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Author Topic:   Trickle Down Economics - Does It Work?
Dr Adequate
Member (Idle past 284 days)
Posts: 16113
Joined: 07-20-2006


(3)
Message 16 of 404 (659115)
04-12-2012 2:04 PM
Reply to: Message 2 by Phat
04-12-2012 9:20 AM


Re: Milton Friedman
Well, there are a few things wrong with the Laffer curve.
The first is that people who bang on about the Laffer curve always seem to assume that we are on the right-hand side of the optimum. Even if the curve is correct in theory, the question of which side of it we're on is an empirical one. We cannot necessarily increase revenues by cutting taxes, we can only do so if we are on the right-hand side of the curve. This needs to be demonstrated.
The second is that the x-axis of the curve ("tax rate") does not in fact represent a single figure. Suppose for the sake of argument that we are on the right-hand side of the curve. It does not follow from that that (for example) cutting taxes on tobacco will so much stimulate the consumption of tobacco that the government will gain from doing it.
It would still remain an empirical question --- even if we were, and knew that we were, on the right-hand side of the graph, this would not prove that "trickle-down economics" would work, and that we could stimulate the economy and increase tax receipts by cutting taxes for the rich, as the Laffer curve cheerleaders seem to think.
Even if we are on the right-hand side of the curve, maybe we would do better to increase taxes on the rich --- and then move left on the Laffer curve by giving tax breaks to the poor. This is again an empirical question.
All the Laffer curve tells us is that in principle it is possible for some taxes to be too high. It doesn't tell us that they actually are, or that we know which taxes they are if they are.
Edited by Dr Adequate, : No reason given.

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dwise1
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Member Rating: 5.8


(1)
Message 17 of 404 (659124)
04-12-2012 3:47 PM


Get your salt shakers ready, because I'm no expert on economics either.
But aren't there at least three different kinds of weathy people?
1. The entrepreneurs who are engaged in production and in investing in production. These would not necessarily be the more wealthy (excluding some investors), more the up-and-coming riche.
2. The speculators who essentially make bets on how the market will go. They are not involved in production and, as we saw in the current economic problems, are not above hedging their bets nor engaging in swindles.
3. Past investers and inheritors of wealth who derive their wealth from past investments. I added this category as an after-thought.
The first type is involved in production and in trying to increase production, which involves growing companies and hence creating jobs. The 2nd and 3rd types are not involved in production and hence are not involved in creating jobs. Tax incentives to the first type could arguably have a trickle-down effect, whereas tax incentive to the other two types would have no trickle-down effect, or minimal effect at best.
And, as it seems to me, the most wealthy are of the 2nd and 3rd types, whereas the first type would include most of the less wealthy, the ones still bulding their empires, so to speak. And the first type would also include middle-class entrepreneurs whose small businesses also provide jobs.
FWIW.

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Dr Adequate
Member (Idle past 284 days)
Posts: 16113
Joined: 07-20-2006


Message 18 of 404 (659126)
04-12-2012 4:10 PM
Reply to: Message 17 by dwise1
04-12-2012 3:47 PM


1. The entrepreneurs who are engaged in production and in investing in production. [...] The first type is involved in production and in trying to increase production, which involves growing companies and hence creating jobs.
Well, it's not so clear that tax breaks for them would help the economy.
If they are highly taxed, then one way for them to protect their wealth is ... drumroll ... to invest it in their companies, rather than giving it to themselves in paychecks. So it's not clear that giving them tax breaks would increase their entrepreneurial activities rather than their cocaine consumption. Again, this is an empirical question, no-one can solve it a priori.

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frako
Member (Idle past 306 days)
Posts: 2932
From: slovenija
Joined: 09-04-2010


Message 19 of 404 (659137)
04-12-2012 5:21 PM


We had a solution to this problem of taxing the higher up incomers, or even companies.
Investing in companies or a company investing in its self was tax deductible, now its true that this was a grate loophole to evade taxes it was still a verry good idea, but the elected idots that ran the country back then dint know how to plug the loophole correctly so they just scrapped the whole idea.
Im guessing both sides would agree to a solution in this form or are both sides just greedy??

