Someone posted this on IMDB about the ''trickle down'' theory

[Avonrepus]

I've always felt the idea was stupid but this person seems to go into details and noone had posted a credible response, any ideas on how one could destroy this argument?

"To start with, the wealthy in this country are the one's who take chances to create new business and invest money. By raising their taxes, you lower the incentives for them to invest. They could also find tax-shelters to hide their money, therefore lowering the govt. take.

Remember when George Bush (the first one) reneged under pressure on his 1988 "No New Taxes!" pledge? We got big tax hikes in the summer of 1990. Among other things, Congress dramatically boosted taxes on boats, aircraft and jewelry in that package. They thought that since rich people buy such things, we should let `em have it with higher taxes. They expected $31 million in new revenue in the first year from the new taxes on those three things. We now know that the higher levies brought in just $16 million and we laid out $24 million in additional unemployment benefits because of the people thrown out of work in those industries by the higher taxes. Only in Washington, where too often lawmakers forget the importance of incentives, can you aim for 31, get only 16, spend 24 to get it and think that somehow you've done some good.

Want to break up families? Offer a bigger welfare check if the father splits. Want to reduce savings and investment? Double-tax `em, and pile on a nice, high capital gains tax on top of it. Want to get less work? Impose such high tax penalties on it that people decide it's not worth the effort.

In 1929, when the Great Depression hit, the top marginal tax rate was 24 percent. That was the rate on top incomes. The bottom rate was one-half of one percent. In other words, the taxation started at one-half of one percent. There was an exemption, too, and the exemption was high enough to keep 98 percent of all Americans off the income tax rolls. But we had a small federal government back then.

In 1932, the marginal tax rate went up to 63 percent on top incomes. In 1935 Roosevelt pushed it up to 79 percent, and we started at five percent, and the exemption was lowered, so more people were paying taxes. But it starts at five percent and it goes up to 79 percent. Now, you could see why, right? All these programs had to have a payment. But here's something that is not explained. What about the work ethic of those people in those top brackets? In 1929, you were telling them, you get to keep three-fourths of whatever you make. Now you're telling them you give more than three-fourths to the government. What's your work ethic going to be with a 79 percent tax? Tax-exempt bonds, stamp collections - that was Roosevelt's personal exemption, he had a good stamp collection - coin collections, foreign investments, Swiss banks, anything to shelter that money. But do you see why the depression is prolonged? Who's going to invest to create the jobs to get us out when you're being taxed 79 percent? Do you think the revenue then is going to go up when the tax rate is 79 percent? We raised in 1929 over $1 billion. It was almost $1.1 billion in income tax revenues. In 1935 when the tax rate was 79 percent, our take for the government on income tax was $527 million - less than one-half of what it was in 1929. Did you catch that? Twenty-four percent of something is something, and seventy-nine percent of nothing is nothing - because the high tax rates chased capital into tax-exempt investments. "

[KissMyAsscroft]

1. Utter Bullshit...

Taxes on the wealthy have decreased over the years to the point where I believe they are undertaxed. You can pretty much argue all day as to where you think the rates should be. Besides, they have accountants and offshore banks, and loopholes, etc. The rich are not starting new businesses these days, they are merging with other ones and sending their work offshore. It's the small businesses that are getting screwed.

And what good is it to have entrepreneurs when no one has the money to buy your products because they are jobless?

Basically the big problem right now is jobs, and that is why the economy is faltering. I believe the rich are undertaxed but that is not why the economy is not producking jobs right now. The problem is the outsourcing.

[RainDog]

2. Read The Divine Right of Capital

Read Wealth and Democracy (by a republican, now independent).

Read The Washington Monthly article about how Reagan raised taxes on the sly because his economic programs were killing the economy.

Read Bill Gates' father's book Wealth and Commonwealth.

[MAlibdem]

6. Read anything by John Maynard Keynes

[NashVegas]

22. Divine Right

Majorie Kelly does a great job of laying down why it's an absolutely looney shell game for investors to be considered the end-all and be-all, considering that 99% of the time, they are NOT INVESTING in a company, they are investing in it's stock that was previously held by someone else - ie, gambling - and expect the rest of the world to prop up said investment.

[rfranklin]

3. Many erroneous claims...

For instance, there will be no job creation because of the globaliztion of labor. There is no reason to hire workers in the United States for $100,000 a year with benefits when you can hire someone in India for $30,000 a year with no benefits to do the same job. Even in fast food with minimum wages where the job can't be exported, relatives are imported to work longer hours for less. Do you really believe that all those Indians in Dunkin Donuts are clocking in all the hours they work? I'll bet not.

