a firm's debt-equity ratio does not affect its market value. The second proposition establishes that a firm's leverage has no effect on its weighted average cost of capital (i.e., the cost of equity capital is a linear function of the debt-equity ratio). The third proposition establishes that firm market value is independent of its dividend policy. The fourth proposition establishes that equity-holders are indifferent about the firm's financial policy.​





https://www.econ.uiuc.edu/~avillami/PalgraveRev_ModiglianiMiller_Villamil.pdf said:


> The importance of taxes for the irrelevance of debt versus equity in the firm's capital structure was considered in Modigliani and Miller's original paper (1958). Miller and Modigliani (1963) and Miller (1977) addressed the issue more specifically, showing that under some conditions, the optimal capital structure can be complete debt finance due to the preferential treatment of debt relative to equity in a tax code. For example, in the U.S. interest payments on debt are excluded from corporate taxes. As a consequence, substituting debt for equity generates a surplus by reducing firm tax payments to the government. Firms can then pass this surplus on to investors in the form of higher returns. This raised the further provocative question - were firms that issued equity leaving stockholder money on the table in the form of unnecessary corporate income tax payments? Miller (1977) resolved this problem by showing that a firm could generate higher after-tax income by increasing the debt-equity ratio, and this additional income would result in a higher payout to stockholders and bondholders, but the value of the firm need not increase. The crux of the argument is that as debt is substituted for equity, the proportion of firm payouts in the form of interest on debt rises relative to payouts in the form of dividends and capital gains on equity. Higher taxes on interest payments than on equity returns reduce or eliminate the advantage of debt finance to the firm.​


https://courses.essex.ac.uk/EC/EC372/ec372mm.pdf​
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/articles/MM40yearslater.htm​


https://pages.stern.nyu.edu/~adamodar/New_Home_Page/articles/MM40yearslater.htm said:


> *Tax Critiques*​
> The first major assault on M&M came soon after the propositions were published. The authors, critics said, clearly underestimated the tax benefits of debt, which exist thanks to the tax-deductibility of interest payments. This so-called corporate tax shield means that, for any number of companies, using more debt means paying less taxes and hence increases the value of the company. Modigliani and Miller conceded the point in a correction paper published in 1963, and brought their estimates back in line.​
> *"We made a big mistake on the matter of how firm value is affected by interest deductibility under the corporate income tax," Miller says. "In the correction paper, we worked out the argument a little more rigorously and showed that you could create value with debt, and we came up with an estimate of how much value you could create-- though it didn't turn out to be a very high number."*​
> To this day, however, exactly how valuable the tax shield is for investors remains a bone of contention between Modigliani and Miller: "The whole issue of taxes is a divisive one," says Modigliani. "Miller still seems to think-- something that I disagree with--that taxes make no difference. I believe that is wrong."​
> ...


As Norton got at this Required Rate of Return is the primary reason money doesn't sit in the bank and why firms borrow; they must compete - capital seeks the highest returns. As Norton was saying; this drives business decisions more so than tax code (even though tax code is a consideration).

It's the Cost of Capital, Cost of Debt, Cost of Equity, and the Return on Capital on which firms are compared. Mo&Miller really discuss tax neutrality (the equal taxation of debt and dividends - the double taxation debate matters here too) more so than actual tax-rates; i.e. they do not propose a perfect tax rate or system, but discuss relative conditions and effects on debt and equity decisions in the firm; optimum capital structure.

As you can see there is practical limit to the amount of debt both the credit and equity markets will let firm can issue; aka debt:equity ratio. As Mo&Miller propose it may not affect the value of the firm, but it will increase the risk and have the practical effect of setting the caps on borrowing. As the amount of debt increases the cost of debt does not stay cheap (nor the cost of equity - as debt increases, the risk increases, the risk premium and the required rate of return on capital increases).​
So, does the tax system matter? Of course, it does. But in looking at your specific question would that have "pushed businesses to do so much unnecessary borrowing?" No. Taxes on debt would have to be insanely high in absolute terms and relative terms to dividends. It's more likely the historically low Cost of Debt and inflated asset prices (having enabled them to raise borrowing base and meet covenant restrictions) combined with shorterm incentive packages are the major causes of any excessive borrowing you perceive in a given firm.

