Does Trickle Down Economics Work?

Great Debates
1

I’ve recently started reading Perfectly Legal by David Cay Johnston. In it I have found some disturbing facts about the growth of wealth in this country. For the past 30 years (since he argues the upper percentile of the income levels tax rate has gradually begun being reduced) the upper ten percent of the wealth in this country has grown dramatically, while the bottom 90% has been fairly stagnant.

Mr. Johnston argues this strategy does not really reduce the tax burden on the Middle Class rather it is only increased. He says government has to make up for the lost tax revenue the upper income classes are not paying somewhere. So the system just becomes more regressive rather than progressive. Governments begin taxing services like gas or phone service that hurts the middle classes more than the wealthy.

The conclusion is clear: Our system is un-questionably corrupt, it reeks of corruptness, our “Liberal” media doesn’t mind because their taxes are lower, our political parties only give us rancid slogans like “Marriage Penalty” or “Child Tax Credit.” I am not clear what to do—we can’t vote anyone out of office because the Democrats are just as bad as Republicans.

2

Can you give us some number? I had a discussion like this recently with jshore, I think, but it seemed to me that the conclusion you mentioned relied too heavily on comparing percentage income changes of individuals. That is, if you look at the percentage increase of individual’s income, you might conclude that the rich are getting very much richer. Something like 17 time the increase compared to someone in a much lower income bracket. But if you look at the total wealth available to each bracket, far more is going to the lower brackets than to the upper. I’m not sure about the numbers you are citing, but I found this in a summary of the book here,

Which is most alarming. These 400 (although I don’t think they are the same 400 people, so its not as bad as that) got more money and paid less taxes!

But wait. That may not be entirely true. We are talking about percentages here. So if the total tax burden changes, then maybe they did not pay less taxes after all. And the summary does not contain the percentage of taxes paid before the decrease. So, an 18% decrease may not be that drastic, while an 18% increase for everyone else also might not be that drastic. I’m certain we are not talking about the same amount of money.

From the same summary, we also have this:

So, we have the statement that for 1% of people to pay 25% of the tax is a flat tax. And then, we have the statement that it is actually harsher for the poor to pay less tax? Not merely individually, but as a class. Since they pay less of the total amount collected and there are more of them, each of them pays far less than the top 1%. And this is somehow more harsh? It does not say so in the summary, but I am sure the argument must rely on the idea that a poor person’s money is more dear to him than a rich persons.

These arguments can be made (obviously he is doing so). But it requries using percentage relationships to compare oranges to marbles.

I haven’t read his book, though, so maybe he has found something I am not aware of.

3

Before you can address whether 18% less tax on the rich is correct and all, you have to ask, “How much in tax SHOULD the rich pay?”

My reading of your message indicates that the top 400 taxpayers had their share of taxes more than double in the last 10 years (from .5% to 1.1%). If it’s dropped by 18% from that peak, is that bad? Is there any level of taxation on the rich that you see as being too high? Or should taxes on the rich just keep increasing?

4

I am a strong supporter of the idea that the US became a powerhouse due to the greater share the middle class had in shares and wealth. Rich capitalists might invest and create jobs… but without middle class consumers what are you going to sell extra ? Luxury items mostly ?

Still all capitalist countries suffer this tendency of the rich become even richer. The US just used to have better distribution. Buying shares is very uncommon outside the US for example…

5

Sam’s trying to trick you via logical fallacy here. He’s trying to distract you from the facts set forth in “Perfectly Legal,” as is Pervert, by introducing new and unrelated elements to the argument. Don’t buy it. The rich are escaping their share of the tax burden. It would be nice if none of us had to pay taxes, but so long as we do, it would be nice if the tax burden fell in an equitable manner.

Anyway, a truly equitable tax system isn’t possible in a system as lopsided in favor of the rich as ours. Think about it: what would it take in terms of taxation to impact the wealthy as strongly as the poor and the middle class. People in the lower middle class find themselves having to weigh choices like shall I buy groceries or medications this month, or pay my fuel bill so the house will be warm? When you’re living that close to the bone, taxes have a powerful effect on your ability to survive.

For a wealthy person the decision impelled by higher taxes might be something like, “I won’t be able to make my regular contribution to my stock portfolio in spring AND buy that new Hummer I’ve had my eye on. But I sure am not giving up my spring vacaiton to Tahiti.”

