Tax cuts - what the rich don't want you to hear

from JoeUser Forums

It seems a lot of the time you have people supporting increased government spending arguing against people supporting tax cuts for the rich. However little attention is given to the 'third way' - tax cuts for the poor (and/or tax hikes on the rich).

Firstly, the need for such actions: When an economy is in a recession, it has lots of unused capacity - just glancing at the unemployment rate will tell you as much, since it goes up during a recession. Since recessions are short term, if demand can be boosted up you can get the economy back near full capacity, generating far more money, and meaning that most if not all the pain from the recession is taken away. Confidence will also be boosted, businesses can plan better meaning better investment and in turn better growth, the vicious 'demand falls so fire workers to cut costs so demand falls further' cycle and others will be prevented, and all in all it's generally a good idea if you can manage it.

 

Secondly, how to take such actions? You basically have the choice between fiscal policy and monetary policy. The basic monetary policy tool is interest rates - cut interest rates and you make debt cheaper->people borrow more, they spend that money, and it boosts demand. Given the current situation that's not really working though, and interest rates can't be cut any further.

On the fiscal side, you have increased government spending as an option for boosting demand, and tax cuts as an alternative - that's what this post will focus on. The government can boost demand itself by spending money in various areas (see for example much of Obama's recent spending plan). This runs into some problems though, because the government isn't exactly the most efficient of entities (no incentive to make a profit, and it's run by politicians who aren't all exactly 'whiter than white'). They also lack perfect knowledge of everything, and hence will likely waste some of the money they spend. However it won't all be wasted, and a big splurge in government spending would (all else equal) boost demand.

An alternative to this is for the government to cut taxes on the rich and businesses. The idea is that those rich people will then have more money, they'll spend it, and/or invest it, hire more workers (in the cases of businesses), who will in turn spend the money they get, and you get the 'trickle-down' effect. Unfortunately this too suffers it's problems - the more affluent people are more likely to save money they receive from tax cuts than the poorer people (which makes sense - the poor people will struggle to get by, and so may well have necessities or near-necessities they'd spend their money on. They may also not be so prone to financial planning and so might not realise the value of saving some money 'for a rainy day'). Similarly tax cuts don't provide that great a direct incentive for businesses to hire workers - workers are an expense and so you get tax relief on money spent on them. Hence you'd only be hiring workers if you'd expect them to make you a profit. Taxes won't affect that, all they'll change is the amount of profit you make (not whether you make it or not). In fact the biggest thing to watch out for is just making sure the tax rate doesn't rise so high relative to other countries that businesses just move to those other countries. The US is hardly in such a position though, with low effective tax rates relative to many other developed economies, and also due to it's economic(and geographical) size that means even with high tax rates plenty of businesses would still operate because there'd still be money to be made.

Another argument for tax cuts on the rich is that if you cut taxes, they earn more per hour they work, and so working an extra hour becomes more attractive compared to the alternative of relaxing, and so they'll increase the amount they work. That has two key problems though. Firstly in the current climate, increasing capacity (which that would do) isn't needed since you'd still need the demand to make use of that capacity. Furthermore, with rich people you can actually end up in some cases with a tax cut decreasing the amount of hours they'll work, and similarly a tax increase causing them to increase the hours they work. The reasoning is that once a rich person hits a certain level of income, they may well have everything they really want, and so spending time relaxing will be much more valuable. Hence if they get a tax cut, they can earn that desired level of income by working fewer hours, thus increasing the time they have to relax. Similarly if taxes get increased, they may want to work more to maintain that level of income - in economic terms it's known as the backward bending supply curve of labour.