To further throw a wrench in your premise, until the recent downturn most publicly traded firms had historically high levels of cash on their balance sheets, but private firms often did not. Here is an article that combines all relevant topics to the discussion as to why ... https://www.economist.com/business/displayStory.cfm?story_id=13576300


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## ksinc (May 30, 2005)

Howard said:


> About how long has this system been around?


You should buy a computer! 

https://www.infoplease.com/ce6/bus/A0818010.html



> *excise taxes,* governmental levies on specific goods produced and consumed inside a country. They differ from tariffs, which usually apply only to foreign-made goods, and from sales taxes, which typically apply to all commodities other than those specifically exempted. In their modern form, excise taxes were first developed by Holland in the 17th cent. and *established by law in England in 1643*. Introduced into the Dutch colonies in America, the system spread to other colonies. *Such taxes were first used by the federal government in 1791* and aroused great opposition. They were repealed (1802) in Thomas Jefferson's administration. During the War of 1812 comprehensive excise taxes were levied again but were repealed in 1817. The taxes imposed during the Civil War included an excise tax on all manufactured goods. Most of those were gradually repealed, and by 1883 only liquor and tobacco were taxed. The Spanish-American War saw a temporary expansion of excise taxes. In both World Wars such taxes were greatly increased; in World War II they were levied on furs, jewelry, and leather as well as on liquor, tobacco, and amusements. Excise taxes, which account for less than 10% of all federal receipts, are far less important than the income tax. Nearly all the states and many municipalities levy excise taxes. The Internal Revenue Service collects federal excise taxes in the United States


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## 16412 (Apr 1, 2005)

ksinc, you don't think the tax set up is a hindrance.

There are different reasons to borrow and it seems kinda odd that they would all be treated the same. Buying a building is different than buying machinery, and buying next seasons raw goods to turn into a product. The building goes up in value. The machinery wears out, so depreciates in value. Borrowing to buy next seasons raw goods seems kinda strange. These business practices are shaped around the tax system like putting a box around an apple so it grows into a square shape, which is rather unnatural, don't you think? Or I'm I still missing something.


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## agnash (Jul 24, 2006)

*Incentives*

The tax code does not have to be a cause of recession, or an impediment to recovery, but it can be. Differences in the tax codes between different jurisdictions give companies incentives to move operations, investments, and profits into areas with lower taxes. The US does not have a very competitive position as far as the taxation of multinational companies is concerned. The Bush administration attempted to address this by putting the squeeze on countries seen as tax havens. The Obama administration has announced a squeeze on how overseas profits are taxed for U.S. companies.

If you were a big, multinational company, and the governement of your registration decided to raise the cost of conducting business, what would you do? What if you could change the jurisdiction of your registration for less than the cost of the new taxes?


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## ksinc (May 30, 2005)

WA said:


> ksinc, you don't think the tax set up is a hindrance.
> 
> There are different reasons to borrow and it seems kinda odd that they would all be treated the same. Buying a building is different than buying machinery, and buying next seasons raw goods to turn into a product. The building goes up in value. The machinery wears out, so depreciates in value. Borrowing to buy next seasons raw goods seems kinda strange. These business practices are shaped around the tax system like putting a box around an apple so it grows into a square shape, which is rather unnatural, don't you think? Or I'm I still missing something.


A smart guy once said ...



> "IMHO the macro problems of recession are the size of the budget and tax revenues as a percentage of GDP for the reasons you suggest. I don't think the tax system itself has much to do with recession in the macro sense, but it certainly has some micro effects.
> 
> A lot of these things are so-called "straws." If you pass regulations like SarbOx, raise minimum wage and union participation, have terrorists attacks/fear, and throw in a bad tax system for good measure then you can have a recession, but to say any one alone could cause a recession is really difficult."


It sure seems like the author is using the word "straws" (as in the straw that broke the camel's back) to say it can be a hindrance, but cannot by itself cause a recession.

I would say (and I did) that unions, miminum wage, and taxes are hindrances; as are SarbOx and other regulations. There are many hindrances to running a business succesfully.

I would note that tax policy prior to the current recession has been criticized as too lax by many (W lowered taxes for everybody.) IF taxes cause recession it would seem counter-intuitive to think the recent recession was caused by the tax structure which has been less of a hindrance than taxes historically, no?


