There are many infuriating things about the current federal tax rules, but the one that I find the most egregiously unfair and potentially damaging to the economy is the situation with deductability of interest.

In 1986, individuals were no longer allowed to deduct loan interest, except in special cases, and for their home mortgages. The arguments for this change were simplification, discouraging installment borrowing and more revenue for the government. The only valid argument is the first one, since it’s not clear that discouraging installment borrowing is a good thing for either the economy or the individual.

But it did indeed simplify taxes–there’s no longer any need to find all of your interest deductions, and add them up, since they’re no longer relevant to your return. Of course, in exchange for this “simplification,” most people pay much more in taxes than they did prior to the change. This has resulted in the growth of “mortgage lines of credit” since now the only way to make the interest deductable is to borrow money against your house.

This change was outrageously unfair, because they now get you coming and going. You still have to pay tax on interest earned, but you’re not allowed to deduct interest paid. So interest counts only when it’s incoming–not when it’s an outgoing expense, unless it’s going into some other investment (not consumption). (Thanks to Carey Gage for pointing out my previous erroneous statement, now down the memory hole).

But the situation has a more problematic effect (speaking personally)–it discourages small business formation. Suppose someone has an idea for a business startup, but limited access to capital. Well, one way to do it, if one has a good credit rating, is to do “venture capital by Visa.” Borrow the money from your credit card, and pay it and the interest back from the proceeds of the venture.

Now most financial advisors would say that this is insane. Of course, those same financial advisors would probably also say that starting your own business is insane as well, given the rate of failure of startups. So given that you’re going to be an entrepreneur anyway, it’s not that much nuttier to borrow the money to do it from Mastercard, instead of Aunt Nellie.

And therein lies the problem. Clearly, the interest that you’re paying on the loan is a business expense. But if the main thing that you need the money for is to cover your personal bills (rent or mortgage, groceries, gas, etc.) while you’re getting the business going, there’s no way to deduct it under the current rules.

Well, wait–there is one way. You can borrow the money, then relend it to the business startup, and then pay yourself a salary from the loan. This allows you to deduct the interest for the loan to your business. But there’s a big problem–it also means that you have to pay federal income taxes on it, including FICA, and possibly even things like unemployment insurance, because it’s now taxable income to you.

So that’s the choice you have. You can simply borrow money to support yourself, but you can’t deduct the interest because it’s not considered an allowable business expense, though clearly it should be. Or you can borrow the money and lend it, in which case Sam takes a huge percentage off the top before you can get it to pay your bills.

Either way, I suspect that there are a lot of businesses (including space businesses) that don’t get started because of this financial catch-22, which could be eliminated by simply returning fairness to the tax system, by either excluding interest income from taxes, or restoring the interest deduction.

Perhaps this is so obvious that someone else has already mentioned it, but it seems to me, upon further reflection, that there is an answer to Megan’s question about why Enron (or any B2B) was advertising to a market that was in a position neither to purchase, or influence the purchase of, its products.

Was it trying to boost market? Obviously not. Was it trying to boost profits? How would that be accomplished with expensive and opaque ads? Was it trying to hype stock price?

Bingo.

Senate Majority “Leader” Daschle is having trouble getting his followers in line. No other Democrats want to sign on to his latest demogogic campaign to convince people that tax cuts cause recessions. Sounds like they’re running a little scared.

[Update at 10:36 AM PST]

Tony has a couple comments on this and the previous related post from last night.

My response to his comment on this post is in the comments section for it. As to the previous one, I’ll move it “above the fold.”

I don’t think that you fairly represented what I argued – again, nobody is claiming that “tax cuts cause recession”. The assertion was that “lack of confidence” in the fiscal policy “probably”(D’s word), or “mau have”(my words, had an adverse impact – neither of us say “definitley did have”. That’s precisely Daschle’s stated argument, though few people – except myself E.J. Dionne (in todays WP)- choose to read it that way.

Well, “choose to read it that way” is exactly the right phraseology. Very few others conversant with the English language would “choose” to do so. As I said in my comment in this post, I “choose” to read it the way it was obviously intended–to blame the tax cut for the recession, or at least the depth of it. As I said, if there’s a “lack of confidence” in the Administration’s fiscal policies, it’s not because of the policies themselves–it’s because of their mischaracterization by the Democrats and their willing accomplices in the press.

You refer to “talking down the economy” – when I threw that back at Bill Quick in re Mr. Bush doing the same to sell the 2001 Act, Bill argued that “mau-mauing” the economy wouldn’t have an effect, either.

There’s a more fundamental difference. When Bush was “talking down the economy,” he was simply describing objective reality–all the economic indicators had been heading down even before the election. Of course he was making the case for a tax cut. When the economy is heading into a recession, as it obviously was, it makes sense to cut taxes, and to develop a public consensus for that.

