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How Tax Cuts and Consumption Affect America's Jobs
07.08.08 | Taxes, Work | 0 Comments | by Fred Siegmund

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It has been common in politics to hear that tax cuts in the higher income tax brackets will be good for the economy because the wealthy and the well-to-do will be able to save and provide funds for capital investment spending and jobs.

Americans must have jobs. Large scale unemployment in an urban society guarantees untenable social, economic and political conditions. It is total spending that generates jobs, which includes the investment spending generated by our savings, but also consumption spending including government spending.

In the last two posts I quoted from Alan Greenspan, who told us there are not enough investment opportunities for our savings since the year 2000. Creating hedge funds or other speculative financial investments does not create many jobs: mostly financial advisors and lawyers.

Since financial investment speculation does not create enough jobs, America must rely more on consumption spending to keep ourselves employed.

The consumption spending America needs the most is for domestic services. Consumption spending that goes for luxury products imported from abroad creates foreign jobs, but not American jobs.

The growing importance of consumption spending for creating jobs makes credit card spending a necessity. Given the wages and taxes for millions of Americans, keeping up spending requires credit card borrowing. For those of us who save and read savings blogs, it is sobering that so much of our savings supports credit card spending.

It would be better if it helped pay for long-lived physical assets, but at least we can have an interest return knowing our savings support jobs and the economy.

The growing importance of consumption spending brings us back to the politics and tax cuts I mentioned above. If America is going to have enough jobs, the well-to-do must see to it that all of their income goes back into the spending stream.

They can only save if it helps create jobs, otherwise they must consume.

Washingtonian Magazine published an article over a year ago describing the proper things to buy for the well-to-do lifestyle. They included landscaping, flowers, dog walkers, sports tickets, club memberships, personal trainers, spa memberships, dining out and charity events. For those with kids, include coaches' fees, soccer camp, piano lessons, college consultants and live in nannies.

Perhaps the editors at Washingtonian were celebrating conspicuous consumption or encouraging the wealthy to do their duty and create jobs. That I cannot tell, but tax cuts to the wealthy pose a threat to jobs and economic growth unless they go into consumption. Like it or not; that's a fact.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
How the Bush Tax Cuts Have Affected You
04.10.08 | Money | 1 Comment | by Fred Siegmund

In an article on March 28, The Washington Post wrote about the Bush Tax cuts, saying, "The tax cuts, the signal economic achievement of the Bush administration, are among the three biggest federal tax reductions since World War II … "

If you work for a living, you might want to know how the Bush tax cuts affect your taxes.

Try an example from 2000 with a married couple that files a joint return with $40,000 salary and using the standard deduction with 2 personal exemptions. The year 2000 taxes — before the Bush tax cuts — for our hypothetical couple would be $4,057.50 on taxable income of $27,050.00.

In 2007, the same couple with the same income would pay $2,592.50 on taxable income of $22,500. The tax savings is $1,465.00.

Notice, though, that there are two components to the tax decrease. One is the cut in tax rates. In 2000, the entire taxable income was taxed at 15%. In 2007, the first $15,650 was taxed at 10% and the rest at 15%. The new lower 10% tax rate is the Bush tax cut part of the tax decrease.

The tax rate cut saved $782.50, which is 5% saved on $15,560.

The other part of the tax cut is due to the higher standard deduction and the higher personal exemption, which Congress decided to adjust for inflation long before the Bush tax cuts.

Combined, the standard deduction and personal exemption went up from $12,950 to $17,500, or an increase of $4,550 for 2007 over 2000. That part of the tax decrease is $682.50 because $4,550 was not taxed at all in 2007. The $682.50 is 47 percent of the tax cut that is not part of the Bush tax cut.

Do the same thing for a married couple with $100,000 of income. Now 2000 taxes equal $18,673.50 on $87,050 of taxable income, but 2007 taxes are $13,472.50 on taxable income of $82,500.

Tax savings is $5,201.00.

In 2000, the first $43,850 was taxed at 15% and the rest at 28%. In 2007, the first $15,650 was taxed at 10% instead of 15%. The amount of taxable income from $15,650 to $43,850 was taxed at 15% the same as 2000, but the amount greater than $43,850 but less than $63,700 was taxed at 15% instead of 28% as in 2000 — a 13% tax rate cut.

The rest of the income above $63,700 was taxed at 25% instead of 28%, a 3% savings. Combine the three tax rate reductions and the Bush tax cuts reduced taxes on the higher income by $3,927.

The same $4,550 of reduction in the standard deduction and personal exemption was not taxed at all as before, which saved $1,274 because it was taxed at 28% in 2000.

Here we see a difference of proportion because the Bush tax rate cuts of $3,927 were 76 percent of the total tax cut for Mr. and Mrs. $100,000 instead of 47 percent as with Mr. and Mrs. $40,000. The Bush tax rate cuts reduce taxes, but inflation adjusted exemptions and deductions are more important to lower income families.

Do Bush tax cuts favor the well to do? You be the judge.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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