Debt and Deficits are a Potential Disaster

2012 February 24
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      For many years, Democrats wanted additional programs and were willing to accept deficits as a necessary means.  Republicans opposed tax increases and were willing to accept deficits as a necessary means.  With relatively small debt in relation to GDP, economists did not express concern about the ongoing deficits.  Whether achieved by reduced taxes or increased spending, federal deficits result in economic growth, until the money can no longer be borrowed at low interest rates.  Greece is the example. 

      Sooner or later, the irresponsible fiscal policy takes its toll as the mounting debt becomes a burden.  Interest rates rise which make the matter worse.  Also sooner or later, a recession requires larger deficits to help the economy recover. 

      The continuation of this post discusses some of the issues and the observation that a "tipping point" occurs beyond which recovery requires drastic austerity, as is occurring today in Greece.  It is too late to conclude that the "tipping point" has occurred, because a gradual recovery to maintain and improve confidence is no longer available. 

Don Nordeen
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• Key Words:  economy, fiscal policy, debt, deficits

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Double Taxation on Dividends

2012 February 22
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    Currently, dividends is double taxed.  The first tax is on the company that pays on its business income at business or corporation rates.  The second is paid by the owner of stock on the dividend income received.

    As part of the Bush tax cuts, the tax rate on dividend income was reduced to 15%.  The beneficiaries of the reduced personal tax rate to 15% are the owners of stock — primarily the wealthy. 

    The continuation of this post discusses the double taxation issue and some of the effects of the reduction in tax rate on dividends to 15%.  Changes in the tax code have consequences — some intended, but others unintended. 

Don Nordeen
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• Key Words:  dividends, tax rates, double taxation, public policy, tax code

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Michigan Reform — Civil Service Commission

2017 February 17
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    One of the factors in making Michigan more competitive is to make the government more effective.  Under the Michigan Constitution, the Michigan Civil Service Commission is given broad and poorly-defined powers.  The fourth paragraph in Article XI § 5 of the Constitution states:

    "The commission shall classify all positions in the classified service according to their respective duties and responsibilities, fix rates of compensation for all classes of positions, approve or disapprove disbursements for all personal services, determine by competitive examination and performance exclusively on the basis of merit, efficiency and fitness the qualifications of all candidates for positions in the classified service, make rules and regulations covering all personnel transactions, and regulate all conditions of employment in the classified service."

Note that the Legislature is not given any authority in setting the standards to be applied. 

    The continuation of this post provides two emails I have sent to Governor Snyder on the importance of considering an amendment to this section of the Constitution.  It also provides six general recommendations for the content of legislation to provide the standards for the Commission. 

Don Nordeen
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Please be advised that the writer is not an attorney, and this is not legal advice. The information is based on research on information available in the public domain.

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• Key Words:  Michigan, Civil Service Commission, reform

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Capital Gains, Economy and Income Inequality

2012 February 14
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      The effects of capital gains tax rates on the growth and the economy have been ongoing subjects for many economists, with many papers.  More recently with the Bush tax cuts and their possible expiration, more emphasis has been given to the subject.  Very recently, the effects of the preferential tax rates on capital gains, carried interest and other preferential income has been given much attention.

      The Congressional Budget Office summarized its analysis in a 2009 Sep 25 letter to a member of Congress:

      "When assessing the impact of the increased tax rates on economic growth, it is important to keep in mind that taxable capital gains account for a small portion of all capital income.  Much capital income is paid as dividends, interest, rent, and proprietors’ profits.  In addition, most capital gains are not taxable because they are held in tax-exempt accounts or are held until death.  As a result, CBO does not anticipate that the pending increase in the capital gains tax rate alone will have a large enough impact on the rate of return to capital overall to change significantly the magnitude of saving and capital investment.  The higher capital gains taxes could have an additional effect by discouraging innovation and risk-taking, but there is insufficient evidence on which to base a quantitative estimate."

This paragraph identifies the many effects of capital gains tax rates on growth and the economy, and may account for the differences of opinion regarding preferential tax treatment.  A recent analysis shows that changes in investment track the business cycle, not decreases in the capital gains tax rates. 

      On the other hand, the effects of lower tax rates for capital gains, carried interest and other preferential income on income equality exist in the data.  Currently, the income inequality for the top 1% is the largest since 1929.  The income inequality was stable from 1950 to 1980 with the top 1% earning 10% of the total income.  Since 1980, the number has increased to 20%. 

      If the benefits to the economy are uncertain, but the benefits to the wealthy are significant, can the preferential tax rates be justified? 

      The continuation of this post provide some information concerning the subject with the objective of contributing to the dialogue.  For a quick look at some of the relevant charts, see Mind-Blowing Charts From the Senate's Income Inequality Hearing for a collection of charts on inequality — some of which are shown below. 

Don Nordeen
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• Key Words:   capital gains, dividends, carried interest, income inequality, economy, tax reform

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