Welcome Everyone to Straight Talk and we hope you had a pleasant Thanksgiving holiday. We appreciate your enjoyment of our weekly commentary. In a recent radio program on which I was a guest, we started off with the question of the purpose of taxes. The simple answer of course is to raise revenue or at times put money back into the pockets of the taxpayers. However, there is a deeper more important consideration, that is to control behavior.
In 1980, following the Carter administration, interest rates were as high as 18%, and not a surprise, the economy was in recession. Ronald Regan lowered tax rates to 28%, allowed business to write off their equipment at accelerated rates and people could deduct things like credit card interest and investments they made at a ratio of 4 sometimes even 6 to 1. Ahhhhhhhh the good old days.
What happened is that this tax policy resulted in people actually investing to take advantage of the tax benefits and the economy by 1984 had come out of recession and by 1990, except for a short real estate downtown, the economy started to boom with the dot com explosion. So President Clinton, and I think rightly so, raised tax rates to generate more revenue for the government. The key, however, is the economy was booming so people weren’t harmed. Then of course, the dot com bust and President Bush lowered rates again.
So here we are facing a fiscal cliff in the economy with automatic tax increases and budget cuts at a precarious time when business and the economy can’t stand another shock. In the Wall Street Journal of November 14, 1992 the headlines read: business leaders spooked by fiscal cliff and companies warn about cutbacks. This isn’t some joke. United technologies and Oshkosh corp are cutting jobs. Aetna, inc. has frozen hiring. Mark Bertolini of Aetna is quoted as saying “the american people are going to suffer”. Lockheed Martin, the world’s biggest defense contractor, has said the automatic cuts could result in 10,000 dismissals. Does anyone doubt when unemployment is at 8% and real unemployment is more like 14% with 23 million americans out of work, what this will do?
When people become dependent on government to provide benefits and the benefits are taken away because there aren’t enough people working to fund the cost of government giving out those benefits, we end up with exactly what is happening in europe.
In a Wall Street Journal article dated Thursday November 15, 2012, the headline reads: across crises-weary Europe, striking workers take to the streets. The reason. To protest economic austerity programs. For the uninitiated. Austerity means living within your means. If you spend too much on toys, fun and entertainment and don’t manage and monitor what you own and build you will be broke.
Spoiled children tend to act the same way do they not? Take away their toys and a tantrum usually follows. As a father of twins this job of parenting was doubly important. The difference is that tantrums from adults tend to take a bit different tone, like the l.a. riots, throwing molotov cocktails, burning cars, and breaking store windows.
Tax policy is behavioral conditioning. As the politics play out in Washington over the fiscal cliff and tax policy let’s be careful about what behavior we are seeking to encourage because the wrong behavior could cause some pretty severe damage to our economy and our country.
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