The Great Depression was not an anomaly caused by income taxes. There were other long and deep depressions prior to income tax. Severe and prolonged ones had afflicted the world in 1873-1878 and 1893-1897. others had been shorter. They were usually preceded by a speculative and inflationary boom. A typical boom had immediately followed the war, in 1918-1919, giving way to a short and sharp slump in 1921-1922, which had in turn led to the general prosperity of the years up to late 1929.

Republicans had dug the hole deeper after the stock market crash. The high tariffs enacted by the Smoot-Hawley Act (1930) exacerbated the problems. From 1929 to 1932, about 11,000 banks failed and $2 billion in deposits evaporated. GNP declined by 10% annually on average from 1929 to 1932. Hoover's only response was to give government money to corporations (in other words, rich people.) It didn't work then, it won't work now.

Republicans are once again digging us deeper into economic ruin. But, doomed to repeat history because they are so fucking stupid, all the rest of us will have to suffer for decades to come.

[Paragon]

4. Considering this "recovery" has been on the backs of consumers...

...I'd say the trickle-down crap has just been disproven.

Business spending has been down or flat and is only now beginning to pick up.

As usual, Republicans are full of shit.

[MAlibdem]

5. The upper income bracket under Clinton was 39.6% how was the economy then?

Besides that, there is an ethical question at stake. Even if cutting taxes stimulated the economy, having the government spend money on programs for people who NEED to spend spend spend does it much more effectively.

Also, yes, people with money start businesses, but they have just as much incentive to pocket their savings or buy a luxury yatch that doesn't benefit the economy or the poor. So it's an argument that's reasonable, just short-sighted

[Jim__]

7. Decreases in government revenue after 1929 were not primarily due to tax r

"In 1929, when the Great Depression hit, the top marginal tax rate was 24 percent.

"In 1932, the marginal tax rate went up to 63 percent on top incomes. In 1935 Roosevelt pushed it up to 79 percent, and we started at five percent, and the exemption was lowered, so more people were paying taxes. ... In 1929, you were telling them, you get to keep three-fourths of whatever you make. Now you're telling them you give more than three-fourths to the government. ... But do you see why the depression is prolonged? Who's going to invest to create the jobs to get us out when you're being taxed 79 percent? Do you think the revenue then is going to go up when the tax rate is 79 percent? We raised in 1929 over $1 billion. It was almost $1.1 billion in income tax revenues. In 1935 when the tax rate was 79 percent, our take for the government on income tax was $527 million - less than one-half of what it was in 1929."

The basic problem with this argument is that it's a "post hoc" argument. Why did we have a depression in the first place? With the top tax rate at 24%, why did the Depression happen? Essentially, the fact that the Depression occurred when the top tax rate was 24% demonstrates that either economics is not just a function of the tax rate; or a top tax rate of 24% causes disastrous results. The decrease in government revenues after 1929 was not primarily a function of the change in tax rates.

Some GNP numbers (billions per year) from "Leakage" by treval C Powers:

1929-30 203.6
1930-31 183.5
1931-32 169.3
1932-33 144.2
1933-34 141.5
1934-35 154.3
1935-36 169.5
1936-37 193.2
1937-38 203.2

Does the fact that GNP increased after the tax increases of the early thirties prove that increasing taxes increases GNP? It does if we follow the same type of argument that says government revenue decreased due to the tax increase.

[BillZBubb]

8. Pure sophistry

First, capital will look for the highest risk adjusted return. Tax rates are only a small part of that equation. For instance, most capital gains are routinely tax deferred. Ie, you don't pay taxes on the gain until it is realized through a sale of assets. For business owners and stockholders, that can be a lifetime.

Second, it is NOT the wealthy that create the jobs. Most jobs are created by small businesses. They are funded not by the wealthy, but by the middle class. Entreprenuers rarely are concerned with tax issues, they are driven by other motives.

Third, immediately after WWII, the highest marginal rate was 90%, yet the economy had some of its best growth in history. Tax rates are only a small part of the story on economic growth.

Fourth, economic growth in the Reagan, Bush 1,, and Bush 2 years can be explained only in terms of extreme deficit spending--not tax rates. When you borrow and spend 5% of GDP, like Shrub is doing, shouldn't you expect 5% GDP growth at a minimum? Giving tax breaks to the wealthy while borrowing that money from future generations is the most morally and fiscally irresponsible policy imaginable.