Christianity, One woman's lie about an affair that got seriously out of hand
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Tangle
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From: UK
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Member Rating: 4.9


Message 20 of 404 (659138)
04-12-2012 6:18 PM


It's fairly obvious that 'trickle down' is an excuse for a few to exploit the many. If it was 'pour down' effect their might be an argument. Trickle down, do leave off.

Life, don't talk to me about life - Marvin the Paranoid Android

  
Jon
Inactive Member


(2)
Message 21 of 404 (659141)
04-12-2012 7:18 PM
Reply to: Message 12 by Straggler
04-12-2012 11:04 AM


Advocates of trickle down do not think that the wealthy should get less wealthy. They think that making the wealthy wealthier makes us all wealthier in turn.
And this is nonsense because the wealthy have always been wealthy. Where's the trickling?
And for the past few decades, the wealthy have paid substantially less in taxes than previously. And look... we's all still poor!
In theory it is new wealth. New wealth created as a result of the entrepreneurial endevours of those whose investment wealth has been unleashed.
Sure. But who digs up the resources? Who transforms them into products? Who sells them? Who buys them?
If we look at all the steps that go into generating wealth, we see that the biggest roles are played by the working poor and middle class. These are the folk actually generating the wealth. Yet when we look at who gets the wealth...
Like I said, all these 'wealth creators' are only creating wealth for themselves, which becomes theirs only because they snatch it off the backs of the people actually generating it.
Wealth trickles flows up. If ever it 'trickles down', the effects are negligible.
Jon

Love your enemies!

This message is a reply to:
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Straggler
Member
Posts: 10333
From: London England
Joined: 09-30-2006


Message 22 of 404 (659166)
04-13-2012 5:59 AM
Reply to: Message 21 by Jon
04-12-2012 7:18 PM


I'm no proponent of trickle down economics but I am going to play devils advocate a bit.
Jon writes:
And this is nonsense because the wealthy have always been wealthy. Where's the trickling?
Wealth is a relative term. Compared to times gone by we (in the industrialised West) are all wealthier. We live in greater material comfort and for longer than ever before. This increased wealth is a result of the economic growth that is itself the result of the entrepreneurial activity of the wealth creators under discussion.
Jon writes:
And for the past few decades, the wealthy have paid substantially less in taxes than previously. And look... we's all still poor!
Poor compared to who? Even the poorest in our societies have food, shelter and a degree of material comfort that would boggle the minds of previous generations.
Nobody said that everybody would be equally rich. The argument is that trickle down economics raises the bar for everyone. There are still those who are "poor" in relative terms but even the poorest are richer in absolute terms than they would have been without the economic activity spurred by the wealth creators.
Jon writes:
Sure. But who digs up the resources? Who transforms them into products? Who sells them? Who buys them?
Who innovates the products and invests in the factories and equipment etc. that are required for any of this economic activity to happen in the first place?
Jon writes:
Like I said, all these 'wealth creators' are only creating wealth for themselves, which becomes theirs only because they snatch it off the backs of the people actually generating it.
Any investor invests in order to gain themselves. The question is whether or not their gain also generates wealth for those they employ.
Jon writes:
If ever it 'trickles down', the effects are negligible.
Then to what do you attribute the increased living standards we have all enjoyed?

