Control of System Concepts (was Re: Wealth Disparity)

[Martin_Lewitt]

[Martin Lewitt Dec 6, 2010 1731 MST]

[From Rick Marken (2010.12.06.0950)]

  So many Martins, so little time.

        Martin Lewitt (Dec 5,

2010 1503 MST)–

        You stated that wealth disparity was lower in 1943-1980,

which meant that you interpreted your graph as showing
that.

      Yes, it showed it quite clearly.

        I stated that given the

greater wealth today, that situation was hardly preferable.

      That makes no sense to me at all. You mean lower wealth

disparity was not preferable because there was less wealth
back in 1943-1980?

        I don't think you truly

doubt that wealth is greater today, or believe that I need
to reproduce an inflation adjusted GDP graph to show it.

      Of course wealth is greater today than it was in 1980, just as

it was greater in 1943 than it was in 1900. This is completely
independent of wealth disparity. Wealth generally increases
over time (as does the technical characteritics of the goods
and services themselves). It’s the rate of increase that tends
to vary and the distribution of that largesse.

For much of human existence wealth did not increase over

generational time scales, so lets not take this for granted.

        Your conclusion made

linear assumptions about wealth.

      The wealth disparity data makes no such assumption.  

        I don't assume that the

disparity between a billionaire and a middle class person
today who both have access to internet, sports packages and
scores of cable or satellite channels, DVRs, a suite of
hypertension, cholesterol and erectile disfunction drugs and
cellular phones, is greater than between a millionaire and
middle class person 4 decades ago, despite 3 orders of
magnitude between billionaire and millionaire in nominal or
inflation adjusted dollars.

      So does this mean that the wealth disparity that existed in

1929 was actually bigger than the wealth disparity now? And
that the lower wealth disparity in 1960 was bigger than it is
now for the same reason? I think you are just trying to make
the data compatible with your references: control in action.

it doesn't mean that the disparities were bigger then, just that

those positions are possibly defensible, given hedonic
considerations. Despite charts of inflation adjusted dollars, the
wealth disparity between a poor American and an average sub-Saharan
African may well be greater than that between the poor American and
the billionaires.

          If you were really making a good faith

effort to understand a nonlinear system, you would at
least try to account for more than just couple variables,
and especially include the variables that the competing
hypotheses contend might be relevant.

      The correlations between variables that I report are

descriptive statistics. The positive correlation between top
marginal tax rate and growth rate is simply an observation,
not a system analysis. If that observation is inconsistent
with your “model” of the nonlinear system that you presume the
economy to be then it behooves you (not me) to show why that
observation is misleading (just as we have shown that the lack
of correlation between input and output in a tracking task is
misleading).

      I agree that the positive correlation between taxes and

growth may be an artifact of system characteristics
(nonlinearities, etc) but I have never been shown what those
system characteristics are and, more important, how they can
account for this observation. If you know why this observation
happens you should demonstrate why it happens (just as I have
demonstrated why the low correlation between input and output
happens in a tracking task).

          I don't make the simplistic assumption that

macro-economic data over a period in which some of the
variables considered relevant didn’t vary and many other
variables such as development of various technologies and
geo-political changes likely had a confounding influence
that a couple conincidental correlations are decisive.

      Again, I'm not making any assumptions. I'm making

observations. I have observed a fairly strong positive
relationship between top marginal tax rate and growth rate
(and a fairly strong negative correlation between top marginal
tax rate and unemployment).

You are intellectually dishonest.  How "strong" are you going to

argue the “negative correlation” to be? You’ve already
acknowledged on February 21s of this year:

"As you say, reducing the number of degrees of freedom for the

statistical test, as Martin suggests based on the fact that the
series is autocorrelated, simply makes all the correlations not
statistically significant, which makes my point: I can find no
evidence for the claim that lowering taxes is associated with an
increase in growth. "

So you acknowledge the lack of statistical significance, the

nonlinearities and presumably if pressed would also have to
acknowledge confounding variables, yet you repeat the same invalid
points every few months.

Even if I hadn't lived through those times, it wouldn't take much

research to see there were other things going on which had impacts
on economic activity, and some policies which didn’t change over
that time span that put unnecessary instability and risk into the
economy.

-- Martin L

···

On 12/6/2010 10:52 AM, Richard Marken wrote:

[BUSINESS_GAVIN_HERMA]

( Gavin
Ritz 2010.12.07.15.04NZT)

[ Martin Lewitt
Dec 6, 2010 1731 MST]

[From Rick Marken (2010.12.06.0950)]
Martin Lewitt (Dec 5, 2010 1503 MST)—

To make
wealth disparity assessments one will require one heck of a lot more information
and data than what you have here.