Fifth, the comparison of 1929 versus 1935 tax revenues is about as bad an example as comparing blood pressure from last year of a man who died this year. 1929 was the last year of economic growth, 1935 was the depths of the depression. Tax rates had nothing to do with that.

[mrdmk]

21. Welcome to D.U. amBushed

:hi:

The real fact is this. The government has little control of the economic condition in a capitalistic society. There will always be up and downs in market conditions. The leadership can make adjustments to conditions of the society such as the infrastructure, educating the public, major high risk construction (dams and water projects, airports, shipping ports, defense,etc.), just about anything where people of the country all have a stake in. Taxes, for the most part are a minor factor in the growth of a country, unless the taxes are way to little or way to much or dependent on one part of society.

Most jobs are created by small business, I believe around 80%. Major corporations and government make up the rest. For most small businesses to there needs to be an initial investment and a loan to cover the expenditures of about five years from the start of the business. Most small business at the start are hardly rich to begin with, just persistent.

As far as the president and congress goes, the best/most they can do is project leadership in a positive fashion to have people strive in a positive manner. Pass laws to keep society from imploding upon itself. To project into the future what can be done now to be used by generations to come.

[many a good man]

26. Great response, AmBush

First, capital will look for the highest risk adjusted return.

I believe Paul O'Neill made this very same argument in the Suskind book. In fact, he said it was one of the least significant factors in corporate investment decision-making. Your other responses should become standard for all of us who get into this argument.

I'm still astounded that Bush* had the gall to even propose eliminating the dividend tax. Combined with repealing the estate tax and sharply reducing the capital gains tax, the wealthiest family could go for generations without paying a penny in taxes! Talk about radically restructuring American society! Talk about class warfare!

A widening inequality of wealth in a society can do great harm. A strong middle class was the foundation of this country in the post war period and was the source of its strength. Accumulating wealth at the top IS NOT good for the economy as a whole. The arguments are iron-clad even BEFORE taking into account morality.

:kick:

[Cleita]

9. Rich people can't spend enough money to trickle down meaningfully

even if they tried to pay fair wages and fair market prices for consumer goods. It's the little guy with some money in his pocket who boosts the economy because there are so many more of them. How many Lamborghinis are sold as compared to Chevrolets? Now the guy who owns a Lamborghini may have many other cars in his garage, but the volume isn't there like every household owning at least one family car like a Chevrolet or Toyota.

So when a lot of proles have money in their pocket and they go to the movies, more money is earned than if all the richest people went and no one else.

Since most rich people invest their money rather than spend it, they really do nothing for the economy. Luxury goods are not money makers in the long run. It's the thing everyone needs like a toothbrush that makes money. If the economy is good, a lot of toothbrushes are sold. If unemployment is high or wages poor, those toothbrushes won't be thrown out and replaced as frequently. The rich guy can't buy enough toothbrushes to make a difference, even if he used a new one everyday.

That's what the fallacy of trickle down economics is. In the first place rich people are going to invest that money in securities and not other businesses. They aren't going to pay the housekeeper and gardner one cent more than they have to, and they aren't going to spend it in sufficient volume to move the economy upwards.

[Nederland]

10. Be fair

The advocates of trickle down economics do not claim that rich people are going to engage in higher levels of consumer spending with the extra money they get from tax cuts. If you are going to criticize a theory, the least you could do is get it right.

And this one really gave me a chuckle:

Since most rich people invest their money rather than spend it, they really do nothing for the economy.

Investment does nothing for the economy? LOL!

[Cleita]

12. Oh, you again. You're still around, eh?

I'm so glad you got a chuckle out of that. Please tell me how investing in stocks, bonds and real estate helps the economy? All it does is take money out of circulation. And if stocks are not doing well because no one is buying what they are selling because they have no money, the stocks go down and we have a depression, a market crash or so many other pesky things that happen.

In order for the stock market and other investment venues to do well, the little person has to have money to buy things, which creates profits, which creates wealth, not the other way around.

[Nederland]

14. Gladly

I'd be glad to help you understand.

A Company sells stock so that it can raise capital to fund expansion. Expansion means more jobs.

A Company sells bonds so that it can raise capital to fund expansion. Expansion means more jobs.

You think investing in Real Estate is bad? Since when is building places for people to live and work a bad thing?

