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The Idolatry of Ideology - Why Tax Cuts Hurt the Economy
alternatives ^ | Russ Beaton

Posted on 05/02/2003 7:55:36 AM PDT by please sir may i have a dollar

Edited on 05/02/2003 8:04:07 AM PDT by Admin Moderator. [history]

Never have so many been fooled for so long by an idea so totally lacking in economic logic, facts and theory. I am speaking of the religiously held and seldom questioned premise that (are you ready?): TAX CUTS STIMULATE THE AMERICAN ECONOMY.

I’m fully aware that I risk excommunication from the Church of Economic Science when I argue exactly the opposite: Tax cuts actually hurt the economy. It isn’t just that they don’t help, or that they’re ineffective—THEY REALLY HURT!

I can hear you thinking (even if your values bias makes you otherwise eager to agree): “Here comes the bleeding heart liberal, anti-trickle down, do something for humanity mantra.” No, indeed. I’m talking data here—numbers and empirical evidence. Check your values at the door and come on in.

Let’s start by examining conventional wisdom. You know the drill—Cut taxes. Leave the money in the hands of the people rather than the depraved clutches of the government. That way the people, being good red-blooded (Visa) card-carrying Americans, will dutifully spend the money. This stimulates economic activity, creates jobs and we’ll all live happily ever after. Why, the activity thus stimulated may be so vigorous that collection of taxes on this newly stimulated activity will soon exceed the amount of the original tax cuts! It’s the economic version of perpetual motion.

But let’s get real here, starting with some basic facts. First: tax cuts put more money in the hands of people who (used to) pay taxes. In any data-based analysis of the impacts, the starting point must be the fact that money that would have been spent by the government is now spent by private individuals.

So let’s follow the money.

Propensity to Consume It is virtually always the case (especially with this President) that a tax cut returns money to high income people disproportionate to the middle or lower income taxpayer. This makes understanding the spending patterns of the rich critical to analyzing the economic impacts of a tax cut. Thus, the question becomes: “What kinds of things do higher income folks spend additional money on, compared to moderate and lower income people?”

There is both a quantity and a quality dimension to the evidence on this question. Economists call the percentage of an additional dollar received that will be spent (as opposed to saved) the Marginal Propensity to Consume (MPC). On the quantity question, both the data and common sense support the fact that less wealthy people have a higher MPC—they’ll re-spend it all. They have to, they’re poor. Higher income people will save (or invest?) more, and therefore show a lower MPC. (If you consume only half your income, you have an MPC of .5. If you are at subsistence and can’t save anything, your MPC is 1.)

The essence of economic impact is the hand-to-hand re-spending of dollars. That is called the “multiplier”. A high MPC leads to a high multiplier, and that means a certain amount of spending will go farther in stimulating the economy by being “multiplied” more times within the economy and creating more incomes before the impact dies out like a ripple on a pond. That is the essence of the quantity element—put the money in the hands of people who will re-spend it (moderate & lower income) and the economic stimulus will be more pronounced per dollar provided.

On the quality side, it matters what you buy. Consumer behavior data consistently show that low and moderate income people tend to spend money on goods and services that are more likely to result directly in jobs and incomes in the community (that is, to continue multiplying on a secondary or tertiary basis). Higher income people tend more to take a trip or buy some good or service produced elsewhere and set in motion an earlier “leakage” to their local economy, thus lessening the multiplier.

Of course, trickle-down economics rests on the now widely discredited assumption that wealthier people immediately invest this extra money productively, causing growth in the economy and putting everyone to work. (Good grief, George, even Ronald Reagan gave that one up!) This is equivalent to providing for the welfare of birds by overfeeding the horses, and then encouraging the birds to forage over what’s left in the corral.

It is increasingly the case, beginning with “mergermania” in the 1980s, that the well-to-do have found a great many unproductive (to the general economy) ways to use their extra cash. Most of these ways increase disparity between rich & poor further (a subject I’ll consider in a few more paragraphs, so be patient).

So there we have it. If you want to promote economic well-being through tax policy, don’t give it to the rich. They lower economic multipliers by not re-spending as much in the first place, and then by tending to spend it on the wrong things when they do. You want economic health? Increase taxes and balance public budgets by having government re-spend the money. Let government put the money in the hands of two types of individuals: people who work for the government (generally of middle or modest means); and, people who receive the benefits of direct payments (such direct recipients of social services tend to be our lowest income types).The lower the income of the person you can get it to the better—they’ll re-spend it all!