What you
have has no relationship to wealth disparity. Income or/and net assets. What
are the criteria for wealth disparity?

With who
and what?

You stated that wealth
disparity was lower in 1943-1980, which meant that you interpreted your graph
as showing that.

Yes, it showed it quite clearly.

I stated that given the
greater wealth today, that situation was hardly preferable.

That makes no sense to me at all. You mean lower wealth disparity was not
preferable because there was less wealth back in 1943-1980?

I don’t think you truly
doubt that wealth is greater today, or believe that I need to reproduce an
inflation adjusted GDP graph to show it.

Of course wealth is greater today than it was in 1980, just as it was greater
in 1943 than it was in 1900. This is completely independent of wealth
disparity. Wealth generally increases over time (as does the technical
characteritics of the goods and services themselves). It’s the rate of increase
that tends to vary and the distribution of that largesse.

For much of human existence wealth did not increase over generational time
scales, so lets not take this for granted.

Your conclusion made
linear assumptions about wealth.

The wealth disparity data makes no such assumption.

I don’t assume that the
disparity between a billionaire and a middle class person today who both have
access to internet, sports packages and scores of cable or satellite channels,
DVRs, a suite of hypertension, cholesterol and erectile disfunction drugs and
cellular phones, is greater than between a millionaire and middle class person
4 decades ago, despite 3 orders of magnitude between billionaire and
millionaire in nominal or inflation adjusted dollars.

So does this mean that the wealth disparity that existed in 1929 was actually
bigger than the wealth disparity now? And that the lower wealth disparity in
1960 was bigger than it is now for the same reason? I think you are just trying
to make the data compatible with your references: control in action.

it doesn’t mean that the disparities were bigger then, just that those
positions are possibly defensible, given hedonic considerations. Despite
charts of inflation adjusted dollars, the wealth disparity between a poor
American and an average sub-Saharan African may well be greater than that
between the poor American and the billionaires.

If you were really making
a good faith effort to understand a nonlinear system, you would at least try to
account for more than just couple variables, and especially include the
variables that the competing hypotheses contend might be relevant.

The correlations between variables that I report are descriptive statistics.
The positive correlation between top marginal tax rate and growth rate is
simply an observation, not a system analysis. If that observation is
inconsistent with your “model” of the nonlinear system that you
presume the economy to be then it behooves you (not me) to show why that
observation is misleading (just as we have shown that the lack of correlation
between input and output in a tracking task is misleading).

I agree that the positive correlation between taxes and growth may be
an artifact of system characteristics (nonlinearities, etc) but I have never
been shown what those system characteristics are and, more important, how they
can account for this observation. If you know why this observation happens you
should demonstrate why it happens (just as I have demonstrated why the low
correlation between input and output happens in a tracking task).

I don’t make the
simplistic assumption that macro-economic data over a period in which some of
the variables considered relevant didn’t vary and many other variables such as
development of various technologies and geo-political changes likely had a confounding
influence that a couple conincidental correlations are decisive.

Again, I’m not making any assumptions. I’m making observations. I have observed
a fairly strong positive relationship between top marginal tax rate and growth
rate (and a fairly strong negative correlation between top marginal tax rate
and unemployment).

You are intellectually dishonest. How “strong” are you going to
argue the “negative correlation” to be? You’ve already
acknowledged on February 21s of this year:

"As you say, reducing the number of degrees of freedom for the statistical
test, as Martin suggests based on the fact that the series is autocorrelated,
simply makes all the correlations not statistically significant, which makes
my point: I can find no evidence for the claim that lowering taxes is
associated with an increase in growth. "

So you acknowledge the lack of statistical significance, the nonlinearities and
presumably if pressed would also have to acknowledge confounding variables, yet
you repeat the same invalid points every few months.

Even if I hadn’t lived through those times, it wouldn’t take much research to
see there were other things going on which had impacts on economic activity,
and some policies which didn’t change over that time span that put unnecessary
instability and risk into the economy.

– Martin L

[Martin_Lewitt]

[Martin Lewitt Dec 6, 2010 MST]

(Gavin Ritz 2010.12.07.15.04NZT)

[Martin Lewitt Dec 6, 2010 1731 MST]

        [From

Rick Marken (2010.12.06.0950)]
Martin Lewitt (Dec 5, 2010 1503 MST)—

          To make

wealth disparity assessments one will require one heck of
a lot more information
and data than what you have here.