So then we come to the so called 'third way' - cutting taxes, but for the best target group of people, the poor. The best benefit you have with this? Poor people are generally more likely to spend money than rich, so if you cut their taxes, you can be confident almost all of it will be spent, thus boosting the economy. Furthermore, you'll have the benefit of increased capacity where the poor are more interested in working longer due to receiving more money for it, although for the very poor who are already working flat out this wouldn't have so much of an effect. Still as mentioned before it's not such a big deal anyway, since in a recession you're interested in getting demand up, rather than increasing the maximum capacity of the economy. Meanwhile forget about trickle down - with this idea you'll have a trickle up effect. The poor people get their taxes cut, meaning they go out and spend money. That means businesses hire more people, meaning those people in turn can afford to go out and spend money, and so on. Obviously you can extend this to pay money to those not earning enough to pay taxes and achieve the same boost to expenditure (in effect having a negative tax on such people). The best thing about this though? It's the poor who benefit. Those who can most use the money get to have some, so they can afford to feed themselves, to clothe themselves, to find shelter. A better alternative IMO than having that money go to line the pockets of the rich who already have all such necessities and a ton of luxuries ontop, and who sometimes start frothing at the mouth at the idea of money being spent to stop children starving on the streets. You also have other benefits - reduced crime, a happier population, improved social cohesion/reduced unrest, etc.

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Reply #1 from JoeUser Forums Top

Poor people are generally more likely to spend money than rich, so if you cut their taxes, you can be confident almost all of it will be spent, thus boosting the economy

Is there evidence for this or is this just your opinion/supposition?  Can you (or anyone) show how the economy is 'better boosted' by increased consumption vs. investment?

There is another problem with your suggestion that 'cutting taxes' for the poor is a good strategy - they're paying nothing (or nearly so) in the way of taxes already, so without taking from taxpayers to give to non-taxpayers the latter have nothing more to 'stimulate' the economy with.  So it comes down to deciding whether what the poor buy or the not-so-poor buy is better for the economy.

Reply #2 from JoeUser Forums Top

Can you (or anyone) show how the economy is 'better boosted' by increased consumption vs. investment?

Investment isn't going to directly create demand (or at least as much of it), instead it's main effect is to increase capacity and provide more of a longer term benefit. So if the economy was already near full capacity, you'd want to encourage investment since boosts to demand would just cause massive inflation (as there'd be no capacity in the short term to respond to them). However in a recession if you're producing say $50k and have capacity for say $100k, you're not going to care as much about increasing that capacity to $200k as you are about having the demand for $100k. So for example you have car makers introducing 4 day weeks, or shutting down for several months on end - they have the capacity to produce, there just isn't enough demand to warrant it.

 

they're paying nothing (or nearly so) in the way of taxes already, so without taking from taxpayers to give to non-taxpayers the latter have nothing more to 'stimulate' the economy with.  So it comes down to deciding whether what the poor buy or the not-so-poor buy is better for the economy.

Yes, and with the very poor you may well need to give them increased benefits as opposed to decreased taxes, if they're not paying any taxes already. Since the focus is on boosting demand rather than investment though, you'll want to make sure any income increases go to those who have the greatest marginal propensity to spend (in other words those who will spend the most of the extra money they're given). Increased benefits may not be as ideal as a tax cut when for the same group, but can still be better than decreased tax cuts for a different group.

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Reply #3 from PolMach Forums Top

The problem with your theory is how you define "poor".  Depending on that definition many poor don't pay taxes as it is so a tax cut to them results in no difference.  A 10% tax cut on a 0% tax bracket is still 0%.

Instead what we need is an across the board tax cut that benefits everyone.  Yes the rich will see more dollars back in their pockets because 10% of 100,000 is more than 10% of 1,000.

And honestly the best way to boost the economy is by creating real jobs (not temp government jobs like the current stimulus plan is going to do).  One way to accomplish that is to cut the corporate tax rate in the hopes of attracting businesses that have gone overseas in search of cheaper labor and a better tax climate.  If we create the better tax climate they may return which will then cause jobs to be created which creates permanent wealth rather than temporary.  Yes this is a simplistic explaination but I think it gets the point across.

Reply #4 from JoeUser Forums Top

However little attention is given to the 'third way' - tax cuts for the poor (and/or tax hikes on the rich).

Please explain to me how you give a tax cut to someone who pays 0%?  If you give them money it's called welfare?

They also lack perfect knowledge of everything, and hence will likely waste some of the money they spend.However it won't all be wasted, and a big splurge in government spending would (all else equal) boost demand.

I'm hearing 12 cents on the dollar will go towards something that MAY suggest economic stimulation. 

The second problem is that this money came from somewhere.  It comes from, Either from taxes (from the people), printed (which devalues our currency), or borrowed (comes with a price tag of interest) or a combination of the previous. 

