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Tax cut and jobs

 
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Two prominent economists, Prof. Metzler at the Carnegie Mellon University and Prof. Krugman at the Princeton University, debated during today's News Hour with Jim Leher on "Tax Cuts and The Economy". They strongly disagreed with each other.
[ May 14, 2003: Message edited by: JiaPei Jen ]
 
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Originally posted by herb slocomb:
Never the less, the primary reason most new businesses fail and/or don't get started is because of insufficient working capital.


Are you serious?!?! Can you cite a source for this? I would've thought bad decision making was the reason most business fail. It seems especially difficult to count business which don't get started; I'd like the see the criteria for counting.
--Mark
 
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Originally posted by Mark Herschberg:

Are you serious?!?! Can you cite a source for this? I would've thought bad decision making was the reason most business fail. It seems especially difficult to count business which don't get started; I'd like the see the criteria for counting.
--Mark


Well, yes, not planning your working capital /liquidity requirements is bad decision making in some sense, but in another sense sometimes some costs can't always be foreseen/anticipated with 100% accuracy. In that case, some extra capital from tax cuts can help out in short term, temporary liquidity crunches.
I've been to a number small business forums/workshops over the years and they have always mentioned not having enough working capital/liquidity to pay current bills as the biggest cause of business failure. They cited SBA and other govt stats which I can't recall in detail now years later. Even if the business is selling enough goods to make it profitable, if invoices are due for suppliers before customers are paying on credit, there is a liquidity problem and bills won't get paid. If the business is new, banks may not lend enough money to cover the shortfall. I've heard this so many times from so many different people over the years I accepted it and never bothered to do theses level research on it. But still, I'll grant you that bad decsion making is the biggest cause of failure, its just that stupidty shouldn't really be considered a factor in this discussion I think since that factor is basically a given cause for failure in any endeavor or situation.
As far as businesses not getting started for insufficient capital, I have no statistical surveys to cite, but its rather intuitive, especially if you've read various new articles that say venture capitalists are now approving less than 10% of proposals being submitted to them. Additionally, that 90% that were rejected probably represent a very much larger group that were rejected from other sources of funding and never applied for venture capital since venture capitalists are often lenders of last (or never) resort. Attend a local SBA workshop and you'll see how common it is for small businesses to have problems getting funding to start.
[ May 15, 2003: Message edited by: herb slocomb ]
 
Mark Herschberg
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Originally posted by herb slocomb:
Well, yes, not planning your working capital /liquidity requirements is bad decision making in some sense, but in another sense sometimes some costs can't always be foreseen/anticipated with 100% accuracy. In that case, some extra capital from tax cuts can help out in short term, temporary liquidity crunches.


That's like saying the #1 cause of death is lack of oxygen to the brain. If someone stabs you in the heart, it stops pumping blood, and ultimately you brain doesn't receive oxygen. In business, very few companies go out of business unless they can't afford to stay in business. I don't think its a meaningful number.

Originally posted by herb slocomb:
As far as businesses not getting started for insufficient capital, I have no statistical surveys to cite, but its rather intuitive, especially if you've read various new articles that say venture capitalists are now approving less than 10% of proposals being submitted to them.


Well, it depends on how you define potential business. I've got lots of ideas for comapnies which I never do because of lack of time, lack of committment, don't know the market well enough, risk aversion, etc. So do we need to include all those comapnies in the count? If we only consider companies which seek funding, then yes, I imagine the rate would be close to 100%.
--Mark
 
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Hi,
I know someone whom won jackpot lottery in California, yet failed miserly as enterpreneur depsite the fact happens working with the particular industry for so long.
Somehow I think Tim has a valid point.
Regards,
MCao
 
Mark Herschberg
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Originally posted by Matt Cao:
Hi,
I know someone whom won jackpot lottery in California, yet failed miserly as enterpreneur depsite the fact happens working with the particular industry for so long.
Somehow I think Tim has a valid point.


