Do tax cuts really help the economy? Or just let those who have wealth grow and keep more?

[Zebo]

Found this in a weblog..

Tax cuts encourage investment
The Truth Part 1 - Tax cuts always decrease investment
For example, let's say the government gives a wealthy person a $100 tax cut. Now, the wealthy person will spend some of the $100, put some of it in non-investment financial instruments like cash and his checking account, and he will invest some of it. Say he invests $50. The Republicans then proudly say, "Look, the tax cut created $50 of investment." But were did the $100 come from? The government had to borrow it from someone. Say the government borrowed it from the same wealthy person. Were is the wealthy person going to get the $100 from? From selling his other investments. So in this case, the amount of money in our simple example that the weathy person has invested decreases by $50. Because the government has to borrow from investors to make up for the reduced amount of tax revenue, a tax cut will always decreate the total amount of money invested.


The Truth Part 2 - Tax cuts discourage long-term investment
What has happened recently (the 90's and later) is that bond investors respond to a decreasing government deficit by decreasing long-term interest rates and respond to an increasing government deficit by increasing long-term interest rates. There are economic theories that suggest why this should happen and there are economy theories that suggest this shouldn't happen, so I am going to go on recent experience.

Long-term interest rates are a major factor in whether corporations make long-term investments. Let's say a corporation is considering a project that, when the rate of return is adjusted for risk, pays back 7% over 30 years. If the long-term interest rate is 6%, the company will make the investment. If the long-term interest rate is 8%, the company won't do it. Part of the reason there has been little business investment in 2002 is that the long-term interest rates are up.

The Truth Part 3 - Tax cuts discourage foreign investment
This is weak, but could become important. Foreigners invest in the US because they think the economy is well run and will produce better long-term returns than other countries. If the US government does things that give foreign investors more confidence, then more foreign investment will come into the US. The amount of foreign investment money dwarfs the amount of money involved in a tax cut.

Now here is the weak part - one could argue that foreign investors will be spooked by a government that seems to have lost control of the deficit. There are lots of other factors that drive foreign investor confidence such as the reliability of company financials. But according to a recent Krugman column, all of the factors are pointing in the wrong direction and foreign investors have started pulling their money out of the US.

Tax cuts for high-earners encourage them to work hard and longer
The Truth - Tax cuts encourage high-earners to work less
Let's say I am a consultant who works 48 hours a week at a $100/hour, with an effective tax rate of 30%. That means my net pay is $3,360 per week. Let's say that my effective tax rate drops to 20%. I can now earn the same net pay in 42 hours a week. By economic theory, because I value free time, I will substitute some of the hours I was working for free time. With the new tax rate, I will work somewhere between 48 and 42 hours per week based upon how much I value free time.

Tax cuts for the wealthy encourage entrepreneurship
The Truth - Tax cuts for the wealthy discourages enterpreneurship
The Republicans say that tax cuts for the wealthy encourages entrepreneurship because people will work harder to hit it rich. The number one thing that keeps people from starting their own company is a lack of initial capital. I have already discussed how tax cuts decrease the amount of investment money, and that will make raising initial capital harder. I have already discussed how tax cuts drive up long-term interest rates, and higher long-term interest rates make starting a new company more difficult. Now part of that initial capital usually is the entrepreneur's own money. To raise that money, they have to save it while working their current job, which is probably not over $100K per year. By shifting the tax burden away from the wealthy (which is what tax cuts for the wealthy does), it slows the rate of capital accumulation of the non-wealthy and therefore decreases their ability to raise the initial capital they need to start a new business.

Reduced capital gains tax encourages entrepreneurship
The Truth - Reduced captial gains discourages entrepreneurship
Capital gains tax applies to all investments, risky or not. Most entrepreneurs draw their money out of the business in a form that is taxable as salary, not capital gains. The only way an entrepreneur can draw money out of their business in a form that captial gains would apply is if they sell their business or if they take their business public and then sell part of their stock in the business. So, let's say you have $1,000,000 and could invest it in stocks or start your own business. The stocks earn a 6% appreciation and a 28% capital gain. You could pay yourself a $60,000 salary (6% of 1,000,000) which would taxed at 40%. The stocks would earn you a net $43,200. The job would earn you a net $36,000. The larger the spread between captial gains tax and salary tax, the greater discouragement to entrepreneurship.

