Posted on 12/31/2006 9:36:32 AM PST by G. Stolyarov II
Recently, several frequently articulated objections to tax cuts for upper-income individuals have been brought to my attention. The scenario feared by the objectors and used as grounds for denying tax cuts to the wealthy is the investment of the money gained by the recipients. I shall address three of these objections using the principles of economics and rational self-interest to display the virtues of such an outcome. Indeed, no damage will result from investment of such money; quite the contrary, this practice will fuel economic growth in the United States and rising standards of living for Americans.
Objection 1: What if the wealthy invest the money gained from their tax cuts in foreign nations? Especially if faith in the U.S. economy is weak, they will tend to invest elsewhere. Thus, the government will lose out on that money. The wealthy will essentially take U.S. dollars and give them to China, thus not helping our economy.
Refutation: No harm can be done to the U.S. economy from Americans’ capital investment abroad. If wealthy American investors (or any other investors) decide that some overseas company or industry will yield a more profitable return than a domestic U.S. company or industry, the successful investors will get a higher return in interest and thus more money flowing back into the U.S.—while the failed investors, caring about their financial well-being, will quickly curtail unwise choices. Eventually, the investors will wish to consume some of the fruits of their investment.
It is important to remember that U.S. investors do not give money to foreign institutions; they loan it to them on the condition of receiving regular returns above the principal. If the investors are rationally self-interested, they will either keep their money at least long enough for the accumulated interest to exceed the amount invested, or they will withdraw the amount invested beforehand—having in the meantime accumulated interest on it. In either case, they—if successful—will take back more money than they invested originally. If they fail, they will likely correct their course of action to prevent future losses to themselves.
Objection 2: The more times a dollar is traded, the better. When the wealthy invest their money derived from tax cuts, this reduces the overall velocity of circulation of money.
Refutation: And good riddance! The quantity theory of money—developed by John Locke and known since—states that MV=PQ, where M is the amount of money in a society, V is the money’s velocity of circulation (the number of times the money changes hands in a given time period), P is the price level, and Q is the quantity of goods available. If V rises, other things equal, so will P. Thus, an increased velocity of circulation of money fuels price inflation. Americans are already suffering from mild but steady inflation, and any change that reduces it and stabilizes prices will be a welcome one; it will prevent Americans’ hard-earned savings from being needlessly eroded.
Objection 3: When there are a lot of tax cuts, it does not always promote a proportional growth because people are investing as much or more than they are consuming, and consumption is what drives the economy. The rich will not buy anything that really promotes economic growth with the money they obtained from tax cuts.
Refutation: This is a Keynesian fallacy which presumes that consumption is responsible for economic growth and prosperity. Quite the contrary, it is savings and investment which make possible capital accumulation and thus more efficient production of goods and services and research into new methods of production. Capital is the stock seed of the economy. The more seeds one plants, the greater a harvest one reaps. If one consumes all or most of one’s stock seed, one’s future harvest will be correspondingly diminished. The more one forgoes present consumption and invests one’s resources into the future, the greater one’s future rewards. The more one consumes of one’s present goods, the less productive capacity is left for the future. So it is with a whole economy; the more capital is accumulated now, the higher living standards and productivity will be in the future.
Thus, let the wealthy invest the money they receive due to tax cuts; it will improve everybody’s quality of life as a result. Investors do enable the creation of goods to promote economic growth; the money they loan to banks, corporations, and entrepreneurs gets invested into productive equipment which fuels economic progress. Adam Smith’s invisible hand principle works here as in all economic cases: let people dispose of their money as they see fit, and universal benefits will result.
Of course one could just look at the history of tax cuts in the US and easily infer that they lead to job and wealth creation for the economy in general. The good old rising tide.
ping
.............39% Capital Gains Tax????? Here come's Barney Frank!!!!!!!!!!!
LOL. What the rats never admit, something that is just in front of their faces, is that the lower capital gains rate produced billions in new revenue.
This is one of the first accounts youth entering the work force should be taught to open. PAY YOURSELF FIRST! Not only will this provide an enormous retirement fund, but also act as your own health insurance fund, one that pays you 24/7 instead of you paying it.
Money is similar to manure. If you spread it around it can do a lot of good but if you just keep it in a pile all it can is stink.
Thank you for your interesting comments and your readership. Your insights are much appreciated.
I am
G. Stolyarov II,
Editor-in-Chief,
The Rational Argumentator,
http://rationalargumentator.com
"Money is similar to manure. If you spread it around it can do a lot of good but if you just keep it in a pile all it can is stink."
I disagree. Money is rather like bricks. If you spread it around, you will only have one or a few bricks at a time-- not enough to build anything useful with. If you keep it in one pile, you will have enough to create a valuable building.
People do not become wealthy by spending their wealth.
I am
G. Stolyarov II
http://rationalargumentator.com
What is your opinion of the FairTax?
http://fairtax.org
You are correct, we disagree. There is a vast difference between spending wealth and investing wealth. Therefore I continue to assert "Money is similar to manure. If you spread it around it can do a lot of good but if you just keep it in a pile all it can is stink."
I consider myself dang lucky. My parents taught me at an early age to save save save and as I grew older I learned the ins and outs of the stock market.
Starting when I was 14 my parents gave me some money to invest at birthdays and christmases. And we'd together go over the stock market and pick some out and I'd buy them. I had to do my research and write out why I chose the stock.
When I graduated college I had a portfolio worth over 50,000. I also had 88 savings bonds since along with a toy my grandparents gave me a savings bond for my birthday and christmas every year. 22 x 2 from each grandparent twice a year is 88.
I have always had a good portfolio and invested wisely. I also have learned to save.
Because of this I can be a stay at home mom right now. We're living on my husband's income but we have the fallback provided by my investments and our savings if something happens.
I think teaching kids about money is very important. No matter what kind of financial situation you are.
Let me see if I understand you correctly.
Do you mean to include investing in the category of "spreading money around"?
It certainly can be done that way (say, through mutual funds or loaning the money to a bank and giving the bank the ability to decide how it invests it-- which means it will usually allocate your money to multiple projects).
However, many productive endeavors are made possible by the contributions of investors who *do* keep their money in one pile-- so to speak-- by investing it all in one project but giving that project the significant capital it needs to get started.
This is why I object to your statement regarding keeping money in one pile.
I am
G. Stolyarov,
http://rationalargumentator.com
Thank you for your question.
The FairTax deserves an entire article in itself; it is an interesting proposal, and I hope to do it justice in a way that a simple short comment cannot.
I will be sure to notify you once I have written such an article and made it available.
I am
G. Stolyarov II,
http://rationalargumentator.com
Well, if you want a debate, or much more knowlege of it, you should delve.
Keep all earnings and instead pay tax on discretionary spending.
The disagreements come when one tries to quantify the benefits.
Certainly. I just wish someone would quantify the benefits of taxes on earnings vs. taxes on wealth. What are we all about anyway? Creating wealth, are we not? And when one has created that wealth then TAX THEM. Not before.
Investors who follow your advice in lieu of the quotation's advice violate the wisdom of the most sacred and valuable risk-management technique available to investors; diversification.
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