[PA Democrat]

15. Only one problem with supply-side theory

Fortune 500 companies in aggregate have not created a SINGLE DOMESTIC job over the past 20 years (Kevin Phillips addressed this in "Wealth and Democracy").

So money invested in corporate America is invested in
building new factories in China, and Indonesia or wherever the slave labor rates are cheapest.

[Nederland]

17. Agreed

Fortune 500 companies do not create most new jobs, most new jobs are created by small companies. However, this merely proves my point. The vast majority of new stock and bond issues are from small start up companies, not Fortune 500 companies. Like all investment, these methods of raising capital are the primary engine of job growth in this country. This fact is completely at odds with the original poster who ignorantly claimed that investment does nothing to help the economy. It is ignorant statements like this one that cost Democrats elections.

[PA Democrat]

20. That's why cutting taxes on dividends will not create jobs

Bush wanted to eliminate taxes on dividends, and had to settle for "just" cutting the tax rate on dividends to 15%. He falsely stated this would create jobs.

But the only problem is that the types of start-up companies that might create jobs typically don't pay dividends. And the dividend tax cut actually diverts capital away from the very companies most likely to create jobs.

[AZCat]

23. Question from layperson

I guess I don't understand this very well. While I see that issuing stocks and bonds raises money for a company, I don't understand how me purchasing stocks/bonds from someone else provides money to companies if I am not buying newly issued stocks/bonds. Isn't the transaction independent from the issuer of the stock?
I.E. when I buy a used car, the original manufacturer doesn't make any extra money.
Is my analogy flawed? Please help.

[Jim__]

24. I think you're right

But, then, I'm just a lay person too.

Even when companies initially offer stocks, it may not mark an actual "investment." I worked for a software company in the 90's and I was with them when they IPO'd. But, the real investment had already been made, and the IPO was a chance for the original investors to get their money out. So, even when you're buying stock from the company, it doesn't necessarily mean the company is going to invest in growth.

But, my guess is that there are secondary effects of the market. One being that a venture capitalist knows that if the company is relatively successful in the short term, he can easily get his money out by selling stocks. The other being that when you buy stock, you may be buying from a venture capitalist who will take the money from this sale and put it into a start-up.

I think most money in the stock market is really just "savings" rather than investment.

[Nederland]

25. Not flawed

Yes, when you purchase an existing share of stock the company whose stock it is does not gain much. (One exception is that if enough people are buying their stock, the price of their stock will rise, which inevitably reduces costs for the company) In general however, the trading of existing stock does not aid a company the way the purchase of new stock or the purchase of new bonds does. However, you need to look beyond the transaction to what happens afterwards. The key question is this: if you buy a few shares of stock, what is the seller going to do with the money they receive from you? Perhaps they will spend it, perhaps they will invest it elsewhere. Either way, the economy as a whole benefits.

[Cleita]

16. You know it's far more complicated than that.

The fact is that societies that are social democracies function better for all their citizens because the money is circulated around instead of funneled up. Oh, I know all about the stocks and bonds stuff, Miegs and Miegs. All those commodities are not always taxed as much as they should be to spread the money around.

I really blame the real estate tax giveaway in California, thanks to the Jarvis Ammendment, proposition 13, as being responsible for the housing problems and high rents we suffer here.

[Nederland]

18. Funny

...how your post does nothing to address my main disagreement with you. Namely, that investment does nothing to help the economy.

[Cleita]

30. That's because your main disagreement is that you

disagree with me, and I with you and perhaps never the twain shall meet, however, reality favors my version. Investment in the stock market or buying bonds has not created one job in this economy. As a matter of fact jobs have been lost because of the companies' obligations to make a profit one way or the other for the stockholders. This type of investment does not infuse the economy with spending, which is what is needed for profits.

[BillZBubb]

29. Some comments about corporate finance

Although companies do finance their growth by selling shares and/or bonds, the bulk of trading activity in these issues has nothing to do with the company. They are issued once at the IPO. Then, they are widely traded in the secondary markets. I believe this is the activity of the wealthy that was being alluded to. It doesn't have much economic benefit.

In that sense, pushing the paper around doesn't have a huge, direct, effect on company finances either, except it sets the market price for future issues.

I might add that a portion of the extra tax cut cash provided to the wealthy goes to off-shore investments and does nothing for the U.S.of A. Another large portion goes to the purchase of government debt instruments--which finance Republican deficit spending. It's a brilliant con: The well off get their interest income from debt issued by the government to give them the money to buy the debt instrument! Only in Republican America!!!!