You also stated that the government has no interest in being profitable this means there is a huge gaping ineffeciency here that compounds the previous TWO problems. 

This runs into some problems though, because the government isn't exactly the most efficient of entities (no incentive to make a profit, and it's run by politicians who aren't all exactly 'whiter than white').

The major crux of this type of economics is there is negative cash flow.  The very fact that the government isn't profitable (as you pointed out) means they are not producing more cash flow.  So as the government takes from the people through taxes a portion of that is 'lost' in government.  Using the above calculation only 12% of this money taken makes it back to the market place. 

The question then becomes Maudlin.  Although yes businesses are likely to take some of their revenue and set it aside for saving.  I can guarantee you that the private sector would invest more than 12% of their excess back into the business to pay expansion which it hopes generates MORE revenue.

If you allow the business to keep the money then the people that work for them have greater job security.  If you take the money from the business you are taking money that 'could' have gone to pay for another employee. 

Poor people are generally more likely to spend money than rich, so if you cut their taxes, you can be confident almost all of it will be spent, thus boosting the economy.

All you do in this case in temporarily (and falsely) boost the economy.  The money didn't come from someone with a job.  The money came from the gov't to the poor' back to the business from their purchases.  In the meantime no money has been generated, less money actually makes it back to the business it was taken from (government takes some back through taxes, as well as less was distributed from gov't than what was taken from business). 

Even if the rich or business had saved just a portion of that money they could have generated extra money off the interest. 

 

Ultimately:

Until the government can actually produce a profit, the best thing for gov't to do is allow the business and people that CAN turn money into profit KEEP more of that money.

Reply #5 from JoeUser Forums Top

increased consumption vs. investment?
Been there, done that--trickle down doesn't work.

Reply #6 from JoeUser Forums Top

Until the government can actually produce a profit, the best thing for gov't to do is allow the business and people that CAN turn money into profit KEEP more of that money.
And they sure do keep it, such as 18Bln in bonuses.

Reply #7 from JoeUser Forums Top

The money didn't come from someone with a job.

Actually, it comes exclusively from people with jobs.

Been there, done that--trickle down doesn't work.

Ah, yes, the old broad-brush non-sequitor oranges-to-apples response.  Where's all that 'nuance' you liberals are supposed to be so good at?

Reply #8 from JoeUser Forums Top

this money came from somewhere.  It comes from, Either from taxes (from the people), printed (which devalues our currency), or borrowed (comes with a price tag of interest)...there is negative cash flow

Which is why if you didn't expect things to return to normal in the medium term this policy wouldn't be a good idea. However based on history, recessions are maybe a couple of years long, after which you will return to growth, and long term you can expect to see growth of maybe 1-2% a year consistently. So the idea is to use government borrowing to stave off the recession in the short term, (artificially) put the economy back where it will be in a couple of years time, and then as things return to normal the need for that borrowing fades off, and then you end up getting a surplus instead of borrowing which can be used to repay that borrowing. In a sense, you're smoothing the peaks and troughs of the typical business/economic cycle, which if done successfully will have very positive impacts in the long term due to the confidence it creates (since for example a business can plan on the economy growing slightly or at the very least not shrinking, rather than maybe holding back for fear that there may be a recession).

 

Using the above calculation only 12% of this money taken makes it back to the market place.  The question then becomes Maudlin.  Although yes businesses are likely to take some of their revenue and set it aside for saving.  I can guarantee you that the private sector would invest more than 12% of their excess back into the business to pay expansion which it hopes generates MORE revenue

First of all I'm not really sure where you get the 12% figure from. Given the costs of running and maintaining government are already there, we're only talking about the additional cost of administering tax cuts and possibly benefit increases and possibly tax rises on the rich (although the last is probably less likely in a recession). Such systems are already mostly in place so these should be small, and certainly not even close to 88% of the total amount spent, and since the money is likely being borrowed you dont have to worry about any possible negative impacts of a tax rise (although it's debatable just how much of an impact this would have), just the interest on the debt which will be low since it's the government borrowing). Secondly why would a business want to expand during a recession (unless they're in one of the few industries that benefit from a recession)? You'll have some expanding, true, but far far less than in a period of growth.