Like it or not, the American Economy is correctly resizing itself for what the private sector can support in the current business environment. Improve that environment and the Economy can turn around. by EJ Moosa
(libertarian)
Wednesday, April 1, 2009
The worst thing we can do is to assume that because we have the same symptoms as the rest of the world's economic powers, we have the same illness.
Not all economies are created equally. Not all economies have the same economic environment for private sector business. So when they all seem to exhibit similar qualities at relatively the same time, it is easy to associate your ills with the ills of the rest of the world. It is also the easy route to assume that if we all must take the same medicine to get better. It seems rational, after all. Yet rational is just what we do not need.
The ADP employment numbers released today indicate that the American economy is hemorrhaging jobs at an ever increasing rate. Nearly of a million private sector jobs gone in one month. The economy is right-sizing itself based on the profitability of the private sector. You better expect more declines. Our economy is adjusting itself to fit the profitability of the private sector, whether we like it or not. If we do not take actions to improve profitability, things will only deteriorate.
Corporate profits peaked in the third quarter of 2006. Remember those good ol' days? Since then the loss of profits has resulted in increasing job losses. Without growing profits there is not a reason to increase the number of people working for your organization. Profits declining, and companies cut back. If they are not adding to the bottom line, they are taking away from the bottom line. It's a simple concept. What CEO is going to expand a business as they are making less money?
This summer, minimum wage will increase yet again, removing even more profits from the bottom line.
None of the efforts in Washington are going to improve profitability for American companies. In fact, they are going to have the reverse effect. Higher energy costs, higher compliance costs, greater costs of benefits will all erode the bottom line. I have not even gotten to higher corporate taxes, which come straight out of the bottom line for corporate profits.
Yet, we do not hear a thing out of Washington about improving the environment for businesses. We hear about the after effects, the lost jobs, the foreclosures, the despair. All of this is a result of declining profitability for American companies. If we do not fix the cause, we will not eliminate these side effects.
But we continue to spend money on reducing the impact of the side effects on the American people. Increased unemployment benefits, rewriting mortgages for those in foreclosure, making sure there is more money to loan for people who cannot afford to borrow it, and keeping companies in business that should have folded a long time ago. We are addressing the symptoms, but not the disease.
So what are we supposed to do? There is not much we ourselves can do. We do not generate the policies that are driving us deeper into the hole. But we can be honest. We can question the policies and say "how will this help"? We can watch the numbers as they come out and begin to realize that the truth is the United States is nothing without the private sector. And our government is doing nothing but creating additional obstacles to the private sector returning to profitability.
With each new government action announced, ask yourself if this will allow companies to generate and keep more of their income? If the answer is no, then the action is part of the problem and not part of the solution.
The bottom line is that it is really not any more complicated than that. The solution could not be more clear.
Have the Federal Government get out of the way.
An excellent start would be eliminating Federal Taxes on Corporations. This would send each and every one of those dollars to the bottom line for private sector companies immediately. Then we would begin to see a turnaround over the next four quarters.
Then again, the continued actions of the Federal Government are reducing Federal Taxes by destroying the private sector. When we get to zero in Federal Corporate Taxes by this method, we will not recognize this nation. Our economy will be the right size for the business environment we have created, whether or not we like the results.
Track the numbers for yourself. Review the history of corporate earnings. Watch future corporate earnings in the future. The correlation will become clear enough that a politician can grasp it.
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"This summer, minimum wage will increase yet again, removing even more profits from the bottom line."
Marx would agree with your above statement. His theory stated that all "surplus" value, that which profit is derived from, was produced by the laborer and confiscated by the capitalist. So if raising the minimum wage directly reduces the bottom line, you seemed to have proved his theory!
On the other hand, if the capitalist adds value above and beyond the value of the necessary labor and resource in order to obtain his profit, then the wage cannot be the determining factor of value, it would merely raise the cost if the "mimimum" wage is above the natural wage. The "value" of the product would remain labor plus resource plus added value. The profit would originate from the "added value" not the labor cost.
This of course, is another issue that is of importance. Is the "natural" wage of these corporations you mention so close to the "minimum" wage that their bottom line would be so affected? If this is true, perhaps we might be more concerned with putting so much faith in a corporate system that pays minimum wage?
"Corporate profits peaked in the third quarter of 2006."
This fact you mention is true because mega conglomerate corporations are dependent on the Fed to artificially inflate the money supply which inflates their asset values and balance sheets. This is the "bottom line" they are so dependent on and when it fails as it eventually always does, they get in line for their Fed handouts, each one larger than the last.Â
The government "getting our of the way" goes far beyond corporate tax. The highest "real" rate of tax is wage tax, wouldn't eliminating wage income taxes "discount" labor rates for industry? According to your logic on the minimum wage, elimination of any wage income tax should be directly transferred to the corporate bottom line, just as elimination of the minimum wage would. Once the @$25 of tax is eliminated on $100 of labor, corporations need only pay $75 and the employee is just as happy as before! The estimated "real" corporate tax is in the vicinity of 8%, that is of realized profit. The wage labor saving would be at least 25% of gross labor payout, even at "minimum wage" this should far exceed the savings on corporate tax.
