Obama's Stimulus Theory: Will it Work?

[_Nimrod]

Given that a corporation is a grouping of people that have voluntarily joined together for their own and mutual financial interests, I do not see the inherent evil.

If my purpose in going to work today is to make money so that I can pay my mortgage--not going to work today for the betterment of my fellow man--am I evil for going to work for this purpose?

If I join together with someone else who also wants to earn money to pay her mortgage, is our association inherently evil because we do not have as a goal the betterment of our fellow man?

I don't equate the absence of altruism with evil.

[_cinepro]

As an experiment, it may be instructive to compare the Great Depression of the 1930's with the Great Depression of 1920.

Austrian School economists and historians argue that the 1921 recession was a necessary market correction, required to engineer the massive realignments required of private business and industry following the end of the War. Historian Thomas Woods argues that President Harding's laissez-faire economic policies during the 1920/21 recession, combined with a coordinated aggressive policy of rapid government downsizing, had a direct influence (mostly through intentional non-influence) on the rapid and widespread private-sector recovery.[11] Woods argued that, as there existed massive distortions in private markets due to government economic influence related to World War I, an equally massive "correction" to the distortions needed to occur as quickly as possible to realign investment and consumption with the new peace-time economic environment.

If there is another explanation for the quick recovery, I haven't seen it.

Also, it is my understanding that some long-held beliefs about the Great Depression of the 1930's aren't actually true.

For example, the common perception is that Hoover didn't do anything, which made the Depression worse, and then FDR rode into town and saved the day with his spending plans and regulation. But if you look at what Hoover did, it almost looks like a page out of the Bush/Obama playbook:

Many people believe that President Hoover did little or nothing in response to the Great Depression. In fact, beginning immediately after the stock market crash in October, 1929, Hoover implemented many ideas to lessen the effect of the Depression and to hasten the recovery. He directed all Federal Departments to speed up public works and other projects, in order to create more jobs. He directed the Federal Farm Board to support commodities prices and asked Congress to decrease non-essential government spending and use the money to start new public works. President Hoover called many conferences with industry and finance leaders to encourage voluntary cooperation among businesses to relieve the Depression. Hoover also created the President's Organization on Unemployment Relief to stimulate and coordinate employment and relief efforts.

After the collapse of the European economy in April of 1931 caused the Depression to become even worse, President Hoover called for a temporary suspension of international debt payments, which saved the international banking system from complete collapse. With foreign trade at a standstill, prices for U.S. manufactured goods and farm products fell, and American industries began laying off even more workers. President Hoover asked Congress to appropriate more money for farm loans and to create the Reconstruction Finance Corporation, which would be used to help financially endangered building and loan associations, agricultural cooperatives, banks and railways. He proposed federally funded Home Loan Discount Banks to help protect people from losing their homes. He asked Congress to loan $300,000,000 to the states to aid their relief programs, and to transfer agricultural surpluses from the Farm Board to the Red Cross for distribution to relief agencies.

By July, 1932 the Depression had begun to show signs of improvement. But many people in the United States were unhappy with the rate of recovery, and blamed Hoover for all the problems and suffering that had occurred. With the Presidential election approaching, the Democratic candidate, Franklin D. Roosevelt, promised the people a "New Deal." In November, Roosevelt was elected President.

It's also a myth that World War II ended the Depression. There's no way that a country sending hundreds of thousands of it's able-bodied men out of the workforce while at the same time severely rationing basic products so factories can churn out war material to be shipped overseas and destroyed would help an economy.

If such a thing could help an economy, then by all means, let's do it again, but without all the killing. Pay almost every able-bodied male to go and work on some meaningless project (say, building replica of the great pyramids in the middle of Nevada). Then start rationing fuel, rubber and metal, start building tons of planes and tanks and battleships. Then go and dump all that stuff in the middle of the ocean. Voila! Instant prosperity!

[_Kevin Graham]

If its OK with you guys, I'll start another thread later tonight to respond to the commentary about corporations. Don't wanna derail the subject here, which is the efficacy of Obama's stimulus strategy.

[_Jason Bourne]

Jason, Obama is offering tax breaks for small businesses. You knew that right?

I am well aware of the tax breaks that small businesses receive currently. They are few. I have seen no new ones from Obama. They are simply an extension of what Bush had in place. Small businesses can expense rather than depreciate up to $250k a year of equipment purchases. This phases out at $800,000 of equipment purchases. What is callesd the Section 179 expense also cannot be used if it creates a loss.

All businesses currently get a 50% bonus deduction on new equipment purchases no matter what the size of the company.

Both these ended last year but may be extended to 2010. Both of these originated under Bush, not Obama.

Both these favor capital intensive businesses.

There are also some tax credits available but most of these are not allowed for Alternative Minimum Tax and many small business tax payers, because of the narrow rate spread between regular tax and alternative minimum tax, fall into this category.

There are some potential credits in the current jobs bill for small businesses that hire new employees.