It’s just not the same thing. To make the impact on the wealthy as dire as it is on the middle class and the poor, we’d have to take everything they have. And that would be wrong, fun though it is to think about sometimes.

I guess my problem is, whenever I see conservatives rushing to the defense of our beleaguered wealthy taxpayers, I get a sense of cognitive dissonance. Wealth is such a huge advantage in a capitalist society. If economic warfare is the metaphor, the wealthy would be riding around in Abrams tanks, the poor would have wooden spears and rocks and the middle class would have everything from cheap handguns to 50 caliber machine guns. And whenever you proposed taking a few assault rifles from the wealthy and giving them to the middle class and the poor to even things out, Sam and Pervert are there to say, “How could you propose taxing these poor wealthy people? Aren’t they taxed enough already?”

And I’m always thinking, “…But look. They’re still riding around in motherfucking tanks, for og’s sake!”

6

Trickle down economics is working great. I can’t count the number of overqualified people who are trickling down from better-paying jobs they lost to outsourcing to compete with me for the clerical and data entry jobs my college degree qualifies me for. I myself am trickling down to retail positions and displacing the folk who couldn’t go to college for one reason or another. I wonder where they’ll trickle down to?

As I said, it’s great! That is, it’s great if you’re a stockholder in all these companies surfing the wave of this amazing jobless recovery. Unfortunately that’s not me, since I had to cash in my 401(k) after being unemployed for a while and having some surprise medical expenses.

7

I guess my problem is, whenever I see conservatives rushing to the defense of our beleaguered wealthy taxpayers, I get a sense of cognitive dissonance. Wealth is such a huge advantage in a capitalist society. If economic warfare is the metaphor, the wealthy would be riding around in Abrams tanks, the poor would have wooden spears and rocks and the middle class would have everything from cheap handguns to 50 caliber machine guns. And whenever you proposed taking a few assault rifles from the wealthy and giving them to the middle class and the poor to even things out, Sam and Pervert are there to say, “How could you propose taxing these poor wealthy people? Aren’t they taxed enough already?”
That is a very appropriate metaphor given today’s war on terror.

The crazy thing about all this is how President Bush is handling his fiscal spending. He spends and spends like their is no tomorrow, all the while cutting taxes to lower revenue. Who does this guy think he is? How can any real fiscal conservative support him? People say: “what am I going to do? Vote for Howard Dean?!?” Well Howard Dean did manage to balance the budget as Governor of Vermont, it sure appears George Bush has no intention of even attempting such a ridiculous idea.

8

Hold on just a second. I don’t think I offered an opinion one way or another as to how much the rich should pay. I only offered to critic the book mentioned in the OP.

And just for clarity, Sam, I think you misread the quote I took from the book’s summary. It suggested that the income of the rich changed from .5 to 1.1. Not their tax burden.

However, if you want to talk about introducing useless marbles into a discussion about oranges, I’ll play along. Let’s talk about this riduclous notion that rich people don’t deserve their money as much as the poor, because they don’t buy food with most of it. I’d suggest that you stop thinking of rich people as worrying about buying a Hummer or a Land Rover. I’d suggest that most of the rich look for vehicles to place their money into. That is, investments. These investments are what allows our economy to function. So, yes, you could theoretically reduce all of the rich people to the point of poverty, but I contend that you would cause 2 major problems. First, of course, the economy would grind to a halt. Secondly, I think you might find that you would not have enough wealth to make a big dent in the wealth of the rest of us. Again, I am not sure what numbers are offered here, but I suggest that you look very carefully whether mr Johnston is saying that rich people’s income increased or whether he is saying that their income increased relative to everyone else’s.

Also, I’d like to address the idea of economic war. There is no such thing. Possesing more money than my neighbor is not an advantage in the same sense that having more or better weapons is. I may be able to afford a better car, I may be able to afford a better house, but I cannot kill him, or harm him in any meaningful way. Economically, warfare is only an apt analogy in that it is a critical, or at least, very important undertaking. The two activities do not use similar methods at all.

There are political conflicts which are sometimes construed as wars. This is often reffered to as class warfare in America. In this war, everyone besides the very rich have the vast majority of the power. They simply have more votes.