Thanks for the feedback. On the Minimum Wage, even if corporations are not paying near that, they are likely to be affected as many have have contracts tied to that number. Consequently, wages will rise even for those not at the minimum. The most effective wage should be the Natural Minimum wage. It rises or falls based on the value of that labor relative to the enterprise in question.
Regarding the money supply-has the Fed not been increasing the money supply over the last twelve months? This has not had any impact in corporate earnings. Are you implying that corporate earnings would have been worse had the Fed not been supplying money as it has?
Regardless of how much money the Fed prints, the profit motive does not exist for companies to expand their companies. There is no amount the Fed can print that is going to turn GM profitable. No one wants their product, and it will only sell if Americans are coerced to purchase with subsidies.
The other aspect regarding corporate taxes-corporations do not pay taxes(as we should all know by now)-they collect them from consumers. This keeps the consumers ignorant of their true tax burden, and the pitchforks out of the hands of those same consumers, which is why the politicians love the sleight of hand so well.
What would happen if the public individually knew their true tax burden relative to their income? There would be many new politicians elected to office in 2010.
The money supply causes the bulk of the cycle. it artificially pushes up asset prices till they are no longer sustainable[2006], at this point[which is now] vast monetary increases can have little effect.
I totally agree with you on the corporate tax. It should be abolished. But to be fair, all corporate profit should be passed directly thru to the shareholders who should pay income tax at their existing rate[not capital gains], exactly like everyone else, including the unincorporated small business owner, must do. This is only equitable, as shareholders are one and the same as a small business owner or tax payer who pays taxes on his wage.
Also, any dividend transfer corporation to corporation should also be passed through to the shareholders as income, since that is exactly what it is. If this is ever done, and i would bet against it, rates could be lowered substantially for everyone and the same amount of revenue would result. Obviously another effect would be that your neighbor hardware store Joe would be on a bit "more" level playing field pricing his bolts in against a giant like Home Depot.
Your mention that "consumers" pay the corporate tax should not hold true if there is any presence of a free market. Competition should still pressure prices downward. What you are admitting to is true, there is little competition outside of the corporation. They can pass taxing thru to the consumer, because of the lack of non corporate competition, which wouldn't be subject to corporate tax. As you know, this is a symptom of monopolization.
There is no need for taxes to "advantage" capital or labor or resource, that is nothing but socialism. Any advantage is simply paid by some other group of taxpayers.Â
Taxes need to be across the board. Why should a taxpayer working at a corporation pay $25 or $30 tax on every $100 he earns while the shareholder of the same corporation pays $10? In that case, why not just pay all laborers in shares which are immediately redeemable back to the company and they can pay the same $10?
EJ, don't want to run on in your comment section but, like you say if the public really knew their tax burden, there would probably be public hangings!
Thanks for replying. I agree. Taxes need to be applied across the board(and I would add equally).Â
We have created a class of citizen in the United States that has no vested interest in the common infrastructure other than their right to use it. So the care and investment in the infrastructure is not of their concern. Were we all vested, we would all be interested in prudent investment in the common infrastructure and not be interested in bridges to nowhere.
Regarding the difference betweed dividend tax rates and earned income tax rates, I have to disagree. Shareholders have their entire investment at risk. Employees have only the wages they have not yet been paid at risk. If you expect investors to invest in enterprises, then the tax rate will have to be favorable for me to risk that capital against a complete loss. Â
Finally, the dividend rate and the capital gains rate needs to be the same. Otherwise, corporations suspend the dividend, and the shareholder benefits by an increase in valuation for the company(because of the cash held). As an investor, I am happy to eliminate the dividends and pay lower capital gains rates. Not to mention that I get to decide when I will be subject to those taxes(as in only when I sell the stock).
Just last night I was watching the John Adams series from HBO. There were bodies hanging from the bridges.
There are situations where thieves should be hung. But I would have to wager that before that happened, the public officials would suddenly back away from such incredible levels of taxation.
Look at it one more way, an investor is choosing where to put his money. anyplace besides his mattress is a risk of some kind. if he invests in more labor, then the government immediately gets 25% of his investment, if he invests in capital and lets someone else make the decision, he will probably eventually lose 10% or so to the government.
If, like you say, you shelter the capital risk by taxing it less than labor, you have altered the natural risk and created like you said an "incentive" to invest because of lower tax. this raises the amount of entries into the capital markets which lowers the return. We are a great example right now of top heavy overinvestment and malinvestment in the capital markets and lack of real production.
Right about the less risk of the laborer, but........wages are paid "after" work is completed. It is the laborer who has "loaned" or risked his labor not the owner who has risk his money on the labor, although that certainly has its own risks.
Really tho, taxing income of any kind is the best way to get people not to work and raising costs at the same time! I am a fan of the "single tax" or land fee when funds are needed. If you haven't checked it out you might find it a decent way to raise revenue without interupting the economy.
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