          What you

have has no relationship to wealth disparity. Income
or/and net assets. What
are the criteria for wealth disparity?

          With who

and what?

That is ambiguously my point.   I might control for my own wealth,

but I don’t control for wealth disparity. I figure the guy that got
the cheerleader pregnant at 16 and had 5 kids by age 25 and enjoys
beer and football on Sunday’s with the boys has a kind of wealth,
every bit as material (perhaps moreso) as dollar figures on a
ledger. I feel a bit jealous of what he had while I was slaving at
the books, but Richard feels there is a wealth disparity and wants
to give him some of my money (assuming I had more). I don’t
begrudge half a billion people joining the productive middle class
in China and India, just because it creates a temporary labor glut
partially responsible for holding down wages here in the US. I
may be a dupe of judeo-christian western values I was raised with,
but I just don’t begrudge them or US billionaires their monetary
wealth, whether lower or higher than my own, and arguably those
working for less have cost me more, wealth than the billionares. I
do begrudge them their babes, it pains me whenever I see another
young one tie the knot with someone else, but Richard doesn’t seem
concerned about babe disparity. it seems only fair that I should
have three or four (perhaps more). Doesn’t he know what the game
of life is really about?

-- Martin L

···

On 12/6/2010 7:25 PM, Gavin Ritz wrote:

[rsmarken]

[From Rick Marken (2010.12.06.2230)]

Martin Lewitt (Dec 6, 2010 1731 MST)–

it doesn't mean that the disparities were bigger then, just that

those positions are possibly defensible, given hedonic
considerations.

They are defensible no matter what. If you want to defend huge wealth disparities go for it. That has nothing to do with whether they exist or not.

Despite charts of inflation adjusted dollars, the

wealth disparity between a poor American and an average sub-Saharan
African may well be greater than that between the poor American and
the billionaires.

I doubt it, but if that makes you feel better about egregious wealth disparity, go for it. But my objections to wealth disparity are economic, not moral. In my model of the economy, the economy works better when wealth disparity is relatively small. How small “small” is is a question for research

      RM: Again, I'm not making any assumptions. I'm making

observations. I have observed a fairly strong positive
relationship between top marginal tax rate and growth rate
(and a fairly strong negative correlation between top marginal
tax rate and unemployment).

You are intellectually dishonest.  How "strong" are you going to

argue the “negative correlation” to be? You’ve already
acknowledged on February 21s of this year:

"As you say, reducing the number of degrees of freedom for the

statistical test, as Martin suggests based on the fact that the
series is autocorrelated, simply makes all the correlations not
statistically significant, which makes my point: I can find no
evidence for the claim that lowering taxes is associated with an
increase in growth. "

I acknowledged that the lack of significance of the correlations makes my point: that the belief that taxes are recessionary is not consistent with the facts. If taxes were recessionary you would expect to see a negative relationship between taxes and growth, not zero correlation (as non-significance implies). By the way, you do know that there is a difference between the significance and the strength of a relationship, right?

So you acknowledge the lack of statistical significance, the

nonlinearities and presumably if pressed would also have to
acknowledge confounding variables, yet you repeat the same invalid
points every few months.

My points are perfectly valid. The observed relationship between taxes and growth is positive and that between taxes and unemployment is negative. These correlations were not statistically significant at the conventionally acceptable significance levels (.01 or .05). Actually, I just checked and it turns out the that correlation between top marginal tax rate and growth is .34, which (given the df for the test) actually is significant at the .01 level. The correlation between top marginal tax rate and unemployment is -.23 which is significant at the .07 level, so it would not be considered statistically significant by convention.

When correlations are not significant it just means is that we can’t reject the idea that the true correlation is zero. So if the correlation between top marginal tax rate and unemployment or that between top marginal tax rate and growth is considered non-significant, that just means that we can’t reject the idea that there is no relationship between these variables. So a non-significant correlation is not good news for your side at all; it is completely inconsistent with the idea that taxes are recessionary (increased taxes slow growth or increase unemployment).

As for non-linearities, I have looked at the scatter plot of the relationship between these variables and there is no visual evidence of systematic non-linearity (log, exponential, etc). The lack of non-linear trend is confirmed by the lack of improvement in fit that you get when you try to fit non-linear functions to these relationships. Linear is the best you can do.