As promised, this hasn’t involved values—just data (and a few cheap shots). But this analysis wouldn’t be complete without some observations of the income and wealth distributional effects of all of this. I know—I promised an “ideology free” case for the negative effects of tax cuts, but even traditional economists occasionally allow themselves to speak about income disparity. (They just don’t DO anything about it…)

Much of my argument has derived from the fact that people who pay taxes normally have higher incomes than people who do not. That goes for normal people, of course. If you’re really rich, or a corporation, you might get out of paying taxes altogether—but that’s a different story. Of course, avoidance of taxes by the super-rich is a lose/lose for all the rest of us (the welfare class, the working poor, the middle class, the upper middle class—the whole bunch of us) since those elite occupants of the high income tax havens are really getting double subsidies. One is a systemic tax structural subsidy, and the other is a government expenditure subsidy.

What are these things? First, anyone who has enough wealth and flexibility can often avoid paying taxes through a bewildering variety of features within the tax code and state-of-the-art accounting practices. That’s a built-in structural subsidy not available to us mere mortals. If you don’t believe me, go get your own oil depletion allowance—or buy Rockefeller Center for the rapid depreciation write-off. Then we’ll talk.

The second type of subsidy derives from taking advantage of direct government programs. For instance, Archer Daniels Midland (“Supermarket to the World”) is rumored to collect about half a billion dollars each year for a methanol fuels project that no one ever derives fuel from. (Or is it ethanol? No matter—they grow a lot of corn.) You just have to know where to look and how to apply. It also helps to have important friends and lobbyists in Washington and all the state capitols to help write the enabling laws and keep the programs funded. Homeless people or those on food stamps should be so well connected.

Do you suppose George Bush has ended this and other shameless “slopping at the public trough” in righteous indignation? No point even asking.

Never-Never Land So finally, what is the justification for the almost religious adherence to the idea that tax cuts stimulate the economy? In my humble opinion, we must once and for all leave the land of data and logic, and enter the never-never world of ideology, which can roughly be defined as the willingness to believe whatever the hell you want to believe no matter what logic or scientific evidence might suggest. As near as I can tell, it comes down to people wanting to keep their money rather than see it go somewhere else.

I hear you thinking: “Of course—so do I!” No awesome insight to understand this point, just self interest, greed, looking out for Number One. We can all identify with those feelings. They form the foundation for this market-oriented capitalist culture that we inhabit.

But a problem arises when a few people can manipulate the tax code and the markets to gain advantage, and the rest of us cannot. That’s precisely our problem: the rich can and do control the actions of lawmakers, and also the rhetoric we hear from the media about what “makes this country great…”. That is not the level playing field glorified in the myths about the marketplace.

You don’t like it? Tough. Go buy your own president.


TOPICS: Business/Economy
KEYWORDS: 2standdevfromavg; a5minargument; busylilbeaver; deadtrollposting; dirtyunderwear; dummycrats; dumpandrun; hisfirstpost; libealismisadisease; lockboxliberal; newbie; strikeupthebanned; takeyourmeds; thisaccountisbanned; troll; trollintrollin; vikingkitties; zot
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To: discostu
"The government can always deficit spend... well it could until that moronic balanced budget crap got written"

Well that crap was part of the Contract With America, and passed the House (balanced budget ammendment) with leadership from Newt & Tom Delay, it failed by 1 vote passing the Senate (2/3 majority required). I am and always have been a "deficit hawk" (Jim).
You also state that it's our money, that means deficits are your responsibilty not to pas off to your progeny. Spending constraints can lead to balance - if we ever get a chance to see them used.
21 posted on 05/02/2003 8:28:49 AM PDT by familyofman
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To: please sir may i have a dollar
This is a joke -- RIGHT??? If not, you are so far off-base here that remedial economics training is a necessity before future posting on this subject. Remember the old adage: "There are some who remain silent and are THOUGHT to be ignorant - and there are some who speak and take away all doubt." Guess where I think you fit.

Do you honestly believe "saving" and "investing" take money out of circulation? What a rediculous premise.

