Personal Tax vs Business Tax and Trickle Down Theory

[Screech]

This is a good example of the argument that we see here in P&N about 99.999% of the time against the 'cut taxes and increase employment' argument.

I am not currently advocating cutting taxes to increase jobs (excepting our top corporate rate, I don't think having the highest corporate tax rate in the world in conducive to good economic policy). But I think this argument misstates, or misses the point, of the 'tax cutters' argument.

Their main argument is not "cut taxes so the business owner has more money and that extra money will magically compel him to hire people to spend it on'.

I believe their main argument is "cut taxes so (almost) everyone has more money and will buy more things. With everybody buying more things, demand will increase and businesses will need to hire more people'. I.e., cut taxes to stimulate demand by the populace.

These two versions are significantly different.

Fern

Understood. The argument I was describing is really a "trickle down" idea (which I think is basically a terrible lie). The idea behind cutting taxes that you state is, as you describe, different and has its merits. I think that in that case, however, cutting more taxes at the lower/lower middle/middle class level makes a whole lot more sense than at the top........but that is really another topic at this point

 

[JSt0rm]

The Rich hoodwinked everyone and why shouldnt they? They got rich because they were SMART and had Charisma. I see it differently. I'm not rich beyond my wildest dreams but I have opportunities that could lead down that road. What I need more then tax cuts for the rich is a vibrant healthy economy and for that to happen we need money velocity.

 

[werepossum]

You want to reward money velocity. Why does this not make sense to you?

I understand the value of money velocity. I also understand that money velocity is not the most important part of an economy, not by a long shot. The wealth of a society is generated by wealth creation - not by consumption, and certainly not by money velocity.

Also, beyond a certain point we don't want to reward money velocity. Technological progress is made via wealth concentration. Early societies were most subsistence farming or hunter/gathering; everyone was the same. Although it often takes comparatively little time to satisfy basic needs of food and shelter (including clothing where needed), there is no particular drive to innovate because no one has anything you can't easily get for yourself and hunting or gathering additional food only makes sense to the degree one can preserve it and will use it before it spoils. Once tools become more specialized, there is increasingly a competitive advantage to obtaining tools produced by specialists rather than those anyone can turn out. Once specialization begins, people with desirable skills begin to accumulate more wealth. That accumulated wealth allows investment and therefore technological progress, which drives further specialization. If one becomes wedded to the theory that money velocity is the most important thing and frames policy toward that end, there is a lot of consuming, but accumulated wealth (the opposite of money velocity) is discouraged. No accumulated wealth means no investment in major projects whose scope requires that resources be conserved over years. And that means technological progress is greatly discouraged.

 

[JSt0rm]

How can u create wealth if the money supply isn't moving?

You can't. All of our tax problems would be solved by getting dollars moving and getting them taxed. How many times can the same dollar be taxed as it moves thru the system?

 

[werepossum]

How can u create wealth if the money supply isn't moving?

You can't. All of our tax problems would be solved by getting dollars moving and getting them taxed. How many times can the same dollar be taxed as it moves thru the system?

True, you can't create wealth if the money supply isn't moving. My point is that just moving the dollars doesn't solve the problem. Money is just a placeholder, a wealth transfer mechanism. Yet government taxes have to have real wealth to serve their purpose. When government spends money, it is generally to consume wealth - to build a bridge, pave a road, feed the poor, build a bomb. All those things require real, tangible wealth to be created or imported in order for it to be consumed. They require steel, aluminum, concrete, stone, food, electricity, and everything the workers who use these materials will buy with their wages. Money velocity can cause problems if it is too high and certainly even more problems if it is too low, but it's merely one factor, not an end in and of itself.

 

[JSt0rm]

i know its not the only thing but I feel as though its pretty important. Raising taxes on the wealthy incomes will increase spending in their businesses NOT the other way around.

 

[werepossum]

i know its not the only thing but I feel as though its pretty important. Raising taxes on the wealthy incomes will increase spending in their businesses NOT the other way around.

I wouldn't disagree that money velocity is pretty important, just that it is more important than wealth creation. I would be more inclined to support schemes to increase money velocity if so much of our consumer spending wasn't on Chinese-made and other imported goods. The more of that we consume, the more of our limited wealth must be exported to pay for it.

As far as raising taxes on the wealthy's personal income to increase spending in their businesses, I'm leery of accepting that idea. I can see issues on both sides, and I'd also say that most wealthy people who own and run businesses would look for other ways to pay fewer taxes rather than jump to spend money before it could be taxed. Say my company earns $1 million a year in net income, on which I now pay $300,000. Of the remaining $700k, I reinvest or save $400k and use the remaining $300k for my personal lifestyle and savings. If you increase my tax rate to an effective 40%, I will have $600k rather than $700k to consume, save, or reinvest. I must choose whether to drop my investment into the company, or drop my lifestyle, or both. There's certainly an argument to be made for increasing the business spending that can be deducted as spending, but a successful business spends money to make money, not to avoid taxes. And if I choose to invest more into the business to avoid paying taxes, I'm taking a double hit personally; I'm losing the money that I reinvest but would otherwise keep, plus I'm paying a higher rate on the money I do keep. The flip side of course is that if I do invest more money on a qualified expense, I'm getting nearly double the bang I would get if I saved it and invested it later.

This is especially iffy during a reception. Perhaps over the last three years my business has provided net income of $1 million, but the ten years before that it averaged $3 million. I may well have enjoyed a much more lavish lifestyle, and $300k may be barely paying my bills. In that case, raising my tax rate may well require either losing some assets like homes (in a very tough buyer's market), or cutting back on business expenses. I might well choose to lay off some employees or close some part of my business that produces a marginal return on the money it ties up. Often some employees and/or business elements in an otherwise profitable company even lose money, with the assumption that in the future (due to cracking a new market or just better economic times) they will be profitable. After all, one common reaction to increased expenses, including higher taxes, is to close domestic manufacturing and outsource it to a cheaper country, therefore preserving the old ROI with the new, higher tax rates. There are principles both pro and con, and off the top of my head I'm not prepared to accept either side as convincing.