As for confounding variables, of course I acknowledge their existence and the fact that they may account for the observed relationships. I am assuming that economists continue to believe that taxes are recessionary because when they look at the relationship between taxes and growth or unemployment they are able to factor out (using multiple regression methods) the confounding variables that make the bivariate correlations between these variables go the right way. I have no idea what covariates (confounding variables) might make my observed correlations consistent with economic dogma but since you believe the economic dogma I expected you to tell me how to do the analysis properly. But so far all I get from you is the usual economic double talk. So I’m pretty sure that it’s all a bluff. I bet there is no known covariate, non-linear transformations or anything else that will make the bivariate correlations I observe between taxes and growth/unemployment go in the expected (according to economic dogma) direction.

Best

Rick

···

–
Richard S. Marken PhD

rsmarken@gmail.com
www.mindreadings.com

[Martin_Lewitt]

[Martin Lewitt Dec 7, 2010 0119 MST]

[From Rick Marken (2010.12.06.2230)]

        Martin Lewitt (Dec 6,

2010 1731 MST)–

        it doesn't mean that the disparities were bigger then, just

that those positions are possibly defensible, given hedonic
considerations.

      They are defensible no matter what. If you want to defend huge

wealth disparities go for it. That has nothing to do with
whether they exist or not.

It might have something to do with whether the are problematic or

not under some values.

        Despite charts of

inflation adjusted dollars, the wealth disparity between a
poor American and an average sub-Saharan African may well be
greater than that between the poor American and the
billionaires.

      I doubt it, but if that makes you feel better about egregious

wealth disparity, go for it. But my objections to wealth
disparity are economic, not moral. In my model of the economy,
the economy works better when wealth disparity is relatively
small. How small “small” is is a question for research.

There are value judgments involved in choosing the "economy", for

instance national or global, there are value judgements in “works
better”, for instance greater growth, some centrally planned norm,
satisficing the values of consumers, etc. Whatever standard we
evaluate upon, disparity may be positively correlated with in some
circumstances and not in others.

                RM: Again, I'm not making any assumptions. I'm

making observations. I have observed a fairly strong
positive relationship between top marginal tax rate
and growth rate (and a fairly strong negative
correlation between top marginal tax rate and
unemployment).

        You are intellectually dishonest.  How "strong" are you

going to argue the “negative correlation” to be? You’ve
already acknowledged on February 21s of this year:

        "As you say, reducing the number of degrees of freedom for

the statistical test, as Martin suggests based on the fact
that the series is autocorrelated, simply makes all the
correlations not statistically significant, which makes my
point: I can find no evidence for the claim that lowering
taxes is associated with an increase in growth. "

      I acknowledged that the lack of significance of the

correlations makes my point: that the belief that taxes are
recessionary is not consistent with the facts. If taxes were
recessionary you would expect to see a negative relationship
between taxes and growth, not zero correlation (as
non-significance implies). By the way, you do know that there
is a difference between the significance and the strength of a
relationship, right?

        So you acknowledge the

lack of statistical significance, the nonlinearities and
presumably if pressed would also have to acknowledge
confounding variables, yet you repeat the same invalid
points every few months.

      My points are perfectly valid. The observed relationship

between taxes and growth is positive and that between taxes
and unemployment is negative. These correlations were not
statistically significant at the conventionally acceptable
significance levels (.01 or .05). Actually, I just checked and
it turns out the that correlation between top marginal tax
rate and growth is .34, which (given the df for the test)
actually is significant at the .01 level. The correlation
between top marginal tax rate and unemployment is -.23 which
is significant at the .07 level, so it would not be considered
statistically significant by convention.

      When correlations are not significant it just means is that we

can’t reject the idea that the true correlation is zero. So if
the correlation between top marginal tax rate and unemployment
or that between top marginal tax rate and growth is considered
non-significant, that just means that we can’t reject the idea
that there is no relationship between these variables. So a
non-significant correlation is not good news for your side at
all; it is completely inconsistent with the idea that taxes
are recessionary (increased taxes slow growth or increase
unemployment).

Well I wasn't counting on that analysis.   The number of independent

data points is so small that you probably can’t support your claim
that it is inconsistent with the idea that taxes are recessionary
either.

      As for non-linearities, I have looked at the scatter plot of

the relationship between these variables and there is no
visual evidence of systematic non-linearity (log, exponential,
etc). The lack of non-linear trend is confirmed by the lack of
improvement in fit that you get when you try to fit non-linear
functions to these relationships. Linear is the best you can
do.

Really, from perhaps a dozen independent points, you conclude that

variables that aren’t included aren’t possibly a better explanation
for the values. Things like federal reserve actions, wars, energy
crises, the prevalent financial decisions influenced by specifics of
the tax policy, etc.