That is all I can think of off the top of my head. So what other small business tax incentives has Obama proposed? I can't think of any.


Do you understand how taxes work for most small businesses that are pass through entities?

Also, Bush dropped the taxes for corporations and two terms and eight years later we had a net gain of zero jobs.

Uh no, he did not. Congress did pass what is called the Manufactures deduction that lowers the tax rate for all manufacturers. by 3% in the first few years, 6% in the next to and 9% which I think starts for 2010. The definition of manufactures is fairly broad and this deduction is available for ALL business taxpayers.

But for this Corporate tax rates were topped out at 35% when Bush took office and were at 35% when Bush left office. Interestingly Obama has proposed dropping the top corporate tax rate to 26% and ending the Manufactures deduction. But for manufactures the effective rate is already 26% for 2010. However, the manufacturers deduction is a complex computation especially for a business that has some revenue that qualifies and some that does not.

How do you explain this? I mean you knew unemployment was skyrocketing well before Obama took office, right?

Unemployment is not totally solved by cutting tax rates, nor is it totally solved by direct government stimulus.

Government taxing and spending can take money out of the private sector which makes it harder for businesses to have access to the capital they need to grow and create jobs.

Cutting rates for all taxpayers puts immediate cash into their pockets for whatever they want-savings, business expansion, consuming, paying off debt and so on. This would seem to be a way that would provide immediate stimulus to the economy.

[_zeezrom]

I'm working on two projects that are stimulus funded. There are 2 or 3 other very large projects that my company is working on that should last through the year. From my perspective, the stimulus has been pretty nice. But we are not recipients of the huge dollars like the banks were so I'm not sure how it's working on a national scale.

[_Kevin Graham]

Hi Jason, thanks for your comments...

== I am well aware of the tax breaks that small businesses receive currently. They are few. I have seen no new ones from Obama. They are simply an extension of what Bush had in place.

So what he proposed just last month is merely an extension of what Bush did? Here is what I am referring to: http://www.savingtoinvest.com/2009/03/t ... small.html -

To address high unemployment and tight credit markets, President Obama has put in place more stimulus funded tax breaks for small business in his latest budget. The President is pushing Congress to use $30 billion that had been set aside from the TARP program to bail out Wall Street to start a new program that provides loans and tax credits to small businesses, which the White House calls the engine for job growth. This would include the following new 2010 provisions:

- A $5,000 hiring tax credit for each net new employee they hire this year. The $5,000 per-worker tax credit would be available to businesses of any size, and would be retroactive to the start of the year. Startups launched in 2010 would be eligible for half of the tax credit. To prevent fraud and misuse of the tax credits, the IRS (who will administer the credits) would require companies would have to show net increases in their staffing and payroll to qualify. Businesses that cut 20 workers and hire five wouldn't be eligible, nor would those that lay off a $50,000 worker and hire two $20,000 staffers.

- A reimbursement of the Social Security taxes businesses pay on increases in their payrolls this year. Firms could earn the credit by raising wages or increasing the hours of their current workers, as well as by hiring new employees. The tax credit would be adjusted for inflation, and would not apply to wage increases above the current taxable maximum of $106,800.

- While any business would be eligible for the tax breaks, the refund would be capped at a total of $500,000 per firm, a move the White House hopes will steer the biggest benefits to the smallest companies. Firms eager for cash could claim the credits on a quarterly basis, sparing them the wait before they file their annual taxes.

- Eliminate Capital Gains Tax on Investments in Small Businesses. To create an incentive for long-term investments in the small business sector, the Budget eliminates the capital gains taxes on long-term investments in many small businesses. The Recovery Act (2009 stimulus) temporarily increased the exclusion to 75 percent. The Budget proposes to raise this exclusion to 100 percent, meaning that no income tax whatsoever would be paid on these investments in our Nation’s small businesses.

- Provide funds to support $17.5 billion in SBA 7(a) loan guarantees that will help small businesses operate and expand. The Budget will also support $7.5 billion in guaranteed lending for commercial real estate development and heavy machinery purchases; $3 billion in Small Business Investment Company debentures to support new businesses and new jobs through early-stage and mezzanine small business financing; and $25 million in direct microloans, for intermediaries to provide small loans to emerging entrepreneurs and other promising, but “un-bankable,” borrowers. In addition, the Budget proposes to significantly increase the maximum loan sizes on SBA loans, including an increase from $2 million to $5 million for 7(a) business loans, to further improve small business access to credit.

The administration expects 1 million businesses to benefit from these new provisions.

The official White House statement: http://www.whitehouse.gov/the-press-off ... es-tax-cut

So would you say Obama is taking the right steps here? From what I can tell, this is going beyond merely extending Bush's tax breaks.

== But for this Corporate tax rates were topped out at 35% when Bush took office and were at 35% when Bush left office. Interestingly Obama has proposed dropping the top corporate tax rate to 26% and ending the Manufactures deduction.

