Because ‘basic corporate finance’

On the Today show, this morning, I saw Savannah interviewing Rep. Paul Ryan about the tax bill.

She pushed hard on the cut in corporate tax rate in the plan.

His response was valid.

We have the highest corporate tax rate in the industrialized world. It will be good for the economy to be more competitive, so companies stay here and invest more here.

She pushed again…but Michael Bloomberg, CEO of a large company, says he won’t invest more here. He’ll buy back more stock.

Ryan’s response was valid. That’s one anecdote against studies that show otherwise.

But I think he missed a golden opportunity.

Here’s what my response would have been:

It’s great that Bloomberg supports our position.

I envision Guthrie getting confused look at this point and responding with, But he said he would not invest more. How does that support your position?

He said he’d buy back stock. Basic corporate finance tells us that stock buybacks is one way to return money to owners. Paying dividends is the other. Ask any first year B-school student.

What do investors do with money they receive from their investments?

Often, they invest it elsewhere. 

While Bloomberg’s company might not have good projects to invest in (which may be a problem for Bloomberg), other companies might.

With more money in their pockets, the folks who sold shares to Bloomberg will be able to invest more in companies that have better investment prospects, like Google or Facebook or start-ups building better solar panels, curing cancer or the company that might disrupt Bloomberg’s own business model.

So, the economy still gets the benefit of the reduced corporate tax rate, even if companies, like Bloomberg’s, don’t directly invest their extra cash. Others will be more than happy to.

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Putting your eggs in one basket

In the past, I’ve heard passionate opponents of privatizing Social Security argue that won’t do because it would expose people to the vagaries of the stock market.

Detroit may prove that counting on taxpayers to fund your retirement is not better than betting that folks will continue to buy Coke and McDonald’s hamburgers. Especially so if taxpayers disappear.

There may be $4 trillion in unfunded public pensions. Not sure why people trust public officials with their retirement.

Ask, how much? Part 2

In the same EconTalk podcast with Morris Fiorina that I wrote about in this post, Fiorini describes another ‘how much’ scenario:

…I saw a paper presented yesterday on taxes. And it was very interesting that the population according to these surveys does think we should have more taxes on the rich. But then when you ask them, what are the rich actually paying, they underestimate, of course, what the rich are currently paying. And, what’s interesting is they think the rich should be paying less than they actually are. But you ask them, what is the fair tax to pay for various income brackets? They come in at figures that are actually below what the rich, what people in those brackets are actually paying. So here’s a case of people being uninformed and mal-informed at the same time.

Jon Stewart’s view on taxes

While flipping channels tonight, I came across a segment of the Jon Stewart Show where Mr. Stewart claims John Boehner referring to taxation as theft showed a lack of understanding of the United States Constitution.

Here’s a link to the full clip.

I’d be open for Mr. Stewart, or the writer of that joke, to point me to the part of the Constitution he believes Mr. Boehner doesn’t understand.

Article I, Section 8 of the CoTUS gives Congress the power to ‘lay and collect’ taxes. However, it does not say that taxes are not theft.

I’ll give Mr. Stewart the benefit of the doubt that he is referring to meaning of theft as the unlawful taking of another person’s property without their permission. Since the Constitution makes taxing power lawful, then (I’m guessing) Stewart believes taxes are not theft.

However, some folks believe the more salient meaning of theft is the part where another person’s property is taken without their permission. In that view, many taxes are theft.

I’d rather have elected officials who see taxes the way Speaker Boehner sees them than the way Mr. Stewart sees them.

Stewart was miffed that Boehner’s (what he thought was a) “mistake” didn’t get media attention, while President Obama’s lack of understanding of Star Wars and Star Trek did.

Maybe others in the media were concerned that Mr. Boehner’s view on taxes would make sense to people, especially folks fresh off their 2% payroll tax holiday.

What is ‘modest’?

Bob Murphy makes a good point while responding to Elizabeth Warren’s discussion of a $22 minimum wage:

We’re not talking about a “modest” change that Krugman et al. hide behind when we free-marketeers go nuts on this stuff. (Even here, I’m still waiting for someone to show me why going from $7.25 to $9/hour–which is a 24 percent increase–is “modest.” If the government cut the deficit by 24 percent in a year, I doubt Krugman would dismiss it as “modest.”)

…or cut government spending by 24%, lowered tax rates by 24% or increased tax rates on the poor by 24%.