5 thoughts on “Why Tax Cuts For The Rich Don’t Stimulate The Economy (Commentary, 11/12/2010)

  1. Saying that investing in Land and Art is economically unproductive is a complete lunacy. Saying that when the rich Save is also a complete lunacy.

    Here is what happens when a rich person who paid $150,000 less in taxes decides to spend the money on “economically unproductive” (as you put it) things like art. Joe the millionaire takes the money he did not pay to the government and gives it to the Art Gallery (providing jobs for employees of the gallery and the artists). The gallery takes the money and invest in its business. The Artists take the money and buy canvases, paint and brushes, providing more jobs in the art supply store.

    Now let’s examine what happens when that same Joe the millionaire takes the 150K and gives it to the government. The government is not in the business of producing. It is in the business of spending. There are literally hundreds of thousands of government agencies that exist with the sole purpose of spending the taxpayer’s money. So the government gives it to one of these agencies. Whether it is the agency that is supposed to monitor the migration of Canadian geese in the Western Texas during the months of January and February or the commission to assist the Transportation workers in Oklahoma with a speech impairment, these agencies do not produce anything or don’t create jobs.

    Let’s assume for a second that the $150K was given to the failing school in Philadelphia to make the school more competitive. The superintendent of the school realizes that no matter how bad of a job he is doing – he is going to get a hand-out from the government. In fact, he realizes that the worse he is doing, the bigger hand-out he is going to get. Hence he has an incentive to perform really, really poorly.

    The other, better performing schools that actually try to provide value for the money they charge for the education also see that the poor performance earns the financial reward from the government – hence they learn their lesson as well. They either close the doors, because they can’t compete financially with the government-sponsored institution or they start to perform poorly to compete for the government handout.

    This situation actually kills jobs and destroys the economy.

    It has been proven over and over that the rich in any society are the productive class that is the engine for prosperity. They are also a very mobile class. You tax them enough and they just leave and go to live in Hong Kong. In fact – it has been happening over the decades.

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    • Samy, thanks for taking time to listen to the show and/or visit the website, and thanks for sharing your views.

      “Lunacy” is a pretty strong and even disrespectful way to start a discussion, don’t you think? It kind of delegitimizes any possible response and makes your own contention seem unassailable.

      But to the point…

      The point is, What creates economic activity and gives you the biggest bang for your economic buck? Saving produces a little economic activity for the people in the bank. Spending thousands or millions of dollars on art or land make some sales people and paper pushers a few bucks in commissions or salaries.

      But just selling or trading stuff, while an essential part of a functioning economy, doesn’t actually produce anything in a tangible, physical sense.

      Building a bridge creates construction jobs at the outset. It provides maintenance jobs in the future. It makes commerce more efficient by saving time and fuel for shippers and commuters. It’s a dollar that, in a way, keeps turning over and over in the economy creating more jobs and more efficiencies for the life of the bridge.

      A painting doesn’t do that.

      Real estate, often a good investment, also doesn’t produce any economic activity. It just sits there paying real estate taxes and maybe employing some folks to maintain the land by controlling plant growth. The money that changed hands for the property didn’t make anything of use.

      Interestingly, your statement, ” Joe the millionaire takes the 150K and gives it to the government. The government is not in the business of producing. It is in the business of spending,” makes the point while entirely missing it. The government is in the business of spending, which creates actual long-term jobs. It also often results in long-term infrastructure improvements.
      Employers today often complain that their employees are poorly educated. We can discuss the quality of education today and what can be done to improve it, but you surely can’t deny the need for teachers. That $150,000 might pay 3-4 teachers for a year, each of whom will instruct 20-30 kids. Those kids can be viewed as infrastructure development; human infrastructure.
      That $150,000 might pay 4 trash collectors. Trash collection is essential to public health. A healthy public is more productive that one which is unwell.

      Yes, you’re right. The government is in the business of spending money, but it doesn’t go into a black hole. It provides infrastructure for better living and more efficient business. It creates jobs that provide essential services to the country, like police, firemen and military people and equipment.

      Spending money IS economic activity! The government employs people and contractors to build things. The government seeks out vendors to buy things. The government collects money to help you if your house is hit by a flood, tornado or earthquake.
      Money kept in financial instruments by the rich do none of those things. From the perspective of economic activity, it’s actually a drag on the economy.