[Fla_Democrat]

27. Holy Catfish

Dude... :yourock:

[PA Democrat]

11. Great Article on Supply Side Economics

Below is a link for a very good article on supply side (trickle down) economics. It will give you the basics to dispute the "wisdom" of further tax cuts.

http://www.kuro5hin.org/story/2004/1/22/164856/449

We are already seeing the first stages of what could be economic disaster for our country: large amounts of our debt held by other countries, sharp devaluation of the dollar, warnings from the International Monetary Fund about the need to reduce the deficit.

One argument that I keep hearing the Repugs using is that the deficit as a percentage of GDP is actually smaller now that during the Reagan years.

But what they fail to address is that during the Reagan years the baby boomers were just entering, or in the beginning stages of their income-earning (and thus TAX-PAYING) years. Today, we face the prospect of large numbers of baby boomers starting to retire and straining the budget even further.

[Poiuyt]

13. I prefer to call it the Trickle Up theory eom

[ngGale]

19. I prefer to call it...

giving to the rich and stealing from the poor. The 2005 budget will cut 68 government programs, including your highway system. More people out of work.

[0rganism]

28. There are so many flaws, it's hard to know where to begin

> By raising their taxes, you lower the incentives for them to
> invest. They could also find tax-shelters to hide their money,
> therefore lowering the govt. take.

Those "tax shelters" are often types of investment the government wishes to encourage. For instance, one common "tax shelter" is the mortage payments on one's primary residence. This is given precisely to promote home ownership and fluidity in the housing market.

> Want to break up families? Offer a bigger welfare check if the father splits.

This is unrelated to supply-side theory. Even as an attack on welfare benefits, the correlation is weak.

> Want to reduce savings and investment? Double-tax `em, and pile on
> a nice, high capital gains tax on top of it.

What this actually discourages is liquidation of investments. As long as investment moneys remain invested, there is no capital gains tax.

> Want to get less work? Impose such high tax penalties on it that
> people decide it's not worth the effort.

Now in this, your friend actually has a point. Social Security taxes, for instance, amount to a significant dent in employability: namely an additional 13% payroll tax up to ~$90k. It's one of many disincentives to American hiring, to be sure. This is an excellent reason to (1) find alternative methods to funding Social Security benefits (e.g., as welfare from the general fund rather than a dedicated flat tax propping up a theoretical "bond investment") and/or (2) equalize international hiring costs via sensible trade regulation.

> What's your work ethic going to be with a 79 percent tax?

Ask the Europeans. They do okay with high top rates.

> Who's going to invest to create the jobs to get us out when you're
> being taxed 79 percent?

Easy: companies that wish to take advantage of the additional income given to consumers via work programs and welfare. You'll hire people to produce consumer goods, even if your net earnings are 21% of the total cost. Just because the take is decreased doesn't mean it isn't a take. Now, of course, the argument is confounded by offshoring: when a company can hire workers in China to produce goods at a fraction of the American labor cost, any consumer spending amounts to a transfer of wealth to international corporatists investing in foreign countries. This will persist until the American labor market is price-competitive with those of 3rd-world nations. But to attribute this to tax rates rather than international trade policy is a huge mistake.

The 79% tax certainly did not prevent the rich few from accumulating wealth; they merely did so at a slower pace than they do today.

Conversely, dropping the rates to 30% hasn't done much to prevent tax-sheltering. If the supply-siders' argument were correct, we would see increases in unsheltered investments and booming job creation, independent of business cycles. But why would someone give up $.30 on the dollar, any more than they'd give up $.79 on the dollar? One can safely presume that investors WILL seek maximum tax shelters, regardless of tax rate, to maximize their profits. The way one changes this is by revising the law concerning tax shelters, not by lowering top marginal rates.

> We raised in 1929 over $1 billion. It was almost $1.1 billion in
> income tax revenues. In 1935 when the tax rate was 79 percent, our
> take for the government on income tax was $527 million

Check this: he's comparing pre-depression revenues to the take at the height of the Great Depression. That's not apples and oranges, it's apples and walruses.

> because the high tax rates chased capital into tax-exempt investments.

Not because a lot of the high-rollers lost their fortunes in shakey leveraged investments? How quickly we forget.

[Avonrepus]

31. Thanks for the responses

Interesting and insightful to hear about the quite apparent flaws in the ''Trickle down theory'' its not something i know much about and feel enlightened as a result. :)