      As for confounding variables, of course I acknowledge their

existence and the fact that they may account for the observed
relationships. I am assuming that economists continue to
believe that taxes are recessionary because when they look at
the relationship between taxes and growth or unemployment they
are able to factor out (using multiple regression methods) the
confounding variables that make the bivariate correlations
between these variables go the right way. I have no idea what
covariates (confounding variables) might make my observed
correlations consistent with economic dogma but since you
believe the economic dogma I expected you to tell me how to do
the analysis properly.

I doubt the natural experiments have been performed in just a few

decades of US data.

      But so far all I get from you is the usual economic double

talk. So I’m pretty sure that it’s all a bluff. I bet there is
no known covariate, non-linear transformations or anything
else that will make the bivariate correlations I observe
between taxes and growth/unemployment go in the expected
(according to economic dogma) direction.

You observe bivariate correlations of macro-economic numbers, I

observe companies and individuals making different decisions for tax
reasons than they would have made based upon market information, and
having better things to do with their money than the government has.

regards,

     Martin L

···

On 12/6/2010 11:32 PM, Richard Marken wrote:

      Best



      Rick

–

  Richard S. Marken PhD

  rsmarken@gmail.com

  [www.mindreadings.com](http://www.mindreadings.com)

[rsmarken]

[From Rick Marken (2010.12.07.1010)]

Martin Lewitt (Dec 7, 2010 0119 MST)–

Rick Marken (2010.12.06.2230)–

      RM: They [wealth discrepancies] are defensible no matter what. If you want to defend huge

wealth disparities go for it. That has nothing to do with
whether they exist or not.

ML: It might have something to do with whether the are problematic or

not under some values.

RM: Yes, that’s what I said. They are problematic for me under my values (my references for a decent society) but not for you under yours. There is no objective basis for determining whether or not they are “really” problematic. As you note below, even my economic reasons for finding large wealth disparity problematic is based on my own subjective criteria for what a well functioning economy is.

So ultimately I think our disagreement can’t be resolved on the basis of facts or models (ie. science). You just want to live in a different kind society than I do. The things I find awful in a society – poverty, ignorance, greed, lack of community, etc – are apparently tolerable to you as long as the things you care about – your version of “freedom” mainly, non-coercive government – exists.

My view seems better to me because, well, it’s my view. Same is true for you. Societies seem to go in the direction of the majority system concept; and the majority system concept in the US is clearly closer to yours than to mine (and I’m rather hopeless about it changing much since Obama has turned out to be a complete loser). The system concepts in Canada, Europe and Japan seem generally closer to mine. I suppose I should move to one of those places but the weather is just too nice here in LA LA Land.

      RM: So a

non-significant correlation is not good news for your side at
all; it is completely inconsistent with the idea that taxes
are recessionary (increased taxes slow growth or increase
unemployment).

Well I wasn't counting on that analysis.   The number of independent

data points is so small that you probably can’t support your claim
that it is inconsistent with the idea that taxes are recessionary
either.

Since data is not going to change your point of view it’s probably a waste of time to go over this again. But what the heck. The number of data points on which the analysis was based is 60, which is more than 60 times greater than the number of data points you have presented (0) in support of your point of view. I never claimed that the non-significant correlations support the idea that taxes are not recessionary; I said they don’t allow you to reject that idea. The significant correlations (by defintion) do allow you to reject that idea (with only a .01 probability that this is a mistake).

      The lack of non-linear trend is confirmed by the lack of

improvement in fit that you get when you try to fit non-linear
functions to these relationships. Linear is the best you can
do.

Really, from perhaps a dozen independent points, you conclude that

variables that aren’t included aren’t possibly a better explanation
for the values.

Your lack of understanding of data analysis is astonishing. Non-linearity has nothing to do with whether other variables might affect the observed relationship. And I specifically said that other variables could definitely account for the observed relationships and if they were taken into account the relationships between taxes and growth/ unemployment might turn out to go in the direction that they are believed by economists to go. But I haven’t found any such variables (in the set I have) and no one has pointed out any. So my current belief is that the “other variables” explanation is a bluff. I’m calling it.

ML: Things like federal reserve actions, wars, energy

crises, the prevalent financial decisions influenced by specifics of
the tax policy, etc.

Great. Get me the data and I’ll do the analysis that factors these out and we’ll see what happens.

      RM: I have no idea what

covariates (confounding variables) might make my observed
correlations consistent with economic dogma but since you
believe the economic dogma I expected you to tell me how to do
the analysis properly.

ML: I doubt the natural experiments have been performed in just a few

decades of US data.