To summarize. I am not saying that rich people pay too much. I am not saying that poor people pay too little. I simply object to obfuscations involving relative comparisons. Also, I am only addressing the obfuscations offered by liberals and Mr. Johnston. Conservatives do the same thing. They will often talk about the fact that the top wage earners pay a hugely disporportionate share of the taxes collected. Of course they ignore the fact that other taxes do not hit the rich as hard as they hit the poor. And they steadfastly refuse to account for how much of the total income falls on whichever upper percentile they are talking about.

All I am saying, is that if you want to tax any particular socio economic group more, you need a better reason than “fun though it is to think about sometimes”.

9

Trickle down economics used to work. It worked in a closed economy because more money was spent on american made goods, american companies had to produce more, build more factories and offices in america, and hire more americans to get the work done.

With free trade, if people have more money to spend on more chinese made goods, if more asian made goods are sold, it has little effect on the economic well being of americans.

(It is great for the asians economies though - they are booming)

10

:smiley: I don’t see what you’re worried about, you can live on minimum wage no problem if you can somehow manage to… whoops, did you say medical problems? Only the wealthy have medical problems. That’s where you’re going wrong, see.

11

And, as near as I can tell, you alas haven’t learned much from that discussion, my friend. What are you talking about? For one thing, “total wealth” to one bracket than the other doesn’t make much sense unless you specify the bracket and its size. But, what I in fact showed you is that if you took the amount of gains (between 1979 and 2000) that had gone to the top 1% and distributed that money equally in monetary terms to everyone, everyone would get an extra $5000 (in year 2000 dollars). That was enough to double the real income gains that had occurred for those in the median bracket.

What? You lost me here.

Come on, let’s not engage in WSJ editoral page style obfuscation here. As noted, these people pull down 21% of the income, so yes, the fact that they pay 25% of the taxes shows that the tax structure is pretty flat…not perfectly flat (and I think it is more progressive near the bottom)…but not that far from it.

12

Just to clarify, these were after-tax income gains in real terms (i.e., adjusted for inflation).

13

To put these figures another way, the total aggregate amount of real after-tax income gain for the top 1% exceeded the total aggregate amount of real after-tax income gain for the bottom 80% in monetary terms by a factor of ~1.34.

So, if you imagine a pool of money representing the gains made by society between 1979 to 2000, more of that money went to 1% of the people than to the other 80%.

See http://www.cbpp.org/9-23-03tax.htm and references therein in order to access the data here.

14

jshore:

Isn’t a large part (perhaps even the majority) of the “flatness” of the tax in your analysis dependent on FICA? IOW, the biggest source of inequality in the tax code is FICA related. And while FICA is not a reitirement program in the sense of a 401k (where your own money is invested for future payack), there is still an implied direct, future cash payment to the individuals paying into FICA now. I’ve said this before and I’ll say it again: Unless you figure in that implied future payback, the numbers you quote are not telling the whole story.

I know you like to lump all the taxes together and talk about how unfair it is. And that’s fine, as far as it goes. But to get to a solution, you need to break it down and see where the unfairness comse from (mainly FICA and state sales tax). So why propose a fix (raising federal income taxes on “the rich”) that does not address the actual cause of the problem?

Reform Social Security so that it actually is an retirement program with people having control over their investments, and figure out a way to address the regressivity of state sales taxes (like exempting the necessities of life from those taxes).

15

Yes. But you may have to back this up with more numbers. From the cite you included:

Which, again, is a per individual number. I did not find any numbers in that cite which contradicted this. Can you point me to them?

If the rich paid 18% less of the taxes collected, but the total tax collected doubled, they may not have actually paid less taxes.

BTW, your right, of course about the total population numbers being missing from some of my earlier posts. I often get confused as to what the top 1% means. Sometimes cites refer to the 1% of the population with the most income. Sometimes they refer to the portion of the population with income in the top 1% of all incomes. Note, also, that I did not find any such population numbers in the cite you provided. Nor in the summary of the book which I cited. That’s why I am not sure what 21% of the income means exactly.

Also, none of our discussions included the bracket movement. That is, if you look at the top 1% and bottom few percent in 1979, you may not be talking about the same people as in the top 1% or bottom few percent in 2000. That is, as you tax economic activity more heavily, you have to look at the impact it has on the use of current wealth.