I don't follow. How does this support Tim's point? (Or are those two statements independent?)
--Mark
 
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Originally posted by Matt Cao:
Hi,
I know someone whom won jackpot lottery in California, yet failed miserly as enterpreneur depsite the fact happens working with the particular industry for so long.
Somehow I think Tim has a valid point.
Regards,
MCao


hi:
i know someone who work with the particular industry for so long, but failed to win jackpot lottery in California. i was just joking.
 
frank davis
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Originally posted by Matt Cao:
Hi,
I know someone whom won jackpot lottery in California, yet failed miserly as enterpreneur depsite the fact happens working with the particular industry for so long.
Somehow I think Tim has a valid point.
Regards,
MCao


It does not follow that since extra capital does not insure enterpreneural success, that it means that a lack of it does not cause its failure or prevent enterpreneural activities.
 
frank davis
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Originally posted by Mark Herschberg:


--Mark


A liquidity crisis for a new business would not be terribly uncommon I think. After all, a significant amount of inventory often has to be paid in advance and those bills will be due before customer's purchases can cover them. Sufficient short term working capital to cover that temporary deficit is essential. The fact that there is a temporary deficit does not mean the business is inherently unsound, unprofitable, or that bad decisions were made. Consumer demand can unexpectably drop for any number of unforeseeable reasons.
I don't know, just seems intuitive to me based on my experiences, that a lot of legitimate businesses are never started by individuals because of lack of capital. I know I would invest in a McDonald's franchise if I had enough money. I know know similar things happen on different scales as well.

Again, a short trip to a meeting at the local SBA branch office should clear this up.
 
John Lee
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Originally posted by Matt Cao:
Hi,
I know someone whom won jackpot lottery in California, yet failed miserly as enterpreneur depsite the fact happens working with the particular industry for so long.
Somehow I think Tim has a valid point.
Regards,
MCao


matt,
seriously, working with the particular industry for so long does not ensure the success of enterpreneur, even with lottery as fund. I think the success of enterpreneur takes different skill set, and some lock. of course, experience is everything. after all, you only work with the particular industry for so long, you did not practise enterpreneur.
just my 2 cents!
 
Mark Herschberg
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Originally posted by herb slocomb:

A liquidity crisis for a new business would not be terribly uncommon I think.
...
I don't know, just seems intuitive to me based on my experiences, that a lot of legitimate businesses are never started by individuals because of lack of capital.


Ok so this is speculative. Perhaps rational thinking, but speculative nonetheless. Personally I find this type of thinking dubious. Nothing personal, i just find its wrong more often then its right.

Originally posted by herb slocomb:

Again, a short trip to a meeting at the local SBA branch office should clear this up.


No. That will at best, only reveal the number of companies which registered with the SBA and susequently fail. (We'll assume reason for failure is recorded at the SBA.) Now if you define a company only as those which have registered with the SBA then maybe you're right. Most startups I know of were in garages and didn't become publically known until after they received funding. They certainly didn't file records of their activities until they had money. Hence all those companies are not included in your proposed data set.
--Mark
 