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Percy
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Posts: 22392
From: New Hampshire
Joined: 12-23-2000
Member Rating: 5.3


Message 23 of 404 (659170)
04-13-2012 7:08 AM


I don't know if trickle down economics works, whatever that means, but it certainly happens. There's a whole industry catering to the needs and wants of the rich, from homes to furnishings to boats to vacations to art and so on. Those who cater to the rich have their needs and wants, and so forth on down through the economic layers. The rich create money, and money circulating in an economy creates demand, and even if it isn't demand for a burger flipper at McDonalds, it does eventually trickle down to that level.
Here's an old joke that's been told here before, I cut-n-pasted it from the first website where Google found it:
There are these two Russian serfs — Igor and Ivan. One day Ivan goes out into the forest and finds a wood fairy. The wood fairy tells Ivan she will grant him any one wish. Ivan thinks for a moment. With my own goat, I can have milk for my family, he thinks. So he wishes for a goat and—poof — a goat appears. Happy, Ivan goes back to the village where Igor, seeing Ivan and his new goat, becomes enraged. Now Ivan has a goat he will sell me the milk and take all my money, Igor thinks. Where did you get the goat? he yells at Ivan. Ivan explains to Igor about the fairy and the goat and Igor storms off into the forest to find the fairy. When he does, the fairy tells Igor that she will grant him any one wish. Without blinking an eye, Igor says, Kill Ivan’s goat!
An economy built upon egalitarian ideals with constraints against wealth attainment will be poor and stagnant. The answer to the problems of those at normal income levels is not to get rid of or penalize the rich. It would only make things worse.
--Percy
Edited by Percy, : Clarify last two sentences.

Replies to this message:
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 Message 27 by Straggler, posted 04-13-2012 8:10 AM Percy has replied
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Percy
Member
Posts: 22392
From: New Hampshire
Joined: 12-23-2000
Member Rating: 5.3


Message 24 of 404 (659172)
04-13-2012 7:39 AM
Reply to: Message 16 by Dr Adequate
04-12-2012 2:04 PM


Re: Milton Friedman
One other misleading thing about the Laffer curve is that many interpret the right side of the curve as indicating declining economic activity. While that is one of the possibilities, another is increasing tax avoidance through bookkeeping arrangements or influencing tax legislation or shifting into untaxed or less taxed economic activities.
Dr Adequate writes:
All the Laffer curve tells us is that in principle it is possible for some taxes to be too high.
I'd go beyond making this claim only to be in principle and possible. There isn't any doubt in my mind that taxes can be sufficiently high to dampen economic activity, but I agree with you that empirical data is necessary for establishing cause/effect details.
--Percy
Edited by Percy, : jar => Dr Adequate

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PaulK
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Posts: 17822
Joined: 01-10-2003
Member Rating: 2.2


Message 25 of 404 (659173)
04-13-2012 7:39 AM
Reply to: Message 23 by Percy
04-13-2012 7:08 AM


I don't think that anyone argues that rich people don't spend money in the local economy. The question is whether giving them more money means more spending in the local economy compared to giving more to the poor or, say, spending it on infrastructure projects.
Would giving $100,000 to Bill Gates result in more economic stimulus than giving $100 each to 1000 poor families ? Is maintaining or building transport routes - which can give long term benefits to businesses that use them - in addition to the money going to the construction firms and their workers, obviously worse than cutting taxes for the rich?
It doesn't seem obvious that trickle-down is even plausible, let alone definitely a good idea.

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Percy
Member
Posts: 22392
From: New Hampshire
Joined: 12-23-2000
Member Rating: 5.3


(1)
Message 26 of 404 (659176)
04-13-2012 8:00 AM
Reply to: Message 25 by PaulK
04-13-2012 7:39 AM


PaulK writes:
Would giving $100,000 to Bill Gates result in more economic stimulus than giving $100 each to 1000 poor families?
The right question to ask is if Bill Gates has $100,000, who should decide what he does with that money?
You said, "I don't think that anyone argues that rich people don't spend money in the local economy," so we agree that trickle down happens. The question I think you're raising is who can best decide how to dispose of the money of the rich, the rich themselves or the government through tax and spend programs.
--Percy

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Straggler
Member
Posts: 10333
From: London England
Joined: 09-30-2006


Message 27 of 404 (659178)
04-13-2012 8:10 AM
Reply to: Message 23 by Percy
04-13-2012 7:08 AM