Tax cuts for the wealthy is the best way to grow the economy
The Truth - Tax cuts for the poor is the best way to grow the economy
Republicans say that tax cuts for the wealthy is the best way to grow the economy because they will wisely invest the money and therefore create new jobs. I have already discussed how tax cuts decreases the amount of money invested. I have already discussed how tax cuts for the wealthy actually discourages entrepreneurship and encourages high-earners to work less. Another problem with giving money to the wealthy is that they don't need anything so they are slow to spend it. Give it to someone who is poor and they will spend it immediately. As most people spend their money in their neighborhood and Americans tend to live in areas according to their wealth, the poor will spend their money in poor neighborhoods where the people who receive it will in turn immediately spend it. This means that the amount of economic activity generated by a tax cut to the poor is much greater than the economic activity generated by a tax cut to the wealthy. Increased economic activity means more jobs and more tax revenue. So tax cuts for the poor will generate far more jobs than the equivalent tax cut for the wealthy.

I am not an economist and have only taken economic classes while getting my MBA. But most of this is common sense.

 

[DT4K]

You can't give tax cuts to the poor because they don't pay taxes.

So why did the unemployment rate continue to rise under Carter's tax hikes and begin to go down after the Reagan tax cuts. From 9% to 5% in the six years following the implementation of the tax cuts.

 

[Corn]

There is a reason the so-called author of this tripe isn't published, and instead languishes in blogs:

The Truth Part 1 - Tax cuts always decrease investment

*always*?

Something that *always* happens would be easy to document. Yet our so-called author provides a hypothetical example instead of verifiable and documented evidence.

I am not an economist.........

Well, there's a certainty that he did provide evidence of.

....and have only taken economic classes.....

I guess the real question is, did he actually pay attention in class?

 

[Corn]

You can't give tax cuts to the poor because they don't pay taxes.

Hey, the poor only screw up this country anyway because they shop at Wallyworld and Costco. Give them more money to spend and they'll only spend it on cheap imported crap at the expense of the American worker.

 

[rjain]

Lower tax rates mean you keep more of your profits from investment, therefore they encourage investment. Equity fund inflows have been at very high levels since the tax cuts. I'd like to see Mr. Weblog explain that one.

Interest rates go up because they are low, encouraging people to sell bonds. You want to sell yours before the next guy sells theirs. Low interest rates occur because people aren't willing to take on the risk of debt and people want to put their money in "safe" bonds. Increasing long-term rates with stable short-term rates indicates that people expect inflation to pick up soon, so they are selling long-term bonds to unlock them from those soon-to-be-higher rates and buying short-term bonds so that they aren't locked in for long at those low rates. Actually, in these environments, banks can make huge amounts of money because they can sell lots of short-term debt at low rates and buy up long-term debt at high rates. They earn the interest rate difference. Of course, if the rates shoot up, they'll get hurt badly, but if they go up slowly, it gives them a chance to unload gradually as the risk of economic expansion increases. That's right, buying long-term high-rated bonds is a bet against the economy.

First he says you need to have lots of capital (be wealthy) to start a business. Then he says that tax cuts for the wealthy don't help the poor get enough capital to start a business. Duh, they don't have enough capital because they're poor!

Capital gains can only be achieved via entrepeneurship (or investment in existing assets). How is earning an extra $7,200 a discouragement? They don't have to go public to get private investment in their company.

Looks like Mr. A. Weblog's "common sense" isn't so sensible after all. His "disclaimer" indicates, as would be expected from his silly statements, that he has no practical understanding of the complex dynamics involved in the economy. He just knows a few theoretical forces at work. This guy is just ranting on a soapbox. Does he go by the name of "dmcowen" in some places?

 

[rjain]

Originally posted by: Corn

You can't give tax cuts to the poor because they don't pay taxes.

Hey, the poor only screw up this country anyway because they shop at Wallyworld and Costco. Give them more money to spend and they'll only spend it on cheap imported crap at the expense of the American worker.

!

 

[desy]

Tax cuts do both, hurt and help
Its all in the timing and what is happening with the spending of taxes.
The gov't is a player in the economy like it or not and can/does impact economic outcome.
Truth is you will always need taxes to handle big picture issues such as National defense and Disaster Relief, Trade and so forth
To what degree you need gov't is debatable and always will be. Smith's capitalism and Marx's communism don't work in pure form so you will continually have the pendulum swing from either extreme.