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## ksinc (May 30, 2005)

agnash said:


> The tax code does not have to be a cause of recession, or an impediment to recovery, but it can be. Differences in the tax codes between different jurisdictions give companies incentives to move operations, investments, and profits into areas with lower taxes. The US does not have a very competitive position as far as the taxation of multinational companies is concerned. The Bush administration attempted to address this by putting the squeeze on countries seen as tax havens. The Obama administration has announced a squeeze on how overseas profits are taxed for U.S. companies.
> 
> If you were a big, multinational company, and the governement of your registration decided to raise the cost of conducting business, what would you do? What if you could change the jurisdiction of your registration for less than the cost of the new taxes?


Good post. That's what I tried to address by Macro/Micro and GDP v GNP, but I think the point was lost. Well said.


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## Howard (Dec 7, 2004)

ksinc said:


> You should buy a computer!
> 
> https://www.infoplease.com/ce6/bus/A0818010.html


I already own a computer.


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## 16412 (Apr 1, 2005)

So, then it was the supply side that was short for the borrowers. What does that mean? The business system was set up in the fifties and sixties when loans were no problem. Perhaps the business system needs a few adjustments to meet todays demands?

ksinc, You can yell at me but you shouldn't degrade people you have never meet before such as that middle school teacher. You see his predictions weren't predictions at all. He taught a few systems to predict the near future of events of the times. The class was in 69 or 70 and the systems he gave didn't happen until about 88 with people who were not even in the picture in 69 or 70. I also said this guy taught at the college level before he went to teach at high school and then to avoid his own children to be at the same school he was teaching at he ended up at the middle school for a few short years. He taught systems about economics he thought were good and ones he didn't think were good and ones time hadn't proved either way. He made it very clear he didn't want to teach college age or middle school age nor elementary age. One of the kids I went to school with his dad taught college economics. In his classes of every class he demonstrated how wise buying of stocks or commodities can double your money. There are a number of good books from the 50s and 60s on economics about buying and selling stock. Some of these books will show some systems and variations and then say, "Now make your own".


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## ksinc (May 30, 2005)

WA said:


> So, then it was the supply side that was short for the borrowers. What does that mean? The business system was set up in the fifties and sixties when loans were no problem. Perhaps the business system needs a few adjustments to meet todays demands?
> 
> ksinc, You can yell at me but you shouldn't degrade people you have never meet before such as that middle school teacher. You see his predictions weren't predictions at all. He taught a few systems to predict the near future of events of the times. The class was in 69 or 70 and the systems he gave didn't happen until about 88 with people who were not even in the picture in 69 or 70. I also said this guy taught at the college level before he went to teach at high school and then to avoid his own children to be at the same school he was teaching at he ended up at the middle school for a few short years. He taught systems about economics he thought were good and ones he didn't think were good and ones time hadn't proved either way. He made it very clear he didn't want to teach college age or middle school age nor elementary age. One of the kids I went to school with his dad taught college economics. In his classes of every class he demonstrated how wise buying of stocks or commodities can double your money. There are a number of good books from the 50s and 60s on economics about buying and selling stock. Some of these books will show some systems and variations and then say, "Now make your own".


Please don't post while drinking ...


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## norton (Dec 18, 2008)

WA said:


> So, then it was the supply side that was short for the borrowers. What does that mean? The business system was set up in the fifties and sixties when loans were no problem. Perhaps the business system needs a few adjustments to meet todays demands?
> 
> ksinc, You can yell at me but you shouldn't degrade people you have never meet before such as that middle school teacher. You see his predictions weren't predictions at all. He taught a few systems to predict the near future of events of the times. The class was in 69 or 70 and the systems he gave didn't happen until about 88 with people who were not even in the picture in 69 or 70. I also said this guy taught at the college level before he went to teach at high school and then to avoid his own children to be at the same school he was teaching at he ended up at the middle school for a few short years. He taught systems about economics he thought were good and ones he didn't think were good and ones time hadn't proved either way. He made it very clear he didn't want to teach college age or middle school age nor elementary age. One of the kids I went to school with his dad taught college economics. In his classes of every class he demonstrated how wise buying of stocks or commodities can double your money. There are a number of good books from the 50s and 60s on economics about buying and selling stock. Some of these books will show some systems and variations and then say, "Now make your own".


Its nice that you had a teacher in middle scholl who you admire, but....

Words fail me.


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## ksinc (May 30, 2005)

Because it seems apropos:



> In the twilight's last gleaming
> This is open season
> But you won't get too far
> We know you've got to blame someone
> ...


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