As stated in the OP I don't want to get hung up on what is fair etc. And I don't think anyone doubts that rich people spend money.
What I am interested in is whether or not cutting the taxes of the richest ultimately benefits all by facilitating wealth creation.
This (as Dr A rightly states) is an empirical question. The problem is I am not really sure what empirical evidence is necessary or available to settle this question...?
Percy writes:
The answer to the problems of those at normal income levels is not to get rid of or penalize the rich.
Is the answer to cut their taxes and wait for the positive effects to filter through?
If trickle down economics works - The answer to this would would be "yes".

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 Message 23 by Percy, posted 04-13-2012 7:08 AM Percy has replied

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Percy
Member
Posts: 22392
From: New Hampshire
Joined: 12-23-2000
Member Rating: 5.3


Message 28 of 404 (659180)
04-13-2012 8:30 AM
Reply to: Message 27 by Straggler
04-13-2012 8:10 AM


Straggler writes:
Is the answer to cut their taxes and wait for the positive effects to filter through?
If trickle down economics works - The answer to this would would be "yes".
What does it mean to ask if trickle down economics works? Clearly trickle down happens, and I think the word "trickle" trivializes the magnitude of the effect.
What I think the question about whether it works is really asking is, "In terms of the greater good, who is better able to decide what the rich should do with their money, the rich or the government?"
If we're talking about social and economic programs, I don't see where the government has ever demonstrated that they're very good at it.
--Percy
Edited by Percy, : . => ?

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PaulK
Member
Posts: 17822
Joined: 01-10-2003
Member Rating: 2.2


Message 29 of 404 (659181)
04-13-2012 8:39 AM
Reply to: Message 26 by Percy
04-13-2012 8:00 AM


quote:
The right question to ask is if Bill Gates has $100,000, who should decide what he does with that money?
No, it is not because that question has nothing to do with whether trickle-down works.
quote:
You said, "I don't think that anyone argues that rich people don't spend money in the local economy," so we agree that trickle down happens. The question I think you're raising is who can best decide how to dispose of the money of the rich, the rich themselves or the government through tax and spend programs.
Absolutely not. The question is whether the best way to help the economy is to give money to the rich - the claim of trickle-down economics - or something else. I argue that giving money to the poor or spending it on useful infrastructure are plausibly better. The morality of taxation is a complete irrelevance. So, no, I asked the questions that I meant to ask which are concerned with the alleged practical benefits of trickle-down.

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Straggler
Member
Posts: 10333
From: London England
Joined: 09-30-2006


Message 30 of 404 (659185)
04-13-2012 9:12 AM
Reply to: Message 28 by Percy
04-13-2012 8:30 AM


Percy writes:
What does it mean to ask if trickle down economics works?
Well lets first state what we mean by "trickle down economics". From Wiki:
quote:
"Trickle-down economics" and "the trickle-down theory" are terms in United States politics often used by the American right to refer to the idea that tax breaks or other economic benefits provided by government to businesses and the wealthy will benefit poorer members of society by improving the economy as a whole.
So when I ask - Does trickle down economics work? I am asking if cutting the taxes of the richest demonstrably improves the living standards and wealth of society as a whole.
Percy writes:
What I think the question about whether it works is really asking is, "In terms of the greater good, who is better able to decide what the rich should do with their money, the rich or the government?"
With all due respect I think you are changing the question.
If we are going to cut taxes to stimulate the economy we could, for example, cut sales taxes that affect everyone. Or taxes that affect the middle classes most significantly. Or we could remove the poorest from paying tax altogether. Or we could not cut taxes and instead invest in public infrastructure projects.
The question is which of these has the most positive effect on the economy as a whole and which ultimately has the biggest benefit for all in terms of raising living standards. If cutting taxes for the richest is the most effective means of generating wealth then trickle down economics works. If it doesn't do this it doesn't work.
So we need the evidence.....

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