I'm just going by this website that details the tax breaks/hikes over the past 18 years: http://www.moneychimp.com/features/tax_brackets.htm
Apparently, when Bush took office, the top three tax brackets were 31%, 36% and 39.6%. But according to this chart, in 2003 he lowered that to 28%, 33% and 35%, effectively reducing the first two by 3% but the highest bracket was reduced by 4.6%. I'm just saying that he did in fact lower the tax rate on corporations, and after seven years the results have not been promising because he grossed zero new jobs by the end of his second term.

Also, I understand that small businesses employ most of the workers in the private sector, and I respect all small business owners. My beef is with corporations, which actually force smaller businesses to close shop, and I'll elaborate further on that in another thread.

== Unemployment is not totally solved by cutting tax rates, nor is it totally solved by direct government stimulus.

Yeah, I agree with you there. But so many on the Right keep speaking of the tax break as if it is the only thing that we need to do. It would seem to me that tax breaks only provide temporary financial relief for business owners, but they're not going to hire people just because they have some extra cash. They're going to hire people only if increased business calls for it. Right now consumer confidence is at a record low. Business sucks. People aren't buying things beyond basic necessities it seems.

[_Jason Bourne]

So what he proposed just last month is merely an extension of what Bush did? Here is what I am referring to: http://www.savingtoinvest.com/2009/03/t ... small.html -

I was referring to what he has been put in place the past year. Some of what Obama is proposing goes beyond what Bush had in place. See comments below

- A $5,000 hiring tax credit for each net new employee they hire this year. The $5,000 per-worker tax credit would be available to businesses of any size, and would be retroactive to the start of the year. Startups launched in 2010 would be eligible for half of the tax credit. To prevent fraud and misuse of the tax credits, the IRS (who will administer the credits) would require companies would have to show net increases in their staffing and payroll to qualify. Businesses that cut 20 workers and hire five wouldn't be eligible, nor would those that lay off a $50,000 worker and hire two $20,000 staffers.

This is a fine tax break if businesses have enough activity to hire. However, if business is down, or they do not have capital to invest expand and grow then they will not hire. No business owner I know will hire someone and say pay them $30k per year just to get a $5000 tax credit.

- A reimbursement of the Social Security taxes businesses pay on increases in their payrolls this year. Firms could earn the credit by raising wages or increasing the hours of their current workers, as well as by hiring new employees. The tax credit would be adjusted for inflation, and would not apply to wage increases above the current taxable maximum of $106,800.



- While any business would be eligible for the tax breaks, the refund would be capped at a total of $500,000 per firm, a move the White House hopes will steer the biggest benefits to the smallest companies. Firms eager for cash could claim the credits on a quarterly basis, sparing them the wait before they file their annual taxes.

Same comments that I made about the wage credit apply.

- Eliminate Capital Gains Tax on Investments in Small Businesses. To create an incentive for long-term investments in the small business sector, the Budget eliminates the capital gains taxes on long-term investments in many small businesses. The Recovery Act (2009 stimulus) temporarily increased the exclusion to 75 percent. The Budget proposes to raise this exclusion to 100 percent, meaning that no income tax whatsoever would be paid on these investments in our Nation’s small businesses.

This is an extension/expansion of a similar tax break Bush had in place. I think it is good and will stimulate investors to put money into small businesses. I wish it applied to not just C Corporations but S Corporations and Partnerships/LLCs as well.

Apparently, when Bush took office, the top three tax brackets were 31%, 36% and 39.6%. But according to this chart, in 2003 he lowered that to 28%, 33% and 35%, effectively reducing the first two by 3% but the highest bracket was reduced by 4.6%. I'm just saying that he did in fact lower the tax rate on corporations, and after seven years the results have not been promising because he grossed zero new jobs by the end of his second term.

These rates refer to what individuals pay/ Yes Bush did lower those and be default many small businesses ended up with lower rates. However, because they did not fix the problems with the AMT the lowering of the top personal rates while leaving AMT rates the same ended up dragging more small business tax payers into the AMT so they lost some of the benefits.

Also, I understand that small businesses employ most of the workers in the private sector, and I respect all small business owners. My beef is with corporations, which actually force smaller businesses to close shop, and I'll elaborate further on that in another thread.

I agree with you. I think many large publicly traded companies are ruthless.

== Unemployment is not totally solved by cutting tax rates, nor is it totally solved by direct government stimulus.

Yeah, I agree with you there. But so many on the Right keep speaking of the tax break as if it is the only thing that we need to do. It would seem to me that tax breaks only provide temporary financial relief for business owners, but they're not going to hire people just because they have some extra cash. They're going to hire people only if increased business calls for it. Right now consumer confidence is at a record low. Business sucks. People aren't buying things beyond basic necessities it seems.

While I am more of a free market type I do think government can play a role in assisting with certain targeted stimulus and tax cuts.