Mr. Daschle, on the other hand, is not so much “talking down the economy” directly, as attempting to talk down the people’s confidence in the Administration policy with errant nonsense (which he perhaps hopes will have the desired effect of prolonging the recession until after the election). Fortunately, it doesn’t seem to be working.

So – which is it?

As I said, you’re comparing simply describing economic reality on the one hand, with raw unfounded propaganda on the other.

In re Hoover – read over the history again: Hoover’s initial reaction was DO NOTHING, everything will be OK, the economy is FUNDAMENTALLY SOUND.

As indeed might have been the case, had he not panicked with Smoot-Hawley, and had money been looser (something over which he had no direct control, though a little jawboning might have helped).

Hoover didn’t act until after it was too late to turn things around.

As I said, it was not the timing of his actions that was the problem–it was the stupidity of them.

Finally, the argument that tax cuts spur investment is good theory, but companies are telling us what they would do with a tax cut that comes NOW – they wouldn’t use it to “invest”, they would use it to “recoup”.

What does that mean, exactly–“recoup”?

Does it mean that the money will not get spent, or invested, in something? How can that be?

Do you think that it will just sit in a vault somewhere, so that the greedy corporate executives can swim around in it a la Scrooge McDuck? I don’t really understand this comment.

As far as the causes of the depression – ask yourself why monetary policy was tightened.

Because the people running the equivalent of the Fed at that time were economic ignoramuses, and didn’t understand the problem.

Could it possibly be that when everybody tried to “cash out” it was discovered that nobody could cover the debt, and pumping the requisite number of dollars into the economy would have resulted maybe in hyper-inflation?

Nope, though it’s possible that they thought that.

[End Update]

Senate Majority “Leader” Daschle is having trouble getting his followers in line. No other Democrats want to sign on to his latest demogogic campaign to convince people that tax cuts cause recessions. Sounds like they’re running a little scared.

[Update at 10:36 AM PST]

Tony has a couple comments on this and the previous related post from last night.

My response to his comment on this post is in the comments section for it. As to the previous one, I’ll move it “above the fold.”

I don’t think that you fairly represented what I argued – again, nobody is claiming that “tax cuts cause recession”. The assertion was that “lack of confidence” in the fiscal policy “probably”(D’s word), or “mau have”(my words, had an adverse impact – neither of us say “definitley did have”. That’s precisely Daschle’s stated argument, though few people – except myself E.J. Dionne (in todays WP)- choose to read it that way.

Well, “choose to read it that way” is exactly the right phraseology. Very few others conversant with the English language would “choose” to do so. As I said in my comment in this post, I “choose” to read it the way it was obviously intended–to blame the tax cut for the recession, or at least the depth of it. As I said, if there’s a “lack of confidence” in the Administration’s fiscal policies, it’s not because of the policies themselves–it’s because of their mischaracterization by the Democrats and their willing accomplices in the press.

You refer to “talking down the economy” – when I threw that back at Bill Quick in re Mr. Bush doing the same to sell the 2001 Act, Bill argued that “mau-mauing” the economy wouldn’t have an effect, either.

There’s a more fundamental difference. When Bush was “talking down the economy,” he was simply describing objective reality–all the economic indicators had been heading down even before the election. Of course he was making the case for a tax cut. When the economy is heading into a recession, as it obviously was, it makes sense to cut taxes, and to develop a public consensus for that.

Mr. Daschle, on the other hand, is not so much “talking down the economy” directly, as attempting to talk down the people’s confidence in the Administration policy with errant nonsense (which he perhaps hopes will have the desired effect of prolonging the recession until after the election). Fortunately, it doesn’t seem to be working.

So – which is it?

As I said, you’re comparing simply describing economic reality on the one hand, with raw unfounded propaganda on the other.

In re Hoover – read over the history again: Hoover’s initial reaction was DO NOTHING, everything will be OK, the economy is FUNDAMENTALLY SOUND.

As indeed might have been the case, had he not panicked with Smoot-Hawley, and had money been looser (something over which he had no direct control, though a little jawboning might have helped).

Hoover didn’t act until after it was too late to turn things around.

As I said, it was not the timing of his actions that was the problem–it was the stupidity of them.

Finally, the argument that tax cuts spur investment is good theory, but companies are telling us what they would do with a tax cut that comes NOW – they wouldn’t use it to “invest”, they would use it to “recoup”.

What does that mean, exactly–“recoup”?

Does it mean that the money will not get spent, or invested, in something? How can that be?

Do you think that it will just sit in a vault somewhere, so that the greedy corporate executives can swim around in it a la Scrooge McDuck? I don’t really understand this comment.

As far as the causes of the depression – ask yourself why monetary policy was tightened.