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But will got get back that $1000 education credit every year?
It's not hard to get back more on a family of 4, since the dependent child deduction's going up. Since that's a flat deduction off the top, it's not really a tax cut. It's also AFAIK not something that would have only happened under this particular president. I.e. was a COLA increase external to Bush's plan.
Of all the enterpreneurial success (and failure stories I've ever read, I really can't think of one where the federal personal income tax rate made a critical difference. "Colonel" Sanders only needed a beat-up station wagon and a pressure cooker. Plus, of course, a secret receipe and more salesmanship than ANY amount of cash in hand would even grant me (unless I hired it - not likely on $2000 a year or whatever). I think it safe to say that no true entrepreneur is going to be sitting around waiting for that "one day" when taxes get low enough.
OTH, sad to say we have recessions in large part because many businesses all sit around for OTHER businesses to make a move. Just like they all swarmed over the cliff because all the other businesses were doing so.
There's also the song that goes "It's your money". Which is true, and we all know that all governments really exist for is to grab your money. However, it's good to ask these questions sometimes, too:
Is it your Interstate highway system?
Is it your FEMA? (residents of OK and TN are not allowed to answer this month)
is it your NOAA weather and NIST? Hurricane Season's 2 weeks away!
is it your CDC (SARS, Anthrax research)?
is it your FBI? Scratch that, no, I think it's John Ashcroft's.
is it your Department of Homeland Security?
is it your Armed Services?
Everyone would like to believe that a tax cut is only going to come out of the "bad" parts of government. They should know better by now. We can't even fund a simple war without salmon-fishing subsidies sneaking in.
 
Mark Herschberg
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Originally posted by Tim Holloway:
Of all the enterpreneurial success (and failure stories I've ever read, I really can't think of one where the federal personal income tax rate made a critical difference.


With all due respect, this oversimplifies the issue. A tax cut / rebate on personal income will result in one or both of the following:
1) More consumer spending
2) More consumer investing (which includes putting the money in the bank).
In the first case, companies see their revenues increase and so are more likely to undertake new initiatives, which often promote entrepreneurship.
In the latter case, increased dollars lowers the expected risk return premium, making new ventures more financially attractive to companies.
Will my next door neighbor invest in a new startup? Unlikely. But he may take a vacation causing a hotel chain to upgrade their reservation system giving sales to a large software company who may back a new startup.
I can't imagine any study tracked this as a whole, but each step in that process has been proven.
--Mark
 
frank davis
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Originally posted by Mark Herschberg:

No. That will at best, only reveal the number of companies which registered with the SBA and susequently fail.


I think now we're guessing at the actual methodology used by the SBA or perhaps even assuming too much by thinking that the SBA actually conducted the study. I merely recall the SBA citing govt stats (I admit my memory is not clear who did the study) I that the most common reason for business failure was insufficient working capital. The study may or may not have done by the SBA itself, and it may or may not have involved businesses registering with the SBA (bankruptcy proceedings, public statments, third party interviews, and other venues may reveal the cause of business failure without anyone having direct contact with SBA).


(We'll assume reason for failure is recorded at the SBA.) Now if you define a company only as those which have registered with the SBA then maybe you're right.


Although this would not prove my claim that its the number one cause of all business failure it would tend to offer some support for that presumption. In any event it would be a significant factor that a responsible tax policy would take into consideration.


Most startups I know of were in garages and didn't become publically known until after they received funding. They certainly didn't file records of their activities until they had money. Hence all those companies are not included in your proposed data set.
--Mark


Again we don't know the methodology used in the original study and whether it is releveant at all whether the businesses contacted the SBA, but many garage businesses do contact the SBA. The SBA (Small Business Assoc) was created for those types of businesses and the SBA actively advertises itself as offering services for those types of businesses (at least in the several South Florida cities in which I have lived).
On the issue of business creation and capital, I myself am an example and know several friends who would also buy franchises if we had enough money. I find it hard to believe that we are unique amongst Americans in that respect. Now whether a tax cut is going to provide enough for anyone to start a business is another matter. Maybe a hotdog stand, lawn maintenence, etc. There are people out there at the margins of society who really do have trouble scraping together a few hundred or thousand dollars to start a small business.
[ May 15, 2003: Message edited by: herb slocomb ]
 
frank davis
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Originally posted by Tim Holloway:
It's also AFAIK not something that would have only happened under this particular president. I.e. was a COLA increase external to Bush's plan.


I remember seeing about 3 types of credits/deductions for education/training when I did my taxes last. The one I qualified for was a new one attributable to Bush if I recall correctly.
Thankyou Bush for the $1,000


Of all the enterpreneurial success (and failure stories I've ever read, I really can't think of one where the federal personal income tax rate made a critical difference.