What I don't want

Erosion of freedom, once you've had how do you give it up?
Declining standard of living, yeah its selfish
Debt, of which my children will be responsible for, there should be no reason we have to bankrupt future generations

 

[ReiAyanami]

giving more money to the rich does not hurt the poor, the poor still have the same small amount of money. its only if the rich use all that extra money to buy things sparking inflation, which then makes the poor man's money worth less. however in reality, rich ppl actually save money even when they get alot more and its the average consumer that does the buying on an aggregate scale, causing inflation. so ironically giving poor ppl money could cause them to have less actual buying power unless productivity per worker rises, which thanks to technology does almost every quarter on quarter.

 

[CADsortaGUY]

Originally posted by: Zebo
Found this in a weblog..

Tax cuts encourage investment
The Truth Part 1 - Tax cuts always decrease investment
For example, let's say the government gives a wealthy person a $100 tax cut. Now, the wealthy person will spend some of the $100, put some of it in non-investment financial instruments like cash and his checking account, and he will invest some of it. Say he invests $50. The Republicans then proudly say, "Look, the tax cut created $50 of investment." But were did the $100 come from? The government had to borrow it from someone. Say the government borrowed it from the same wealthy person. Were is the wealthy person going to get the $100 from? From selling his other investments. So in this case, the amount of money in our simple example that the weathy person has invested decreases by $50. Because the government has to borrow from investors to make up for the reduced amount of tax revenue, a tax cut will always decreate the total amount of money invested.

One little problem with this. If that $100 tax "given" to the rich...came from the rich...then wouldn't paying taxes reduce investment? So if they say that the rich only invest $50 of what was "given" to them(although it was theirs to begin with) then it's still $50 more than would have been invested anyway...no? So tax-cuts in this scenario would infact create a $50 investment increase over what would have been invested. BTW - tax-cuts aren't a "cost" we've been over that before. The gov't shouldn't spend what it doesn't have. Tax-cuts aren't the problem - gov't spending is.

CkG

 

[heartsurgeon]

somebody ate some bad 'shrooms when they came up with this crap:

"The Truth Part 1:...But were did the $100 come from? The government had to borrow it from someone"
Whaaaat? This is completely ludicrous....A tax cut means the person WHO EARNED THE MONEY doesn't pay as much tax on it. Nobody borrows any money from anybody.

The Truth Part 2:..Long-term interest rates are a major factor in whether corporations make long-term investments...
Whaaaat? Companies make capital investments because of market conditions. Capital investments are depreciated rather rapidly (5 years or less). Short term interest rates
are at a historic low, and are set by the Fed.

The Truth Part 3:..Tax cuts discourage foreign investment..
Whaaat? This is beyond ludicrous. The economies of the world have all been in the crapper for the past couple years. Every major country is either reducing tax rates or talking about reducing taxes to stimulate their economies. The U.S. leads the world in recovery from the economic doldrums of the past couple years. Tax cuts stimulate growth in the economy, growth in the economy attracts capital (includiong foreign capital). High tax rates DISCOURAGES INVESTMENTS - why would you want to invest your money somewhere its going to get tax heavily?

The Truth - Tax cuts encourage high-earners to work less..
This is about as stupid as you can possibly get. This is like saying people don't like making money.....crazy..


The Truth - Tax cuts for the wealthy discourages enterpreneurship
If you have more capital (that is you haven't sent it to the goverment in the form of taxes), you are more likely to have a business that can grow and create jobs and more wealth.

The Truth - Reduced captial gains discourages entrepreneurship
This doesn't even merit a rebuttal.

The Truth - Tax cuts for the poor is the best way to grow the economy
The poor are poor...they don't create jobs, they don't hire people, they don't invest....when was the last time you heard of someone being hired by a poor person? This is just a silly post.

What you don't seem to understand, is that wealth can be created..it is not a static for fixed entity. The "wealth pie" grows!
What you really want to know is how best to grow the pie, that is grow the economy and the wealth of the country.
This involves the efficient allocation of capital in the economy. this is best accomplished through free market systems, and not through goverment allocation of capital.