Perhaps you should comment on some other topic where you might be better prepared.

22 posted on 05/02/2003 8:29:51 AM PDT by USMA '71
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To: please sir may i have a dollar
This, uh, attempt at economic analysis has me completely flummoxed. Is this guy trying to pull a Henry Hazlitt (Economics in One Lesson) for the Left? If so, he fails on any number of accounts.

To cut right to the chase, the heart of his argument is the old liberal bromide of "Only the Government can spend your money properly". Of course, when it came to offering logic and empirical data on past government spending, he gave us no insight on that!

This is the old shop-worn plaint of the rich being the bad guys - always. Riiiiiight. Government grows your food for you, markets and sells everything under the sun, provides plant and capacity, stimulates growth by telling us what to do with our money after the barest of essentials have been provided to the household, and is finally beginning to come around to the concept of telling us how to think.

I for one am glad this guy has taken the time out of (what I am sure is) his busy schedule to enlighten the rest of us plebes. It has taken us over 225 years, but we've finally come to the appropriate conclusion that our nation was founded on the wrong principles!

Whew! Whoda thunk?

Pardon me now while I go off to barf in the bushes...

What a dork....

CA....

23 posted on 05/02/2003 8:30:06 AM PDT by Chances Are (Whew! Seems I've once again found that silly grin!)
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To: USMA '71
"Do you honestly believe "saving" and "investing" take money out of circulation? What a rediculous premise."

That's straight out of John Maynard Keynes' "General Theory", and it's the school of thought that's being taught even today in colleges and universities in both the US and Canada.

Encouraging isn't it?
24 posted on 05/02/2003 8:31:44 AM PDT by Jason Kauppinen
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To: please sir may i have a dollar
He forgot to mention that the popularizer and promoter of this theme was none other than President Kennedy, the liberals' idol.
25 posted on 05/02/2003 8:33:53 AM PDT by 3AngelaD
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To: familyofman
Government deficits are one of the most over analyzed things in the world. Like I said later in the post, the government just pays off debt with new debt, they sell 20 year t-bills to payoff 20 year old t-bills. Problem with the balanced budget thing is that it wasn't a spending constraint, they can still spend all they want they just have to steal it all from us. Given that government debt is accomplished by selling t-bills to willing volunteers it is most clearly NOT my duty for future generations to do anything with the debt. Most governments run at defecit most of the time, no big deal.
26 posted on 05/02/2003 8:34:44 AM PDT by discostu (A cow don't make ham)
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To: please sir may i have a dollar
a tax cut returns money to high income people disproportionate to the middle or lower income taxpayer

Gee, maybe this is why:

Group's Share of Total Taxes (Source: IRS)

Top 1% (above $293,415) = 36.2%

Top 5% (above $120,846)= 55.5%

Top 10% (above $87,687) = 66.5%

Top 25% (above $52,965) = 83.5%

Top 50% (above $26,415) = 96%

Bottom 50% (below $26,415) = 4%

How many of you out there are realizing for the first time that you are "rich"?

27 posted on 05/02/2003 8:38:34 AM PDT by kevao
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To: please sir may i have a dollar
please sir may i keep a dollar I earned?
28 posted on 05/02/2003 8:39:45 AM PDT by freeforall
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To: freeforall
bttt for all the people who think they should be allowed to keep the money they earn.
29 posted on 05/02/2003 8:44:42 AM PDT by freeforall
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To: discostu
Most governments run at defecit most of the time, no big deal.

Tell that to your state govenor. I'd like to see some support for your contention...the US government has been either in balance or surplus for most years (historically). But, that is not really a good reason for balance - I just thought I'd mention it.
Anever-ending cycle of debt is fine in theory, but sooner or later someone will have to pay the piper (common sense).
30 posted on 05/02/2003 8:47:53 AM PDT by familyofman
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To: Falcon4.0
Tax Cuts worked well for Regan & the U.S. but that was before NAFTA und GATT
31 posted on 05/02/2003 8:48:34 AM PDT by joesnuffy (Moderate Islam Is For Dilettantes)
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To: familyofman
That's the glory of t-bills, the piper is the American people, and they get paid 20 years later.