Sure they have, though of course they are quasi experiments since other variables are not held constant when policies are varied.

      RM: But so far all I get from you is the usual economic double

talk. So I’m pretty sure that it’s all a bluff.

You observe bivariate correlations of macro-economic numbers, I

observe companies and individuals making different decisions for tax
reasons than they would have made based upon market information, and
having better things to do with their money than the government has.

Show me your data. How many companies did this (and how many didn’t), what decision were different based on taxes, etc?

I have also observed businesses (and run a couple) and I have never seem important decisions made based on tax reasons. I have met business people who are always complaining about taxes and saying that their decisions would be affected by changes in taxes. But these are generally pretty lousy business people and they don’t really base their decisions on taxes anyway. And the taxes I’m taking about are income taxes so they really have nothing to do with running businesses.

Best

Rick

···

–
Richard S. Marken PhD
rsmarken@gmail.com
www.mindreadings.com

[Samuel_Saunders]

Samuel Saunders (07 December 2010 12:27 MST)

One obvious potential issue with the data being cited is that
correlation can be being driven by either variable (as well as external
variables, of course). It may be that there is a tendency of those
setting tax policy to reduce tax rates when economic indicators are
dropping, and there could also be a tendency to be comfortable with
raising tax rates, particularly after a period when government dept has
grown during a time with with low tax rates, when indicators are moving
up. Certainly Rick will get more points with high unemployeement and
low tax rates in early 2011, since a recent record unemployeement was
announced for last month, and yesterday it was announced that the
president and congressional Republicans had agreed to continue low tax
rates. Note that much of the comment from those invovled in the
decision and from outside commentators cited the unemployment levels as
important reasons for continuing the tax cuts.

Samuel

···

--
Samuel Spence Saunders, Ph.D.
saunders@gwtc.net

[rsmarken]

[From Rick Marken (2010.12.07.1350)]

Samuel Saunders (07 December 2010 12:27 MST)

One obvious potential issue with the data being cited is that
correlation can be being driven by either variable (as well as external
variables, of course).

Good point.

It may be that there is a tendency of those
setting tax policy to reduce tax rates when economic indicators are
dropping, and there could also be a tendency to be comfortable with
raising tax rates, particularly after a period when government dept has
grown during a time with with low tax rates, when indicators are moving
up.

Yes, of course. Again, I only present these correlations because they
are the most obvious way of looking at the actual relationship between
taxes and growth/ unemployment. I'm presenting them in the spirit of
asking why economists seem to think taxes are recessionary if the data
don't seem to be consistent with this view, at least on the face of
it. What it the evidentiary.basis of economists' conviction about the
relationship between taxes and growth/unemployment?

One way to approach the direction of causality issue might be by using
lagged correlations. It turns out that the positive correlation
between taxes and growth, for example, is highest when taxes _lead_
growth by one year. Since cause must precede effect this is some
evidence that taxes are cause and growth is effect. Not strong
evidence, I agree, but something. Of course, to get an idea of what's
really going on you need a model of the economy that can account for
all the observed relationships. The model then tells you how taxes are
actually related to growth and unemployment.

Best

Rick

···

Certainly Rick will get more points with high unemployeement and
low tax rates in early 2011, since a recent record unemployeement was
announced for last month, and yesterday it was announced that the
president and congressional Republicans had agreed to continue low tax
rates. �Note that much of the comment from those invovled in the
decision and from outside commentators cited the unemployment levels as
important reasons for continuing the tax cuts.

Samuel
--
Samuel Spence Saunders, Ph.D.
saunders@gwtc.net

--
Richard S. Marken PhD
rsmarken@gmail.com
www.mindreadings.com

[Martin_Lewitt]

[Martin Lewitt Dec 8, 2010 0437 MST]

  Show me your data. How many companies did this (and

how many didn’t), what decision were different based on taxes,
etc?

  I have also observed businesses (and run a couple) and I have

never seem important decisions made based on tax reasons. I have
met business people who are always complaining about taxes and
saying that their decisions would be affected by changes in
taxes. But these are generally pretty lousy business people and
they don’t really base their decisions on taxes anyway. And the
taxes I’m taking about are income taxes so they really have
nothing to do with running businesses.

You seem to lack a basic understanding of business finance, and how

managers are trained to make decisions. You should read up on
Internal Rate of Return, Cost of Capital and Capital Structure.