If you grow the economy, the wealthy make more, the poor make more, and tax revenues soar.

According to the logic in this post, taxes should be at 100% for the economy to be its best...well, i think that was communism....

 

[wirelessenabled]

Originally posted by: CADkindaGUY

Originally posted by: Zebo
Found this in a weblog..


One little problem with this. If that $100 tax "given" to the rich...came from the rich...then wouldn't paying taxes reduce investment? So if they say that the rich only invest $50 of what was "given" to them(although it was theirs to begin with) then it's still $50 more than would have been invested anyway...no? So tax-cuts in this scenario would infact create a $50 investment increase over what would have been invested. BTW - tax-cuts aren't a "cost" we've been over that before. The gov't shouldn't spend what it doesn't have. Tax-cuts aren't the problem - gov't spending is.

CkG

Cad:

I agree with you! Bush is increasing spending by 12% while cutting taxes. If he wants to cut taxes then he should cut spending. Where is the conservatism in Bush's course of action?

 

[CADsortaGUY]

Originally posted by: wirelessenabled
Cad:

I agree with you! Bush is increasing spending by 12% while cutting taxes. If he wants to cut taxes then he should cut spending. Where is the conservatism in Bush's course of action?

Your % is misleading but yes I'm just as pissed as the next guy about the continued wasteful spending that goes on in DC. But one thing I'd hate to imagine is adding a 40B prescription Drug entitlement and then a 80B+ UHC entitlement program to the budget. YIKES!!!



CkG

 

[chazzheatherly]

Our topic starter is dead on right. If Joe 6 pack needs a job, how is giving Joe millionaire an
extra Mercedes gonna create a job? It won't.
Unless you detail cars, you won't see anything from the Bushy tax cuts.

 

[CADsortaGUY]

Originally posted by: chazzheatherly
Our topic starter is dead on right. If Joe 6 pack needs a job, how is giving Joe millionaire an
extra Mercedes gonna create a job? It won't.
Unless you detail cars, you won't see anything from the Bushy tax cuts.

You=ignorant.

Even John Kerry(yes he's suddenly dropped the F) has stated that the Bush tax cuts have helped us serfs. A family making 70K got around a $2200 reduction. I hardly think $2200 is "nothing".
Nice try though.

CkG

 

[dmcowen674]

Originally posted by: chazzheatherly
Our topic starter is dead on right. If Joe 6 pack needs a job, how is giving Joe millionaire an
extra Mercedes gonna create a job? It won't.
Unless you detail cars, you won't see anything from the Bushy tax cuts.

It all boils (pun intended) down to if you believe in Trickle Down Economics as CAD obviously does.

People are greedy by Human Nature and it only gets worse as people get richer.

Trickle Down Economics has never worked and never will, it goes against Human Nature so it ain't gonna happen.

 

[ElFenix]

Found this in a weblog..

wow, you must be proud to find such a well qualified and respected source!

Originally posted by: dmcowen674

Trickle Down Economics has never worked and never will, it goes against Human Nature so it ain't gonna happen.

never heard of the laffer curve eh dave?

 

[djNickb]

Originally posted by: CADkindaGUY

Originally posted by: chazzheatherly
Our topic starter is dead on right. If Joe 6 pack needs a job, how is giving Joe millionaire an
extra Mercedes gonna create a job? It won't.
Unless you detail cars, you won't see anything from the Bushy tax cuts.

You=ignorant.

Even John Kerry(yes he's suddenly dropped the F) has stated that the Bush tax cuts have helped us serfs. A family making 70K got around a $2200 reduction. I hardly think $2200 is "nothing".
Nice try though.

CkG

Now the important question is did the family that got the $2200 use it to create wealth or use it to further increase their debt?

 

[dmcowen674]

Originally posted by: ElFenix

Found this in a weblog..

wow, you must be proud to find such a well qualified and respected source!

Originally posted by: dmcowen674

Trickle Down Economics has never worked and never will, it goes against Human Nature so it ain't gonna happen.

never heard of the laffer curve eh dave?

Please, what does the Professors sarcasm have to do with anything?

 

[CADsortaGUY]

Originally posted by: djNickb
Now the important question is did the family that got the $2200 use it to create wealth or use it to further increase their debt?

