Sometimes, a Tax Cut for the Wealthy Can Hurt the Wealthy

New York Times ^ | November 24, 2005 | ROBERT H. FRANK

[nickcarraway]

WHEN market forces cause income inequality to grow, public policy in most countries tends to push in the opposite direction. In the United States, however, we enact tax cuts for the wealthy and cut public services for the needy. Cynics explain this curious inversion by saying that the wealthy have captured the political process in Washington and are exploiting it to their own advantage.

This explanation makes sense, however, only if those in power have an extremely naïve understanding of their own interests. A careful reading of the evidence suggests that even the wealthy have been made worse off, on balance, by recent tax cuts. The private benefits of these cuts have been much smaller, and their indirect costs much larger, than many recipients appear to have anticipated.

On the benefit side, tax cuts have led the wealthy to buy larger houses, in the seemingly plausible expectation that doing so would make them happier. As economists increasingly recognize, however, well-being depends less on how much people consume in absolute terms than on the social context in which consumption occurs. Compelling evidence suggests that for the wealthy in particular, when everyone's house grows larger, the primary effect is merely to redefine what qualifies as an acceptable dwelling.

[durasell]

No. The machinery is sturdy. The economy isn't static. It's in a constant state of flux. What we're seeing -- the huge pooling of wealth -- has happened before and the corrections -- when it comes -- has happened before.

[nickcarraway]

Certain people on the left use a so-called "gap" as evidence. Let me give you a scenario. Your neighbor Joe, is slightly wealthier than you. Say his net worth is 3% greater than yours. Suppose that I want to purchase some asset from each of you. I will pay Joe $1 million and you $250,000, which represents a huge increase in both your net worths. The gap between you has expanded. Joe is now much more wealthy compared to you than before. Question: does that mean you got poorer when I gave you the $250,000?

[nickcarraway]

I agree with that. However, this professor's suggestions would likely make them even worse.

[expat_panama]

"the federal budget deficits created by the recent tax cuts ...  ... will exceed $300 billion for each of the next six years, according to projections by the nonpartisan Congressional Budget Office."

Fascinating.  Here's another thread on an article that mentions that the "deficit dropped by 23 percent in the latest fiscal year, down to $318.6 billion."   I suppose we have to expect the NYT to put it one way and the National Review to cover it in a different light; but the question remains --are we all doomed or not?

[RipSawyer]

Based on what evidence? Standard of living has been rising in this country.>>>>>>>>>

Well, if it's risin' nationwide it shore nuff muss be risin' mighty fast somewhere 'cause it dang sho' is a fallin' where I live!

[RipSawyer]

Certain people on the left use a so-called "gap" as evidence. Let me give you a scenario. Your neighbor Joe, is slightly wealthier than you. Say his net worth is 3% greater than yours. Suppose that I want to purchase some asset from each of you. I will pay Joe $1 million and you $250,000, which represents a huge increase in both your net worths. The gap between you has expanded. Joe is now much more wealthy compared to you than before. Question: does that mean you got poorer when I gave you the $250,000?>>>>>>>>>>>

Actually, if you paid fair market value neither one got richer or poorer, net worth did not change, you simply converted it into cash. Just where do you imagine a huge increase in net worth came from, are you paying all that money for something that was actually worthless? Or do you think that only cash counts when computing net worth?

[FreeRep]

Congress should be ashamed of themselves for not deleting the estate tax for small business this July. If the estate tax were repealed, the effect on the economy would be significant. The burdens on small farms and businesses under 5 million because of increasing property evaluations is extreme.

[durasell]

We've probably seen the last of the tax cuts.

[exDemMom]

but the question remains --are we all doomed or not?

We are. So if we just stop worrying about it, we'll be a lot happier.

[lewislynn]

We've probably seen the last of the tax cuts.

Couldn't we wait untill I've seen the beginning?

[Toddsterpatriot]

A careful reading of the evidence suggests that even the wealthy have been made worse off, on balance, by recent tax cuts.

This is only true in bizarro (or hedgetrimmer) world. In bizarro world everyone benefits when taxes are raised to 100%, because the government knows how to spend money better than the people who actually earn it. Utopia in bizarro world was the old Soviet Union.

[durasell]

Oops. Sorry. No, I think we've pretty much cut as much as we can. They will probably have to start raising taxes to keep our creditors from becoming jittery.

[Mase]

Doesn't the poorest ten percent of the U.S. have a better quality of life then anywhere else in the world. Often better than a higher percentile in other nations?

Cato did a study recently to remind the doom and gloomer's among us just how well we have it here in the U.S. This thread should probably be placed on a monthly rotation given some of the comments we see on FR these days. From the article:

Now go to the Web site "globalrichlist" and type in $39,000 [Household income for a husband and wife both working at Wal-Mart for just $10.00 per hour]. Guess what. Your new household income ranks in the top 4 percent of all the people in the world. Only 72 million people make more than you do. Almost 6 billion make less. And you didn't even have to go to college [or high school for that matter].

[Reeses]

Citing revenue shortfalls, the nation postpones maintenance of its streets and highways, even though doing so means having to spend two to five times as much on repairs in the long run.

Fuel taxes raise enough money to build and maintain the roads 20 times over. The reason the government lets the roads go is because they know people will eventually get fed up and vote for new taxes to fix them. Road repair and school construction bonds are the proven cash cows of taxes.

[Mase]

will exceed $300 billion for each of the next six years, according to projections by the nonpartisan Congressional Budget Office."

I just love it when anyone refers to the CBO as nonpartisan. Not surprising for the NYT who treat their readers as if they were morons. The CBO (and OMB for that matter) is a political organizations with an agenda. There is nothing nonpartisan about them.

From the WSJ:

Once again, they showed that the scoring of the effects of major policy changes performed by the Office of Management and Budget and the Congressional Budget Office were highly erroneous.

The errors were not random. They were strongly and consistently biased against pro-market, pro-growth reforms, and they are the long-recognized results of outdated methodologies employed by federal scoring agencies. The end result is that such errors greatly hamper or prevent Congress from adopting policies that would maximize economic growth and personal prosperity.

Doesn't Anyone Know the Score?

[The Cuban]

That method of funding represents an inefficiency in the system.

[B4Ranch]

That's what the illegals all say.

[spinestein]

Since when is it not paying your fair share to have to cough up 40% or more of your income in taxes?

The current proposal by many fiscal conservatives is to lower the top tax bracket to a marginal rate of 33%. Fiscal liberals think this is outrageous and greedy and want the rate raised to 40% or higher in the mistaken belief that raising the marginal tax rate automatically brings in a proportional amount of tax revenue.

It doesn't. Empirical data shows that raising the rate above the 40's results in LESS revenue and also puts the brakes on the economy by causing people to take their money out of circulation. By setting a lower tax rate, continuous revenue to the government can be maximized and continuous economic growth can be maintained.

This is the reality of economics as opposed to the "command economy" fiction advocated by many of the fossilized econ professors still teaching modern day Marxism in some colleges.

[B4Ranch]

There are legal ways around estate taxes.

[DB]

No, it represents that the funding earmarked for specific purposes is raided for other purposes. Government spenders create virtually infinite numbers of "projects" to spend the taxpayers money on. Each more important than the next...

They always short the police, fire and roads because they know when push comes to shove the people will always vote to increase funding for these things without really asking what happened to the funding that was already approved specifically for those functions. But is never enough...