      You say that, ” It has been proven over and over that the rich in any society are the productive class that is the engine for prosperity. They are also a very mobile class. You tax them enough and they just leave and go to live in Hong Kong. In fact – it has been happening over the decades.”

      I have yet to see that proof, though I hear a lot about it.

      On the other hand, I’ve seen lots of data on my position. If you’ve seen data on yours — and I’m not just talking about someone repeating your position or providing theoretical data (aka, the Laffer Curve), but actual historical data. I’d be happy to look at it, if there is any.

      Nor do conservatives provide any data on alternative modes of economic growth other than tax cuts. Frankly, it seems more a philosophical position rather than one grounded in facts, history and data.

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  2. >“Lunacy” is a pretty strong and even disrespectful way to start a discussion, don’t you think?

    Lunacy is a pretty accurate way to describe what I am reading. For example saying that building a bridge produces more economic activity than painting is something completely pulled out of the air. Open market decides where the $150K that a free-willed person spent will end up. When money is spent on a painting it goes right back into the economy. It can end up building a bridge somewhere, or not. But it will end up where it is needed and where it makes sense. Unless of course the government sticks its hand in it…When the government spends the money it distorts the market equilibrium and creates an unsustainable bubble that leads to great recessions, which cannot correct themselves.

    >Yes, you’re right. The government is in the business of spending money, but it >doesn’t go into a black hole.

    LOL. uhmmm…. really? Is this why the trillion dollar stimulus produced virtually no new jobs and the unemployment rate stayed the same as it was BEFORE the stimulus? Oh wait… it saved ten trillion jobs, right? :) Or was it hundred gazillion jobs? And now we are printing money to buy our own debt, because the rest of the world is fed up and does not want our worthless junk anymore… I would laugh more if it hadn’t been so sad…

    >That $150,000 might pay 4 trash collectors.

    No. If the government controls who collects my trash, $150K will pay for 2 trash collectors. $75K per year for a guy that never finished high school. $75 K per year – more than a newly graduated engineer. Plus that guy knows he will never lose his job and he works accordingly. He picks up about half of the trash – the other ends up on the curb. And being a government employee – he knows he really does not have to try harder.

    $150K would probably pay for 5 trash collectors if the government did not manage it. 3 more people would have been employed – some new immigrants or students trying to work their way through college. Someone with more appreciation for the job and the job would have been done better.

    >I have yet to see that proof, though I hear a lot about it.

    There is plenty of proof. People moved to Hong Kong because there is opportunity. Factories, Export/Import companies, Financiers. I personally know people that have done this. This is why Hong Kong became so prosperous. Government did not meddle in free markets. Hong Kong’s prosperity is all the imperical proof that you need to see how it works out (not sure what else you are looking for). In US, rich people have not felt a need to leave in droves yet, because this country has provided more or less acceptable business environment. The current administration tried to start a class war, and thankfully it was put in check before it was able to take it too far.

    >Savings produces little economic activity for the people in the bank.

    I am trying to hold myself back from using words like Lunacy, but it’s pretty hard. Saying that Savings produces no economic activity is a complete nonsense. Savings end up in a bank that has to employ the money and make more than the interest rate that it will own at the end of the term. What the bank in a free economy does is it lends the money out. It invests. It lends to small businesses, It lends to individuals for purchases of goods and services. Of course this is what the banks do in a free economy. In the “new deal” kind of economy, where the banks are in the business of “encouraging social fairness” or whatever you want to call it, With Freddie an Fannae making ridiculous loans that everyone knows will never get paid back and where the losses are nationalized, but profits are privatized, well…. We all know what happens…

    Economic activiy is produced by the private sector. Government spending, while producing economic activity results in a situation like we are experiencing today.

    Have a nice day.

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    • I was going to let you have the last word on this, but I have to make one final comment.

      I did a lot of research before saying the things I said, partly because I like to be accurate and partly because I knew the remarks would be controversial. For that reason, I did something I don’t usually do: I included links to most of the authoritative documentation I used.

      Samy, do you have anything comparably authoritative that you would like to post?

      Mike

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  3. Pingback: 2010 in review | ThinkWing Radio with Mike Honig

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