If we could force the government to balance the budget by cutting spending that would be great, but the silly balanced budget rules put in place never bothered with that. In the end all they've done is give the government a great excuse to raise taxes because they "have to balance the budget".
32 posted on 05/02/2003 8:51:47 AM PDT by discostu (A cow don't make ham)
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To: kevao
Lucky Ducky, I guess, not having to pay too much taxes.
33 posted on 05/02/2003 8:55:56 AM PDT by berserker
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To: familyofman
According to the Treasury Dept America has by and large been in debt since day 1, we might not have beed deficit spending at a specific time (still looking at that) but we were carrying debt.
[Question] What caused the debt that United States now has?

[Answer] The total public debt is largely a legacy of war, economic recession, and inflation. It represents the accumulated deficits in the Government's budgets over the years. The United States first got into debt in 1790 when it assumed the Revolutionary war debts of the Continental Congress. At the end of 1790, the gross public debt was approximately $75 million. For a brief period in the mid-1830's the public debt was virtually zero. At the start of World War I in 1916, the public debt was $1 billion. It then rose to a peak of $26 billion in 1919 to finance the war. The debt declined for the next decade. During the Great Depression of the 1930's, however, the debt increased from $16 billion to $42 billion. During the Second World War the public debt rose sharply to a peak of $279 billion in 1946. From its postwar low in 1949, the outstanding public debt grew gradually for nearly the next two decades. Then, beginning at the time of the Vietnam War in the mid-1960's, the rate of the debt's increase accelerated sharply.

http://www.treas.gov/education/faq/markets/national-debt.html?IMAGE.X=0\&IMAGE.Y=0
34 posted on 05/02/2003 8:59:42 AM PDT by discostu (A cow don't make ham)
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To: please sir may i have a dollar
Let's take on this idiot's central point.

When you receive a tax cut, you keep more of your own money and you have more money to use. Now, there are only three things you can do with it: spend it, save it, or invest it.

If you spend it, as this guy notes, it moves right back into the economy. If you save it, there is more money for banks and others to lend, which means more houses, cars, and other goods get bought. That's good for the economy. Now, if you invest it, companies have more money to expand and when they expand, they hve to hire more people. So whichever of the three things you do with your money will help the economy, just in different ways.
35 posted on 05/02/2003 9:24:05 AM PDT by TBP
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To: discostu
He needs to take a class from Walter Williams and Thomas Sowell.. This guy is a socialist pure and simple...
36 posted on 05/02/2003 9:24:46 AM PDT by Grymskull (A supporter of the VRWC and the Male Abortion..)
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To: chiller
Russ Beaton is Professor of Economics at Willamette University in Salem, Oregon specializing in environmental economy, urban land economy and energy economy.

In ohter words, Russ Beaton is a Marxist moron.

37 posted on 05/02/2003 9:27:11 AM PDT by TBP
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To: TBP
Don't you know that "rich" people light cigars with paper money and that they stuff their mattresses with it? Even Scrooge McDuck kept moneybins so that he could go swimming in coinage.
38 posted on 05/02/2003 9:34:01 AM PDT by weegee (NO BLOOD FOR RATINGS: CNN let human beings be tortured and killed to keep their Baghdad bureau open)
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To: TBP
The second type of subsidy derives from taking advantage of direct government programs. For instance, Archer Daniels Midland (“Supermarket to the World”) is rumored to collect about half a billion dollars each year for a methanol fuels project that no one ever derives fuel from. (Or is it ethanol? No matter—they grow a lot of corn.) You just have to know where to look and how to apply. It also helps to have important friends and lobbyists in Washington and all the state capitols to help write the enabling laws and keep the programs funded. Homeless people or those on food stamps should be so well connected.

And there should be NO subsidies from the government for anyone. But what does this Marxist moron think welfare is? It's a government subsiyd. And the homeless people on food stamps (also a government subsidy) have an exemption that puts their minimal income level well below the threshold for paying income taxes, and they don't pay employment taxes because they don't work. Now, the payroll tax ought to be cut as well as income taxes. And the personal exemption should be increased (if we're going to have income taxes.) But that would contradict this guy's Haveana-Peking ideology.

39 posted on 05/02/2003 9:43:25 AM PDT by TBP
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To: discostu
Thanks for the link - I'll spend some time there soon.
40 posted on 05/02/2003 10:09:05 AM PDT by familyofman
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