Taxes impact both the cost of capital, and the capital structure of

businesses and thus the economy. Taxes make capital more expensive,
so business opportunities must have a higher rate of return in order
to be funded, so less business investment and activity results. The
differential tax treatment of debt vs equity capital makes debt
capital relatively cheaper and increases the proportion of debt in
the capital structure of businesses and thus the economy. The
capital structure article discusses the increased bankruptcy risk
associated with debt. But it doesn’t discuss real world
corollaries like increased layoffs during economic downturns and the
deeper and longer recessions because of increased the layoffs from a
high leverage less flexible capital structure. If you could see past the simplistic class warfare propaganda, you
would see that all the classes would benefit from tax system which
did not favor debt and had a lower cost of equity capital. These
variables have not changed over the course of your analysis, yet are
arguably relevant to any analysis over a period of time in which
businesses are being financed, capital raised and recessions are
occurring. It is not irrelevant to wealth disparity either, since
arguably longer and deeper recessions hurt the lower classes more
than the wealthy.
Bush had the right rhetoric, talking about an ownship economy, and
trying to reduce or eliminate the double taxation of dividends and
capital gains. The Democrats benefitted the bankers and bond
holders and brokers at the expense of all other people of any class,
behind demagogic rhetoric demonizing the rich.
regards,
Martin L

···

http://en.wikipedia.org/wiki/Internal_rate_of_return
http://en.wikipedia.org/wiki/Capital_structure

  Best



  Rick

  --

  Richard S. Marken PhD

  rsmarken@gmail.com

  [www.mindreadings.com](http://www.mindreadings.com)

[rsmarken]

[From Rick Marken (2010.12.08.0845)]

Martin Lewitt (Dec 8, 2010 0437 MST) --

RM: I have also observed businesses (and run a couple) and I have never seem
important decisions made based on tax reasons. I have met� business people
who are always complaining about taxes and _saying_ that their decisions
would be affected by changes in taxes. But these are generally pretty lousy
business people and they don't really base their decisions on taxes anyway.
And the taxes I'm taking about are _income_ taxes so they really have
nothing to do with running businesses.

ML: You seem to lack a basic understanding of business finance, and how
managers are trained to make decisions.� You should read up on Internal Rate of
Return, Cost of Capital and Capital Structure...

ML: Taxes impact both the cost of capital, and the capital structure of
businesses and thus the economy.� Taxes make capital more expensive, so
business opportunities must have a higher rate of return in order to be
funded, so less business investment and activity results

A couple things:

1) I was talking about income taxes, which have no relationship to
business investment. So your comments are irrelevant to my point about
taxes.

2) To the extent that taxes influence the cost of capital (I think it
would only impact it by the size of the write off allowed for
depreciation; so an increase in taxes on capital is a decrease in the
write off for depreciation) it would affect all businesses the same.
It's just a cost of doing business, like the market cost of labor and
materials. But whatever it is that affects the cost of capital, the
decision to make capital investments would depend mainly on the
existence (or expected existence) of a market (consumer demand) to pay
for the increased capital investment through consumption of the
increased production resulting from that investment.

3) The data show that investment _follows_ GDP (aggregate income)
growth, which suggests that capital investment decisions are based
mainly on the existence of demand (consumers with money in their
pockets) rather than the cost of capital. Most small business people
I've talked to say that their investment decisions are based mainly on
market (demand). Taxes might affect how much is invested, just as
variations in the cost of raw materials or labor will affect how much
is "invested" in these components of production. But it's revenue that
is the main concern of the business people I know, not taxes. And the
evidence suggests that this is generally true of all business owners.

Best

Rick

···

On 12/7/2010 11:09 AM, Richard Marken wrote:

--
Richard S. Marken PhD
rsmarken@gmail.com
www.mindreadings.com

[Martin_Lewitt]

[Martin Lewitt Dec 8, 2010 1034 MST]

[From Rick Marken (2010.12.08.0845)]

Martin Lewitt (Dec 8, 2010 0437 MST) --
RM: I have also observed businesses (and run a couple) and I have never seem
important decisions made based on tax reasons. I have met business people
who are always complaining about taxes and _saying_ that their decisions
would be affected by changes in taxes. But these are generally pretty lousy
business people and they don't really base their decisions on taxes anyway.
And the taxes I'm taking about are _income_ taxes so they really have
nothing to do with running businesses.

ML: You seem to lack a basic understanding of business finance, and how
managers are trained to make decisions. You should read up on Internal Rate of
Return, Cost of Capital and Capital Structure...
ML: Taxes impact both the cost of capital, and the capital structure of
businesses and thus the economy. Taxes make capital more expensive, so
business opportunities must have a higher rate of return in order to be
funded, so less business investment and activity results

A couple things:

1) I was talking about income taxes, which have no relationship to
business investment. So your comments are irrelevant to my point about
taxes.

