With today’s release of the National Federation of Independent Business (NFIB) Small Business Optimism Index it is evident that there is a massive disconnect between the Government and small businesses. While the Administration has been working hard as of late to promote that the recent economic deterioration is nothing more than a soft patch and will re-accelerate into the end of the year – small businesses are saying quite the opposite. In the release Bill Dunkleberg, Chief Economist for NFIB stated; “It is hard to think of anything that happened in July that would make owners more optimistic. The second quarter Gross Domestic Product (GDP) growth report was abysmal (1.3%) and Q1 was revised from 1.9% to 0.4%. Indeed,the government reported that the entire recession period was even worse that we thought. The decline in GDP was revised to -5.1%, one full point worse than previously estimated.”
The recent passage of the Debt Control bill did little to ease any of these concerns as the threat of rising taxes is still prevalent and a deterrent to small businesses. Furthermore, the budget plan did nothing to stabilize the future outlook of the economy or instill confidence in small businesses. We have discussed many times the delusions of Paul Krugman in relation to the economy but Bill Dunkleberg did an excellent job for me this time: “Congress did not come up with a budget plan by the time the month ended, and the likes of Paul Krugman (NYT July 30) continued highly partisan assaults on the Republicans. His claim that high tax rates were responsible for the surpluses in the late 1990s is pure political bunk (many Democrats claim this). I thought it was the outrageous levels of capital gains tax revenues from the DotCom bubble and the record employment levels that resulted from the Y2K/Telecom investment boom, along with a Republican controlled Congress that yielded the surpluses. Maybe the Administration can magically concoct another Y2K event in the calendar. Even small business capital spending hit record levels in that investment boom.
Mr. Krugman also blames people who want government spending curtailed for holding us hostage in raising the debt ceiling. More likely the reverse is true, it is those who will not consider curtailing the reach of government that will not agree to a deal. They are holding sensible people hostage to their view of a larger government at the expense of small business owners. There is no limit to the amount of private income Congress will spend on its pet project – mostly designed to keep them in elected office.”
We have discussed the fallacies in the past on raising taxes on the rich but today Louis Woodhill knocked the ball out of the park: “To ‘tax’ is to take away something from someone and give it to the government. ‘The rich’ are rich because they own a lot of assets. So, what it means to ‘tax the rich’ is to take assets away from rich people and transfer them to the government.
So, what are the assets that the rich own? The rich don’t have money bins full of cash, like Scrooge McDuck. Rather, they own things like factories, office buildings, and oil wells, either directly, or indirectly via stocks and bonds. In other words, the rich own most of the ‘nonresidential fixed assets’ of the nation. These assets certainly count as ‘wealth’, but what they are physically are the tools that workers use to produce America’s GDP.
The government doesn’t want factories, office buildings, or oil wells. It wants cash. So, taxing the rich forces them to liquidate assets. This liquidation is accomplished financially, rather than by actually tearing down factories and selling them for scrap. At the concrete level, what happens is that money that would otherwise have gone to create new nonresidential fixed assets is redirected to buy some of the rich taxpayer’s existing assets. The rich person then hands this money over to the government. The end result of this process is that government has more money, and the rich person-and the economy as a whole-has less nonresidential fixed assets.
The relationship between nonresidential fixed assets and GDP has been essentially constant for the past 60 years. One dollar of nonresidential fixed assets yields about $0.50 of GDP. Real GDP per worker has risen over the years as real nonresidential fixed assets per worker have increased. In 2009, according to BEA data, the average job was underpinned by about $200,000 in nonresidential fixed assets.
So, if you tax away $200,000 from ‘the rich’, GDP goes down by about $100,000 per year, federal revenues go down by about $18,000 per year, and total employment goes down by one job. This is how ‘spreading the wealth’ actually works. This may account for why ‘taxing the rich’ is, inexplicably for Progressives, not popular with voters.
Now, $200,000 is more than $18,000, so doesn’t ‘taxing the rich’ at least leave the federal government better off? No, it does not. This is because to get the $200,000, the federal government has to give up $18,000 per year in tax revenue from then on. The present value of $18,000 per year is about $620,000. So, when the federal government taxes $200,000 away from ‘the rich’, it makes itself worse off by $420,000, the country as a whole becomes poorer by $3.4 million, and Joe Lunchbox loses his job.”
The bottom line is that small business are in no mood to hire because of the economic outlook and the fact that final demand from consumers is still not present, which is why “poor sales” ranks so high on their list of concerns. “The July survey anticipates slow growth for the remainder of the year, high unemployment rates, inflation rates that are too high and little progress on job creation. It seems for all the activity in Washington, D.C…they have done nothing but create a sizeable helping of anxiety, exactly what we don’t need.”
Maybe Washington will start listening to Main Street soon – again, maybe not until after the next election and potential recession.