Tax Relief or Permanent Deficit Spending?
Bill Falzett
May 17, 2006
A recent article summarized Congressman Wally Herger’s position on the economy and so-called tax relief. He voted for House Resolution 4297, the Tax Increase Prevention and Reconciliation Act of 2005, which the House passed by a vote of 244 to 185. This bill extends tax breaks for the wealthiest segment of our population “permanently” in addition to tax breaks for investors on capital gains and dividends rates and alternative minimum tax relief. All these measures benefit people who have lots of discretionary income and are major investors. Their activities make the stock market look good and lead to politicians praising the condition of our economy. Mr. Herger believes that one of the features of this measure will benefit small businesses by allowing them to get immediate expense credit for new investments.
He neglects to note that the average small business person doesn’t get much benefit from the legislation in the 2nd Congressional District of California. Why is that? It’s because business depends on customers. Customers require money. Further, they usually have to have discretionary income – money that they can spend on items in the small business person’s inventory. People in this District don’t have much discretionary income so the businesses can’t afford to increase investment.
The administration and Mr. Herger trumpet the figures on unemployment -- 4.7% and increased income averages across the nation. The problem with these figures is that they don’t apply to this area. Our unemployment is averaging almost twice that number and our average family incomes are well below the national averages. Mr. Herger is a good Party soldier. He toes the line on the administration policy and represents the special interests that fund his campaigns. The people of this District and our infrastructure are left out of this strange equation.
If you take a look at the effects at a national level, the majority of the benefits of this tax cut go to the wealthiest segment of the population. That group is only segment that has enjoyed income growth over the past five years on either a pre-tax or after-tax basis. Anyone who is even halfway observant knows that the gap between the classes is so large that if this were a little league baseball game, it would be over.
If you believe that this measure benefits small business, take another look. When the federal government does not tax dividends it increases the value of companies that pay dividends to their shareholders. Mr. Bush and Mr. Herger believe that this encourages more money to flow into the stock market in order to generate more business capital and greater economic growth.
The truth is that most business investment depends on savings. When government borrows money to cover the loss of revenue resulting from tax breaks, there are no savings. Investors turn to companies that pay high dividends to save their money.
This tax bill creates incentives to move money away from non-dividend stocks and low-dividend stocks into stocks that pay higher dividends. The problem: Companies that pay dividends grow more slowly than those that don’t; and companies that pay high dividends (these are the ones made attractive by the tax bill) grow more slowly than those that pay more modest dividends.
The effect of this tax legislation is to reduce the capital available to businesses that are expanding and creating jobs and move it to older mature companies that have little else to do with the cash other than to pass it back to shareholders in the form of dividends. The wealthy get wealthier and the citizens of this District do without business and income growth.
When the government uses tax policy to shift investment flow like this, it deprives us of jobs and wealth to be shared by the greatest number of people. The wealth generated by this tax measure will benefit executives of big companies in certain segments of the economy. It is disingenuous of Mr. Herger to tout this bill as a benefit to small business people.
What should be happening is attention to programs that lead to energy independence. The government should be passing bills that include incentives to develop alternative, renewable energy sources that lead to more jobs and small manufacturing in this area. We have the potential for growing bio-fuels and using the forests in responsible ways to develop jobs and energy. Our Congressperson should be leading this process. We must create the will to succeed at oil and gas independence within a defined time limit.
We should also be focused on excellence in education. Our school systems should include trades training and foster a wide range of creativity. That type of activity proceeds best when the curriculum is shepherded by local schools with consultation from area and state instructional supervision. The real job of curriculum development is at the local school level. Our greatest renewable resource is still our youth. Our Congressperson should be leading the movement to develop these programs that benefit our people and our District.
He neglects to note that the average small business person doesn’t get much benefit from the legislation in the 2nd Congressional District of California. Why is that? It’s because business depends on customers. Customers require money. Further, they usually have to have discretionary income – money that they can spend on items in the small business person’s inventory. People in this District don’t have much discretionary income so the businesses can’t afford to increase investment.
The administration and Mr. Herger trumpet the figures on unemployment -- 4.7% and increased income averages across the nation. The problem with these figures is that they don’t apply to this area. Our unemployment is averaging almost twice that number and our average family incomes are well below the national averages. Mr. Herger is a good Party soldier. He toes the line on the administration policy and represents the special interests that fund his campaigns. The people of this District and our infrastructure are left out of this strange equation.
If you take a look at the effects at a national level, the majority of the benefits of this tax cut go to the wealthiest segment of the population. That group is only segment that has enjoyed income growth over the past five years on either a pre-tax or after-tax basis. Anyone who is even halfway observant knows that the gap between the classes is so large that if this were a little league baseball game, it would be over.
If you believe that this measure benefits small business, take another look. When the federal government does not tax dividends it increases the value of companies that pay dividends to their shareholders. Mr. Bush and Mr. Herger believe that this encourages more money to flow into the stock market in order to generate more business capital and greater economic growth.
The truth is that most business investment depends on savings. When government borrows money to cover the loss of revenue resulting from tax breaks, there are no savings. Investors turn to companies that pay high dividends to save their money.
This tax bill creates incentives to move money away from non-dividend stocks and low-dividend stocks into stocks that pay higher dividends. The problem: Companies that pay dividends grow more slowly than those that don’t; and companies that pay high dividends (these are the ones made attractive by the tax bill) grow more slowly than those that pay more modest dividends.
The effect of this tax legislation is to reduce the capital available to businesses that are expanding and creating jobs and move it to older mature companies that have little else to do with the cash other than to pass it back to shareholders in the form of dividends. The wealthy get wealthier and the citizens of this District do without business and income growth.
When the government uses tax policy to shift investment flow like this, it deprives us of jobs and wealth to be shared by the greatest number of people. The wealth generated by this tax measure will benefit executives of big companies in certain segments of the economy. It is disingenuous of Mr. Herger to tout this bill as a benefit to small business people.
What should be happening is attention to programs that lead to energy independence. The government should be passing bills that include incentives to develop alternative, renewable energy sources that lead to more jobs and small manufacturing in this area. We have the potential for growing bio-fuels and using the forests in responsible ways to develop jobs and energy. Our Congressperson should be leading this process. We must create the will to succeed at oil and gas independence within a defined time limit.
We should also be focused on excellence in education. Our school systems should include trades training and foster a wide range of creativity. That type of activity proceeds best when the curriculum is shepherded by local schools with consultation from area and state instructional supervision. The real job of curriculum development is at the local school level. Our greatest renewable resource is still our youth. Our Congressperson should be leading the movement to develop these programs that benefit our people and our District.
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