Ah, so is this more of the elitist view that us poor serfs don't spend wisely?
Isn't the important part that these people actually get to keep thier money instead of sending it to DC?
But hey wait...I thought that's what everyone was clammoring for...tax-cuts for us poor and middle class folks.

And No, Dave giving a family that makes 70K a tax cut has nothing to do with "trickle down" Is $2200 not a pretty good chunk of change when you make 70K as a family? It's about 2 weeks worth of pay they get to keep instead of give to DC, I fail to see how that is trickle down - seems pretty direct to me.

CkG

 

[djNickb]

Originally posted by: CADkindaGUY

Originally posted by: djNickb
Now the important question is did the family that got the $2200 use it to create wealth or use it to further increase their debt?

Ah, so is this more of the elitist view that us poor serfs don't spend wisely?
Isn't the important part that these people actually get to keep thier money instead of sending it to DC?
But hey wait...I thought that's what everyone was clammoring for...tax-cuts for us poor and middle class folks.

And No, Dave giving a family that makes 70K a tax cut has nothing to do with "trickle down" Is $2200 not a pretty good chunk of change when you make 70K as a family? It's about 2 weeks worth of pay they get to keep instead of give to DC, I fail to see how that is trickle down - seems pretty direct to me.

CkG

The way I see it is you normally would have not gotten the $2200 without the tax cut so you are not missing the money. If the government through a tax cut hands me $2200. THE MAJORITY of people are going to run out and spend it immeditaely or possibly use it as a downpayment on something that furthers their debt. What they dont realize is that if you take that $2200 and put it to work for you you can see much more significant gains. Thats what counts - and you're right CAD its not how much you make its how much you keep. If you get to keep money that you on a normal year would not have seen doesnt it make sense if you have any kind of financial awareness to put that money to work for you ?

 

[CADsortaGUY]

Originally posted by: djNickb

Originally posted by: CADkindaGUY

Originally posted by: djNickb
Now the important question is did the family that got the $2200 use it to create wealth or use it to further increase their debt?

Ah, so is this more of the elitist view that us poor serfs don't spend wisely?
Isn't the important part that these people actually get to keep thier money instead of sending it to DC?
But hey wait...I thought that's what everyone was clammoring for...tax-cuts for us poor and middle class folks.

And No, Dave giving a family that makes 70K a tax cut has nothing to do with "trickle down" Is $2200 not a pretty good chunk of change when you make 70K as a family? It's about 2 weeks worth of pay they get to keep instead of give to DC, I fail to see how that is trickle down - seems pretty direct to me.

CkG

The way I see it is you normally would have not gotten the $2200 without the tax cut so you are not missing the money. If the government through a tax cut hands me $2200. THE MAJORITY of people are going to run out and spend it immeditaely or possibly use it as a downpayment on something that furthers their debt. What they dont realize is that if you take that $2200 and put it to work for you you can see much more significant gains. Thats what counts - and you're right CAD its not how much you make its how much you keep. If you get to keep money that you on a normal year would not have seen doesnt it make sense if you have any kind of financial awareness to put that money to work for you ?

See that's where we differ - you see tax money as the gov'ts - not as the individuals. Seems to me we make a wage and THEN the gov't takes money...so IMO it is money that we would have seen if the gov't didn't take it I also will once again take issue with your elitist view that people aren't putting their money to work for themselves. Who are you to say how people should spend their money...it is theirs - is it not? The gov't isn't "giving" - it's just "not taking it away"
Quit telling people how they should and shouldn't spend their money - it's none of yours or the gov't business how people are going to spend the money they get to keep because of the reduced tax liabilities.

CkG

 

[djNickb]

Originally posted by: CADkindaGUY

Originally posted by: djNickb

Originally posted by: CADkindaGUY

Originally posted by: djNickb
Now the important question is did the family that got the $2200 use it to create wealth or use it to further increase their debt?

Ah, so is this more of the elitist view that us poor serfs don't spend wisely?
Isn't the important part that these people actually get to keep thier money instead of sending it to DC?
But hey wait...I thought that's what everyone was clammoring for...tax-cuts for us poor and middle class folks.