Because the people running the equivalent of the Fed at that time were economic ignoramuses, and didn’t understand the problem.

Could it possibly be that when everybody tried to “cash out” it was discovered that nobody could cover the debt, and pumping the requisite number of dollars into the economy would have resulted maybe in hyper-inflation?

Nope, though it’s possible that they thought that.

[End Update]

Senate Majority “Leader” Daschle is having trouble getting his followers in line. No other Democrats want to sign on to his latest demogogic campaign to convince people that tax cuts cause recessions. Sounds like they’re running a little scared.

[Update at 10:36 AM PST]

Tony has a couple comments on this and the previous related post from last night.

My response to his comment on this post is in the comments section for it. As to the previous one, I’ll move it “above the fold.”

I don’t think that you fairly represented what I argued – again, nobody is claiming that “tax cuts cause recession”. The assertion was that “lack of confidence” in the fiscal policy “probably”(D’s word), or “mau have”(my words, had an adverse impact – neither of us say “definitley did have”. That’s precisely Daschle’s stated argument, though few people – except myself E.J. Dionne (in todays WP)- choose to read it that way.

Well, “choose to read it that way” is exactly the right phraseology. Very few others conversant with the English language would “choose” to do so. As I said in my comment in this post, I “choose” to read it the way it was obviously intended–to blame the tax cut for the recession, or at least the depth of it. As I said, if there’s a “lack of confidence” in the Administration’s fiscal policies, it’s not because of the policies themselves–it’s because of their mischaracterization by the Democrats and their willing accomplices in the press.

You refer to “talking down the economy” – when I threw that back at Bill Quick in re Mr. Bush doing the same to sell the 2001 Act, Bill argued that “mau-mauing” the economy wouldn’t have an effect, either.

There’s a more fundamental difference. When Bush was “talking down the economy,” he was simply describing objective reality–all the economic indicators had been heading down even before the election. Of course he was making the case for a tax cut. When the economy is heading into a recession, as it obviously was, it makes sense to cut taxes, and to develop a public consensus for that.

Mr. Daschle, on the other hand, is not so much “talking down the economy” directly, as attempting to talk down the people’s confidence in the Administration policy with errant nonsense (which he perhaps hopes will have the desired effect of prolonging the recession until after the election). Fortunately, it doesn’t seem to be working.

So – which is it?

As I said, you’re comparing simply describing economic reality on the one hand, with raw unfounded propaganda on the other.

In re Hoover – read over the history again: Hoover’s initial reaction was DO NOTHING, everything will be OK, the economy is FUNDAMENTALLY SOUND.

As indeed might have been the case, had he not panicked with Smoot-Hawley, and had money been looser (something over which he had no direct control, though a little jawboning might have helped).

Hoover didn’t act until after it was too late to turn things around.

As I said, it was not the timing of his actions that was the problem–it was the stupidity of them.

Finally, the argument that tax cuts spur investment is good theory, but companies are telling us what they would do with a tax cut that comes NOW – they wouldn’t use it to “invest”, they would use it to “recoup”.

What does that mean, exactly–“recoup”?

Does it mean that the money will not get spent, or invested, in something? How can that be?

Do you think that it will just sit in a vault somewhere, so that the greedy corporate executives can swim around in it a la Scrooge McDuck? I don’t really understand this comment.

As far as the causes of the depression – ask yourself why monetary policy was tightened.

Because the people running the equivalent of the Fed at that time were economic ignoramuses, and didn’t understand the problem.

Could it possibly be that when everybody tried to “cash out” it was discovered that nobody could cover the debt, and pumping the requisite number of dollars into the economy would have resulted maybe in hyper-inflation?

Nope, though it’s possible that they thought that.

[End Update]

Well, I’ve finally found a (sort of) explanation for Tom Daschle’s rants. Tony Andragna has been defending his nonsensical assertion that the Bush tax cuts have exacerbated the recession over at Quasipundit. He says:

Neither Tommy D’ nor myself argues that the tax cut per se deepened the recession, but the lack of confidence in this administration’s fiscal policy, especially as regards the return to deficit spending, definitely could have had some impact.

Well, I don’t think that’s what Tommy D’ is arguing, though I suppose it’s possible that you’re channeling him. In fact, I haven’t heard Tommy D’ make an argument at all–just issue fatuous nonsense. But if that’s what you’re arguing, then you don’t really have a case, unless you’re saying that in order to instill “confidence,” we have to cater to the economically ignorant.

Deficit spending doesn’t cause recessions. And concern about deficit spending doesn’t cause recessions, unless the public has been propagandized by the likes of Tommy D’ to believe that they do (i.e., “talking down the economy”). Would it sound a little too cynical if I point out that it’s not in the Democrats’ political interest to see an economic recovery prior to November?