But, your point is also about wealth disparity, and a tax structure which increases layoffs and deepens recessions by favoring less flexible debt financing is one of those variables you aren't accounting for, and where Republicans are on the right side of the issue. Partnerships and S corporations pay personal income tax, so personal income taxes do impact their cost of capital.

2) To the extent that taxes influence the cost of capital (I think it
would only impact it by the size of the write off allowed for
depreciation; so an increase in taxes on capital is a decrease in the
write off for depreciation) it would affect all businesses the same.
It's just a cost of doing business, like the market cost of labor and
materials. But whatever it is that affects the cost of capital, the
decision to make capital investments would depend mainly on the
existence (or expected existence) of a market (consumer demand) to pay
for the increased capital investment through consumption of the
increased production resulting from that investment.

It is just a cost of doing business, but it is a higher cost, and a biased cost, favoring debt over equity, with the negative consequences that come with having encouraged high levels of debt. It impacts how much capital one can afford to attract, and the attractiveness of the returns you can offer, and at the margin whether your enterprise is justified or not at the higher cost of capital. You note that higher tax rates just increase the value of a businesses depreciation due to tax savings. But recall that depreciation is really a limit on those tax savings, since businesses could save even more if they could just expense their purchases of capital equipment and didn't have to depreciate them. Not being able to fully deduct money they've already spent, means that the tax system not only favors debt, but also increases their need for financing. The Democrats really love banks and bond dealers.

3) The data show that investment _follows_ GDP (aggregate income)
growth, which suggests that capital investment decisions are based
mainly on the existence of demand (consumers with money in their
pockets) rather than the cost of capital. Most small business people
I've talked to say that their investment decisions are based mainly on
market (demand). Taxes might affect how much is invested, just as
variations in the cost of raw materials or labor will affect how much
is "invested" in these components of production. But it's revenue that
is the main concern of the business people I know, not taxes. And the
evidence suggests that this is generally true of all business owners.

Demand might well be a prerequisite in any voluntary exchange. Any artificially inflated demand works by borrowing value from the existing monetary stock. It ultimately makes everybody else poorer, unless it results in increased production. It is frustrating that the system was so poorly managed that the crisis unnecessarily moved from wall street to main street, because that part was probably just a monetary issue in this case. That is central planning for you. If the central planners do so poorly when they have an economy that practically runs itself. Imagine how bad the situation will often get when they try to micromanage every aspect of it.

Martin L

···

On 12/8/2010 9:45 AM, Richard Marken wrote:

On 12/7/2010 11:09 AM, Richard Marken wrote:

Best

Rick

[rsmarken]

[From Rick Marken (2010.12.08.1215)]
:

�Martin Lewitt (Dec 8, 2010 1034 MST)--

Rick Marken (2010.12.08.0845)--

RM:1) I was talking about income taxes, which have no relationship to
business investment. So your comments are irrelevant to my point about
taxes.

ML: But, your point is also about wealth disparity, and a tax structure which
increases layoffs and deepens recessions by favoring less flexible debt
financing is one of those variables you aren't accounting for, and where
Republicans are on the right side of the issue.

This is just a story. The fact is that wealth (or income) discrepancy
increases when taxes are regressive (as in the 1920s, and 1980s though
2000s) and decreases when they are progressive (1934-1980). I like my
data better than your story.

� You note that higher tax rates just increase the value of
a businesses depreciation due to tax savings.

No, I said that increasing the tax write off for depreciation is one
way business tax is decreased.

Demand might well be a prerequisite in any voluntary exchange.

Demand (in the form of money in a consumer's pocket) is a
pre-requisite for buying things.

Any artificially inflated demand works by borrowing value from the existing
monetary stock.

The way to "naturally" inflate demand is to pay workers good money for
their work; and this can be done by paying CEOs a lot less than they
are now paid relative to what their workers make. In the good old
(economic) days CEO pay was 50 times worker pay; now it's 500 times.
That's why unemployment is high; not enough demand in the pockets of
workers; too much in the pockets of CEOs. By the way, all that surplus
money held by the CEOs cannot be "invested" in an economy where demand
is slack (as a result of not paying workers). Henry Ford knew this;
why don't business people today understand it?

�That is central planning for you.

No, this is regulated capitalism for you and it was working just fine
until 1980, when Reagan started cashing us out.

Best

Rick

···

--
Richard S. Marken PhD
rsmarken@gmail.com
www.mindreadings.com