I do actually recall a story of enterpreneurial success in Money magazine about 5-7 years ago where this lady started some type of tax return business with an income tax refund of $500. I'm not saying it is common or that the lady would not have started the business without that money, but there are people on the margins of society that can start a lawn maintenance business or some such small business with a small capital outlay. Maybe they will start it sooner rather than later with a little help from Uncle Sam. Maybe the tax refund doesn't provide all the start up money but only helps in some way towards that goal. In that case it still has a positive impact.



There's also the song that goes "It's your money". Which is true, and we all know that all governments really exist for is to grab your money. ...Everyone would like to believe that a tax cut is only going to come out of the "bad" parts of government.


I'll fess up to still secretly harboring that fantasy.
 
frank davis
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Originally posted by Mark Herschberg:

Will my next door neighbor invest in a new startup? Unlikely.
--Mark


But maybe its not relevant whether the average Joe will invest in a startup because of the tax refund. Maybe its still a good thing if only 1% of the population is spurred towards that activity as a result of the refund. Maybe the refund is not enough to start most businesses, but maybe it is the beginnings of a savings plan that will eventually be enough to start some type of business.
 
Mark Herschberg
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Originally posted by herb slocomb:

But maybe its not relevant whether the average Joe will invest in a startup because of the tax refund. Maybe its still a good thing if only 1% of the population is spurred towards that activity as a result of the refund. Maybe the refund is not enough to start most businesses, but maybe it is the beginnings of a savings plan that will eventually be enough to start some type of business.


As my friend would say, "we are in violent agreement."
Tax cuts increase chance of new businesses starting. (I'm ignoring secondary effects and larger market impact.)
--Mark
 
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I am watching the ABC Night Line (Wed., 11:30PM - 12:00 midnight) at the moment. Warren Buffett, the second richest man on earth, is being interviewed. According to Buffett, the tax cuts proposed by the Bush Administration is not going to jump start the economy or help in creating jobs. He says that he will benefit a lot from the tax cuts; he belongs to the winning class; he is not going to use the money to consume because he already has everything; he will simply use the money to buy more stocks. He thinks that lots of people unfortunately do not understand the working of this proposed tax cuts. He sympathizes the receptionist, janitors in his office building for they must shoulder the increasing burden of the Federal budget deficits.
Do not shoot me. I am simply writing down what Mr. Buffett is saying.
 
frank davis
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Originally posted by Natalie Kopple:
I am watching the ABC Night Line (Wed., 11:30PM - 12:00 midnight) at the moment. Warren Buffett, the second richest man on earth, is being interviewed. ... he will simply use the money to buy more stocks.



Yes, Warren will buy more stocks; the company will use the stock sale proceeds to finance future/current growth and expansion, more jobs will be created, the company's revenues will increase, the company will pay an increased amount in income taxes, the newly employed workers will pay income taxes, the company will pay a dividend to its sharholders, and then Wareen will pay taxes on that dividend, and then pay taxes again when he makes a profit when he sells the stock.
As a side note, how will the tax burden of the janitors go up if Bush not increasing their taxes?
As I pointed out before, the Bush plan does save working families money. The child tax credit alone was increased up to $1000. Warren is flat out wrong :

"And those in the 27 percent bracket will pay no more than 25 percent. (Again, this applies to singles with incomes from $28,400 to $68,800 and married couples filing joint returns with an AGI between $47,450 and $114,650.)
...
Meanwhile, lower-income earners in the 10 percent and 15 percent tax brackets won't get a cut. However, they, like all other taxpayers, do get some relief because more of their earnings would be taxed at the lowest 10 percent rate. "

http://money.cnn.com/2003/05/22/pf/taxes/q_taxbill/index.htm
[ May 23, 2003: Message edited by: herb slocomb ]
[ May 23, 2003: Message edited by: herb slocomb ]
 
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