I am a staunch supporter of Obama, lets state that up front. I understand in a vague and misty way the broad strokes of Keynesian economics and am on board with using stimulus to restart an economy.
But. I’m eager to understand the other side so that I’m making an informed decision, and right now I know zip. I think Romney and Ryan are misguided, often dishonest and thin on details, but Republicans can’t be campaigning on “it sounds like it should work” can they really? So I’d like to look myself first-hand at what is being used to support the idea that tax cuts on the wealthy lead to economic growth.
So I have 2 questions:
What real, historical evidence there is to support the Romney/Ryan plan (assertion?) that cutting taxes on the rich leads to job creation and economic growth? When has then been proven in actual real life? I suppose they may just be working on theory and not have historical evidence to back it up, but if they are supporting their claims with evidence, what is that evidence they are using? I’m envisioning charts, with circles and arrows on the back of each one showing “we cut taxes on job creators here” and “Unemployment rates started dropping and GDP started growing here”.
What academic papers or other real research - not blog posts and crap - are used to make their assumptions? Who are their guiding lights in terms of economists or whatever? What books describe for the layperson how it works, and makes the case that everyone should get on board with the idea?
I’m not looking for glib or partisan answers but instead really want the opportunity to be an educated and informed voter.
You don’t specify which tax - income or capital gains.
Warren Buffett says he never thinks about taxes when investing and he is one of the few honest billionaires alive. Of course he does not pay income taxes other than on his modest salary.
Capital gains taxes are now 15% and some on the right want zero. For benefits there you will find no evidence at all.
There seems to be a lot more real-world evidence that government spending will create jobs and grow the economy which will increase tax revenue. Keynes was not wrong. (Not that increasing tax revenue is the point of the whole thing.)
This isn’t a great argument. Not even going to take issue with the conclusion, but the premise is flawed since people are capable of hyperbolic discounting: people work for no immediate reward. If the adherents to the Laffer curve philosophy were serious, they’d take fault with wage rates (at least hourly wage rates) for not giving people the full product of their labour. If people take a purely mercenary view and do not expend effort beyond the median when not fully remunerated, that’s a feature both of wage labour and gregarious labour.
That said, I think they’d point to Reagan. He advocated “supply side” economics by redistributing wealth to the upper class and employment increased during presidency. There are minutia there that other posters will explain, such as massively increasing the governmental debt and increasing taxes.
You are just nit-picking around the edges. Even if you are right that 100% tax will not result in nobody working, it will be close to zero, and does not materially alter this discussion.
I am sure that there is something like the Laffer curve in effect, with revenues at or close to zero at both ends. However, I am not aware of any evidence that we are currently to the right of the apex and therefore a tax cut will increase revenue.
The OP question has interested me for a while because I have heard the right argue the case, with examples, that tax cuts stimulate the economy, and the left, with examples, that it does not. The examples from the right include tax cuts by Harding, Truman, Kennedy and Reagan, plus they cite a slump in the economy following FDR’s tax increases in 1937. The left counter with Bush 43 and the fact that Clinton raised taxes and the economy grew. So it seems to me that the position may well be: tax cuts sometimes stimulate the economy but there are other factors in play.
Note also that with the upcoming fiscal cliff, many economists state that the combination of tax increases and spending cuts will drive us back into recession. Keynesians will focus on the damage caused by spending cuts (see Paul Krugman’s gazillion articles on the failure of austerity programs in Europe where he lambastes spending cuts while never mentioning the tax increases), and the right focuses on tax cuts while not acknowledging any possible harm caused by spending cuts.
I believe the issue is not that cutting taxes isn’t stimulative, it’s about the efficiency and effectiveness of the stimulus. Not all stimuli are created equal and tax cuts appear to be among the least efficient. At least that’s my understanding.
There is also going to be a big difference in stimulus effect between giving 10 million people $500 each in tax cuts vs. giving 500 people $10 million each in tax cuts. In the former case, that $500 is going to be spent fairly quickly, and spread around the economy in a diverse fashion. In the latter case, chances are that the money will simply be added to the cash horde that companies are currently sitting on. Or it will be sent to overseas accounts or companies, if folks like Romney are any indication.
I think it depends on how high taxes are already. If effective rates are 40% and you lower them, it probably creates a lot more demand than if you lowered them from a 20% effective rate.
I don’t think that’s really right either because if we assume that the American economy is heavily dependent on buying American-made goods, an extra $500 doesn’t cut it. It will only enrich the agriculture sector(who are doing quite well right now), oil companies(okay, some employment there), and foreign manufacturers who sell products cheaply enough that you can spend $500 and buy a new TV or computer.
I also don’t think any economists really know what the multiples are for different types of spending and tax cuts.
If you give people a tax cut, then they will do something with the money that otherwise would have gone to the government. Anything they do with this money will end up helping other people (and thus the economy), either directly or indirectly. The only exception is if the money went overseas. Or if they stuffed it in a mattress. And increased economy activity will often end up as extra revenue to the government. It’s a win-win situation.
But it’s the (admittedly unknown) multipliers that are important. If you give someone (even a non-millionaire) $10 million dollars, a lot of that is going in the bank. There is plenty of investment money sloshing around now, waiting on demand.
But if you give everyone $500, they will likely spend it. The original money may ultimately end up in the hands of ADM, Exxon or Apple/Sony, but in the meantime, it pays wages to grocery store clerks, convenience store clerks, and Best Buy blue shirts. Those folks in turn will spend most of the money they received.
Since something was purchased, it needs to be replaced, and a whole new tier of people receive some portion of the original $500. It’s the multiplier that makes it worthwhile.
Most of the arguements for cutting taxes for the “job creators” is that any money that they don’t pay in taxes will be partially spent creating jobs. The flip side is that if they have to pay more taxes, they will have to cut jobs.
The problem with this is that taxes are paid by job creators on net profits so any salaries actually reduce the taxable part.
The reality is that jobs are created when someone has confidence they’ll make more money by hiring more people. That is why a long term government spending plan is a great stimulus. If the Pentagon places an order for 1000 widgets, a company might try to squeeze that out with overtime. If the Pentagon says they want 1000 widgets per month for the next three years, the company will hire more people. Reasonably expectation of profit is the only job creation force.
What do you think the government does with it? There isn’t a big mattress in Washington where tax revenues are stored.
For every dollar they get, they immediately spend $1.10 (or whatever the deficit ratio is) on either goods and services or wages, which provides pretty much exactly the same sort of increased economic activity.
You can argue that that is less efficient for the government to spend the money then for Joe Sixpack to do it, but it’s not the black hole that the right likes to pretend. And, quite frankly, if the money comes from people like me who are well off and saving in non-immediately productive ways (buying stocks/mutual funds does very little to stimulate the economy), then I’m pretty sure it’s much more stimulative.
