Tax Cuts: Stock Market vs the Economy II

A few more thoughts regarding the impact of the Tax Cuts on the economy:

My analysis suggests the Bush Tax package has emphasized (and perhaps over-emphasized) the stock market at the expense of the broader economy. It’s a question of where to put most of your weight.

To some degree, we’ve been treating the symptoms while ignoring the underlying disease.

While the accelerated depreciation of capital goods will create jobs (eventually), most of the rest the tax package focuses on the stock market, and not the economy.

Every tax cut has a real cost — in dollars and/or deficits — and an expected net benefit or economic gain. When I do the cost/benefit analysis on the tax package, I see a lot of cuts which appear dogmatic in natue, and much less usage of targeted tax policy as a way to encouraging specific desirable behavior. By dogmatic, I mean tax cuts for tax cuts sake. If your only tool is a hammer, pretty soon, everything starts looking like a nail.

As President Bush is fond of saying, “If you want to more of something, tax it less.” So then why the capital gains tax rate being cut from 20% to 15%? Do we want more speculation than we’ve seen? We just came out of the greatest bubble in Human history, and are still suffering from the ill effects of excess capacity, over investment and speculative mania. If we got all that with the capital gainms tax rate at 20%, than what do we gain by lowering it — other than a tax cut for its own sake, and encouraging more speculative excesses?

What is the message that investors learn when they see the tax rate on equity dividends — 15% — is the same as the rate on capital gains. Is there any surprise that dividend stocks have failed to keep up with profitless nasdaq biotech, internets and semiconductors? In the modern, who can even wait for immediate gratification society, are we surprised that investors chose go-go growth stocks over dividend paying equities?

Do we want to encourage people to buy the cleanest, no hanky-panky stocks — or do we want to suggest that there is no difference between those firms and the riskier growth companies? Should we treat these the same as a VC or growth investment?

Given my druthers, these are the tax changes I’d have preferred:

· the amount of stock-market losses investors can carry forward each year as write off. Its presently $3,000, and has been for some time. It should be $10,000, and should scale up to $20,000 over thenext 10 years;

· the same numbers apply to the cap on IRA contributions. I’d like to see it boosted from $3,000 to $10,000, and then gradually scale to $20,000.

Gearing tax cuts more towards the “Spending Classes” as opposed to the top tier – the saving and investing classes – would pour more much money back into the economy; That would create more jobs, and be more sustainable over the long run.

I’ve mentioned these issues previously: Stock Market vs the Economy. I find they continue to generate both interest and debate.