Help
Winstonm, on 2011-August-15, 18:44, said:
What happens in the real world is antithesis to supply-siders. However, it is simple to show that the wealthy and corporations do no favors with the extra tax breaks the government has allowed, while giving that same amount to the working class would have created enormous new demand.
Reality has a liberal bias. It goes like this.
In the U.S., consumption produces about 70% of GDP. Of that, 20% comes from high-income families, those who earn >$80K a year, who as a group average $250K a year. Increases in taxes have no affect on this groups' consumption, as the taxes are paid out of savings or capital gains: with higher or lower taxes, consumption stays at 20% of GDP.
At the same time, 50% of GDP comes from consumption of those families earning <$80K, and these earners typically spend all of their wages on consumption and have little or no savings or investments. Their wages are their capital.
Therefore, it is easy to show that GDP=2x low income wages
Any regressive taxation on this lower-income group (sales, VAT, FICA, etc.) has a direct and powerful negative affect on demand and thus GDP.
To stimulate demand and growth of GDP, any tax cuts should go strictly to this group and not to the wealthy or corporations. The reason is simple - the added dollars will go into consumption rather than savings.
This is not a complex issue nor is it hard to explain or understand. The problem is that supply-side thinking has been accepted as dogma by our national consciousness to the point where too many I fear block out the reason behind real arguments in order to support a confirmation bias based on belief in the dogma.
Reality has a liberal bias. It goes like this.
In the U.S., consumption produces about 70% of GDP. Of that, 20% comes from high-income families, those who earn >$80K a year, who as a group average $250K a year. Increases in taxes have no affect on this groups' consumption, as the taxes are paid out of savings or capital gains: with higher or lower taxes, consumption stays at 20% of GDP.
At the same time, 50% of GDP comes from consumption of those families earning <$80K, and these earners typically spend all of their wages on consumption and have little or no savings or investments. Their wages are their capital.
Therefore, it is easy to show that GDP=2x low income wages
Any regressive taxation on this lower-income group (sales, VAT, FICA, etc.) has a direct and powerful negative affect on demand and thus GDP.
To stimulate demand and growth of GDP, any tax cuts should go strictly to this group and not to the wealthy or corporations. The reason is simple - the added dollars will go into consumption rather than savings.
This is not a complex issue nor is it hard to explain or understand. The problem is that supply-side thinking has been accepted as dogma by our national consciousness to the point where too many I fear block out the reason behind real arguments in order to support a confirmation bias based on belief in the dogma.
It really isn't this simple. For one thing economies are too complicated to simply pull out a couple of random data streams and look for correlation.
(1) Many people in the high income bracket have most of their wealth income in businesses. If a business simply reinvests its profits, rather than paying out a dividend, it will increases its share price rather than produce income for investors. This can be used to avoid high rates of income tax, and pays corporation tax/capital gains tax instead. E.g. Berkshire Hathaway has never paid out a dividend, which is why Buffet's tax is so low.
(2) Rich people save more, and that is a good thing too, as savings are the primary method by which capitalisation of the economy occurs. That is to say, that an economy with more capital can change more rapidly to match economic conditions. Lack of capital can undermine growth by preventing investment.
(3) High capitalisation is particularly important in countries with high population growth like the USA, as expanding the economy just to keep up with increases in population, rather than to increasing productivity, already requires lots of Capital.
(4) The salaried upper class, ie not business owners/the mega rich, but highly paid professionals, are far more mobile now than ever before. Many can move abroad to find more favourable tax regimes.
(5) One of the USA's primary advantages over western Europe is that your salaried upper class simply works more hours than Europeans. Many empirical studies have shown that changes in income tax lead to changes in hours worked, especially among the well off, who can normally afford to work less, and due to the decreasing utility of higher income.
(6) Saving is generally a good thing. In effect, an economy has both goods and supply. If I work and then save my money, the economy is better off by the value of my savings until such time as I choose to spend it. Saving money increases the purchasing power of money spent, a high savings rate acts like the opposite of inflation. While this may seem counter intuitive, that paying more to the lower economic classes will not necessarily lead to higher consumption as they are competing for the same amount of goods, it is really this that leads to the "wage spiral" in periods of higher inflation. (In practice I do not necessarily agree with this argument, I suspect wealth transfer in the long term leads to a different supply profile, so that overall demand is increased).
(7) It isn't clear that it is possible to tax "idle rich" successfully. If someone is to consume more of the goods produced, someone must buy fewer, given that in a given (short) time period the amount of goods is a constant. Thus taking away money from rich people who aren't spending it, and spending it, is effectively reducing the purchasing power of poor people. Of course, this is just the collary of point (6) that spending savings is inflationary, whereas saving is anti-inflationary. Everyone should read this exchange. As with (6) I have long suspected in the long run that wealth transfers do work, by changing the supply profile. That is why the high tax regimes of western europe produce economies with less manufacturing and more services, literally because more people can afford services like fast food/cleaners etc. And the economy can afford to have more people in only marginally productive jobs, because wealth transfers mean that people can subsist on lower salaries. But I do not think it is a short term fix.
(8) Finally, passedouts argument about velocity, effectively assumes that the output gap is made up of the kind of thing that poor people will be buying. This is not necessarily the case. Normally when the middle-upper class cut their spending (by assumption the poor classes are still spending their income) the things to go are Ipods and Iphones and Cars and Holidays. No amount of wealth transfer will realistically lead to the poorest classes buying designer jeans. For wealth transfer to work in the short term it is necessary that the output gap is made up of those things that poorer people will want to buy. It is not at all clear that this is the case. (But I think its a good idea in the long run, I just don't thing it will work right away, or at least, it will not work nearly aswell as some people think).
That said, I do think the US needs more taxes on richer folk, and more taxes generally. However, I also think that the division between private and government spending is misplaced (sometimes). For example, healthcare spending is (beyond basic, and generally cheap medicine to help younger people get well) always an economic drag. Whether government is spending it, or the consumer through insurance, it is the same money being spent. The USA could quite easily half their spending on healthcare under a single payer system, and still have outcomes significantly better than Western Europe. That would free up some extra 7-8% of GDP for extra consumption of non healthcare goods. Clearly a win in the long run since comparison with WE suggests that your healthcare system is about half unproductive spending.
I do not think that one can expect consumer spending to rise until consumer debt is significantly reduced. I suspect that government debt is also a drag on companies, who are expecting that either they or consumers will have to pay for all that debt in the medium to long term. However, America's expanding population at least gives it more leeway that western europe, as expanding population = expanding gdp without too much effort.