This argument is pointed up by what actually happened in the instance that Bill cites – the Depression wasn’t the effect of a single event, but a chain reaction flowing from lack of confidence in the government’s ability to deal with the problem.

No, the Depression was caused by too-tight money after the crash, and then compounded by the Smoot-Hawley tariff bill, which, with its retaliatory companion bills overseas, signicantly reduced trade and made the situation global.

If Hoover had done something – anything – instead of nothing, the the Depression may well have been avoided.

He didn’t do “nothing.” He did things to make it worse. Like encouraging and signing Smoot-Hawley. He even did things that modern-day liberals would have him do, like creating the RFC.

Sure, “deficit spending” is one of the tools that a government ought have the ability to use in fighting downturns – nobody argues to the contrary. Daschle’s complaint over handling of the downturn is that the GOP “made a huge tax cut their number one priority — ahead of everything else — and discarded the framework of fiscal responsibility”(italics mine).

Those two things (tax cuts and fiscal responsibility) are not in any way inconsistent, if you believe that cutting tax rates grows the economy (which leads to tax revenue increases, even as rates are reduced). Apparently, you don’t believe that, despite all the historical evidence for it.

IOW, there is an argument that the GOP made our long-term situation less secure with their use of fiscal policy in trying to fix a short term problem, and this insecurity might have had an adverse impact on the recovery.

I find it amusing that Democrats are now concerned about “fiscal responsibility.” They never used to care, as long as they could get all the revenue they needed for their programs.

More to the point, the projected deficits are less a of function of spending than they are of a failure to collect enough revenue to cover all of the things that the government – yes, even under Mr. Bush’s plan – wants to do (some of us argue that sans the recession Mr. Bush’s numbers still never got there). That might seem an inane distinction, but the point is that spending is the cure to downturns, not tax cuts.

No, the point is that recessions are solved by spending and investment. Tax cuts accomplish both (since the money that the people don’t have to pay in taxes will be either spent or invested). Government spending can accomplish both, but it’s usually much less effective at either than letting individuals make the choices.

Since War Correspondent Geraldo is having trouble finding his way to the front, he’s decided to (at least temporarily) revert to his leftist roots and whine about the free market in Afghanistan.

He did a little segment on FNC tonite, in which he wandered around a bazaar in Kabul with his cameraman, showing off American aid goods for sale. Can of cooking oil, five bucks, sack of wheat, ten bucks, etc. Then he complained that it wasn’t reaching the people, but the benefits were accruing to some evil “middle men.”

Now there are circumstances in which middle men are indeed superfluous (usually only with government connivance via various trade rules and laws), but the reality is that commerce and distribution of goods would not occur without them.

I had an artichoke for dinner tonight. I’m damned glad that I didn’t have to drive all the way from LA to Castroville (a 350-mile trip one way) to buy it from the farmer. It was more convenient to go to the local grocery and buy it, and I thought it a bargain, even at $1.69. Unfortunately, in order for me to be able to do this, it had to go through not one, not two, but probably at least three of those evil “middle men.”

They had to expend energy and resources in order to find the artichoke, negotiate its purchase from the farmer, transport it (while keeping it cool and refrigerated), negotiate its sale to the grocery, get it into the store, have a place in the produce section for it (with continued cooling and occasional watering), enter it into a computer system so that I could purchase it without a lot of inconvenience to either myself or the sales clerk, etc. They (or any sane person) wouldn’t do all of this without being compensated.

That this is occurring in Afghanistan, considering the ghastly times that they’ve gone through, is not something to be lamented, but rather to be positively rejoiced. The market is still (or newly) functional there, and if we can get enough food and other supplies in there quickly, the same market that is delivering these goods to the wealthy will ensure that the price will drop (law of supply and demand, doncha know) and the goods will become available to all.

But of course, rather than using it as a lesson for how markets work in the real world, Jerry Rivers chose to make some mindless point about “exploitation.”

According to this story from the Gulf News in Dubai, the bombing of Kandahar has invigorated the local economy. The scrap from US bombs is apparently of a superior quality relative to that which was available antebellum. It is so valuable, in fact, that some Kandaharians have made the investment in decoy bunker lights to attract US bombers, the results of which are then collected and sold on the local scrap metal market. They’ve even (apparently successfully) taken to tying unfortunate dogs to positions near the lights to provide an IR signature.

It brings to mind the coastal inhabitants who would put out false lights to lure wayward ships onto the rocks so that they could be plundered. I wonder if the Pentagon’s damage assessment team is compensating for these spurious targets?

[crackle…ROGER, TANGO BASE–WE HAVE A CONFIRMED KILL ON TWO FLASHLIGHTS, ONE EXTRA DRY-CELL BATTERY PACK, AND A MALAMUTE, OVER…]