And No, Dave giving a family that makes 70K a tax cut has nothing to do with "trickle down" Is $2200 not a pretty good chunk of change when you make 70K as a family? It's about 2 weeks worth of pay they get to keep instead of give to DC, I fail to see how that is trickle down - seems pretty direct to me.

CkG

The way I see it is you normally would have not gotten the $2200 without the tax cut so you are not missing the money. If the government through a tax cut hands me $2200. THE MAJORITY of people are going to run out and spend it immeditaely or possibly use it as a downpayment on something that furthers their debt. What they dont realize is that if you take that $2200 and put it to work for you you can see much more significant gains. Thats what counts - and you're right CAD its not how much you make its how much you keep. If you get to keep money that you on a normal year would not have seen doesnt it make sense if you have any kind of financial awareness to put that money to work for you ?

See that's where we differ - you see tax money as the gov'ts - not as the individuals. Seems to me we make a wage and THEN the gov't takes money...so IMO it is money that we would have seen if the gov't didn't take it I also will once again take issue with your elitist view that people aren't putting their money to work for themselves. Who are you to say how people should spend their money...it is theirs - is it not? The gov't isn't "giving" - it's just "not taking it away"
Quit telling people how they should and shouldn't spend their money - it's none of yours or the gov't business how people are going to spend the money they get to keep because of the reduced tax liabilities.

CkG

I'm not trying to tell anyone how to spend their money, that is up to them no arguement from me there. All I am saying is if you really understand the power of money and how it works that you would realize far greater gains later on by putting YOUR money that you are KEEPING by not paying the taxes to work for you. The problem with your mindset is that you clearly work for money rather than having money work for you. You/the consumers make that choice to spend their money HOW THEY SEE FIT. I see things differently and was just expressing my viewpoint. I was not telling anyone what they should do, just trying to challenge the way that so many people think.

 

[dirtboy]

Originally posted by: dmcowen674

Originally posted by: chazzheatherly
Our topic starter is dead on right. If Joe 6 pack needs a job, how is giving Joe millionaire an
extra Mercedes gonna create a job? It won't.
Unless you detail cars, you won't see anything from the Bushy tax cuts.

It all boils (pun intended) down to if you believe in Trickle Down Economics as CAD obviously does.

People are greedy by Human Nature and it only gets worse as people get richer.

Trickle Down Economics has never worked and never will, it goes against Human Nature so it ain't gonna happen.

Well, if that's true, why not just raise the tax bracket for people earning over say $40,000 a year to 100%. Then everyone will be prosporous!

 

[CADsortaGUY]

Originally posted by: djNickb
I'm not trying to tell anyone how to spend their money, that is up to them no arguement from me there. All I am saying is if you really understand the power of money and how it works that you would realize far greater gains later on by putting YOUR money that you are KEEPING by not paying the taxes to work for you. The problem with your mindset is that you clearly work for money rather than having money work for you. You/the consumers make that choice to spend their money HOW THEY SEE FIT. I see things differently and was just expressing my viewpoint. I was not telling anyone what they should do, just trying to challenge the way that so many people think.

Right so why do you even try to use the argument that they didn't/won't make it work for them? People will do what they see fit with their own money...and IMO i'd rather have the individual make that decision than the gov't...which is what these tax-cuts are allowing.

CkG

 

[djNickb]

Originally posted by: CADkindaGUY

Originally posted by: djNickb
I'm not trying to tell anyone how to spend their money, that is up to them no arguement from me there. All I am saying is if you really understand the power of money and how it works that you would realize far greater gains later on by putting YOUR money that you are KEEPING by not paying the taxes to work for you. The problem with your mindset is that you clearly work for money rather than having money work for you. You/the consumers make that choice to spend their money HOW THEY SEE FIT. I see things differently and was just expressing my viewpoint. I was not telling anyone what they should do, just trying to challenge the way that so many people think.

Right so why do you even try to use the argument that they didn't/won't make it work for them? People will do what they see fit with their own money...and IMO i'd rather have the individual make that decision than the gov't...which is what these tax-cuts are allowing.

CkG

CAD you obviously fail to see the larger picture that I was trying to paint. I challenge you to conduct a survey of family households and find out how many spent their refund from the tax break as opposed to those who invested it in some way shape or form. If you do this and can show me that those who spent the money right away have benefited more financially than those who invested then I will surrender my argument and point that I was trying to make.