16

John Mace, that made way too much sense. You’re gonna have to do better. (BTW, NJ exempts food and clothing from its sales tax, which goes a long way towards what you’re talking about.)

17

Dont worry about social security, it will become more and more insignificant as more and more american jobs are moved to asia, more jobs are outsourced to asia, and more factories and offices are moved to asia. Asian workers dont pay social security, and employers dont contribute to social security if they outsource - saving over $7000 from the get go.

18

That just doesn’t make any sense. On the federal level, FICA is the major tax liability for lower income people. How many jobs move overseas has absolutely nothing to do with that. Tell me how FICA changes for a person making $20k/yr under the following scenarios:

  1. 0 jobs are “shipped overseas”
  2. 1M jobs are “shipped overseas”
  3. 10M jobs are “shipped overseas”
19

Originally Posted by Susanann
Dont worry about social security, it will become more and more insignificant as more and more american jobs are moved to asia, more jobs are outsourced to asia, and more factories and offices are moved to asia. Asian workers dont pay social security, and employers dont contribute to social security if they outsource - saving over $7000 from the get go.

It has everything to do with it.

  1. If 0 jobs are shipped overseas, if your factory does NOT move to china and stays in Peoria, then , then obviously there is no effect. You still pay $7500.00 in social security, and your employer has to contribute another $7500.00 into the social securiy fund.

  2. If you are one of the already one million who have lost their jobs to outsourcing, then you save $7500.00 since you pay no social security tax. There is no unfair tax on you anymore. No more injustice. As a zero income person, you pay no social security tax.

American citizens, as a total, will save up to $7500.00 for each worker replaced by free trade, $7500.00 times 1 million, which means the 1 million unemployed american people save $7,500,000,000 in taxes that they no longer pay.

Much more importantly, and with far greater effects on the overall amercian economy and our stock market :

Your employer, and the others, save $7500.00 for each american citizen replace by a chinese worker, $7500.00 X 1,000,000 = 7,500,000,000. Our american companies save 7 1/2 billion dollars. Possibly the entire $7,500,000,000 would go into the bottom line. That is a lot of profit, and the stocks of these companies go up in the stock market. With a market multiple of 15 time earnings, the stocks of these companies will go up by 15 X $7,500,000,000, which means these companies stocks will go up by $12,500,000,000 . If these are Dow companies which do all of the outsourcing, then the Dow Jones would go up by at least 800 points.

  1. Same thing as number 2 above, you still dont have to pay any social security tax, so you still save yourself $7500.00 social security taxes that you dont have to pay anymore. If 10 million jobs are performed by asians instead of americans, then just multiply Number 2 above by 10 for its effects on our economy, our company profits, and our stock market. We as a country, would save $75,000,000,000 in social security taxes. The bottom line on corporate earnings will increase by $75,000,000,000 each year, and with a market multiple of an average of 15 times earnings, these stocks would appreciate by $112,500,000,000, which would send the Dow JOnes up by at least 8000 points, nearly double what it currently is.

We have already moved millions of jobs to asia, and to eastern europe, which means that american companies are already saving billions of dollars in not paying into social secuity for these jobs. India and china plan to take over many millions of more jobs currently being done in america, so we shall have even greater savings in the future, and even more profitable american companies.

Pretty simple really, why is it so hard to understand why so many companies are outsourcing ?

In addition to these social security costs, we also save in not having to pay any medical beneifts, no unemployment insurance, no workers comp, no epa/pollution worries, no osha standards to follow, no unfair labor laws, etc.

Additionally, instead of paying $10 to $20 in wages, we can hire chinese factory workers for 27 cents an hour.

The economic savings of lower labor costs and of companies not paying these other hidden costs are even greater savings than what anyone can calculate with the social security costs savings.

20

Whoops, $7500.00 X 1 miillion is an increase in corporate profits of $125,000,000,000, not $12,500,000,000. Corporate profits increase by up to one hundred and twelve billion dollars if every worker replaced by an asian is at the social security max. A lot of profit increase just from not having to contribute to social security system.
Add in the additional savings of lower wage costs, no medical , etc and you get several hundreds of billions of dollars of increased profit each and every year by moving your factories and IT work from america to asia.