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Author Topic:   Trickle Down Economics - Does It Work?
Dr Adequate
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Joined: 07-20-2006
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(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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Dr Adequate
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Posts: 12679
Joined: 07-20-2006
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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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Dr Adequate
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Posts: 12679
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(1)
Message 34 of 404 (659207)
04-13-2012 12:35 PM
Reply to: Message 24 by Percy
04-13-2012 7:39 AM


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.

True, but in that case there is more than one solution to being on the right of the Laffer curve --- for example, instead of reducing taxes one could pass legislation stopping the loopholes by which tax avoidance is achieved. Or one could raise the taxes on these "untaxed or less taxed economic activities". The existence of these possibilities actually shows that even if we were on the right of the Laffer curve, we could shift to the left-hand side (to be more precise, to change the shape of the Laffer curve so that we were on the left-hand side of it) not by cutting taxes but by increasing them.

jar writes:

No he doesn't.

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 ...

Then I don't see why you think you're disagreeing with me. You say that taxes "can be sufficiently high to dampen economic activity"; I say that in principle it is possible for taxes to be sufficiently high to dampen economic activity. The only distinction between us is that I have used more words.

Edited by Dr Adequate, : No reason given.


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Dr Adequate
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Posts: 12679
Joined: 07-20-2006
Member Rating: 2.4


Message 36 of 404 (659212)
04-13-2012 12:49 PM
Reply to: Message 35 by Straggler
04-13-2012 12:42 PM


Evidence
Is that a reasonable interpretation? Or is this the wrong evidence/interpretation on which to draw that conclusion?

Well, we can only go by the evidence we have. We can't construct randomized double-blind experiments. On the basis of the evidence we have, I would say that trickle-down is a failure.

Edited by Dr Adequate, : No reason given.


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Dr Adequate
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Posts: 12679
Joined: 07-20-2006
Member Rating: 2.4


(2)
Message 38 of 404 (659216)
04-13-2012 1:06 PM
Reply to: Message 28 by Percy
04-13-2012 8:30 AM


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?"

Then I think that short of actual evidence, we must suppose that the answer is "the government".

Because "in terms of the greater good", the greater good is a goal that the government actually aims at, unlike rich people.

Now, there are some rich people, from Andrew Carnegie through to Bill Gates, who have given their money to the greater good. I do not dispute that.

But that aside, which is more likely to contribute to the greater good of the American people: Rush Limbaugh spending his money on French wine and Cuban cigars, or the federal government spending the same money on the upkeep of federal highways, which both employs American citizens and improves American infrastructure.?

If you have data, then now is the time to unleash it. If you don't have data, then it seems much more likely that the latter does more for the general good.

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.

I don't think that they are very good at it. But I suppose that they are the people who are actually doing it.

You're making a comparison of apples and oranges. The government is not very good at social and economic programs. Whereas Paris Hilton is very efficient at snorting Colombian cocaine. Now, clearly our national wealth should be distributed so as to use it most efficiently ...

... oh, wait. The government may not be very good at social and economic programs, but at least it is instituting them. We need such programs, whereas our need for cocaine consumption is not so clear.


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Dr Adequate
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Posts: 12679
Joined: 07-20-2006
Member Rating: 2.4


(3)
Message 39 of 404 (659219)
04-13-2012 1:28 PM
Reply to: Message 37 by Straggler
04-13-2012 12:58 PM


Re: Evidence
Pardon my ignorance (and I mean that genuinely here) but what evidence do you mean?

What exactly is the evidence available? And how does it point to trickle down as a failure?

Well, I was thinking of the evidence that you yourself just supplied.

Average GDP/population has risen. And yet most of that has gone into the pockets of the rich. It has scarcely become easier for the poor to buy food and heat; it has not become easier for the average family to buy health insurance or to send their kids to college. Making the rich richer has not made everyone richer, it has left many people just the same --- or worse. So much for "trickle down". We have made the rich richer, but without making the poor richer --- or the middle classes, if it comes to that. What, precisely, has trickled down?

Now, as I say, we do not have enough evidence to draw a completely satisfactory conclusion. We can certainly imagine that if taxes on the rich had been just a little higher in order to defray middle-class expenditure on college fees, then civilization would have collapsed and you and I would both have resorted to cannibalism. But the evidence that we have is that the increasing wealth of the rich does not bring about universal bliss through the magic of "trickle down".

And there is no reason why it should. Money, after all, is money. If I had another $100/week I can guarantee you that I would spend it. No-one has given me a reason why this money would better stimulate the economy if it was spent by Ms. Hilton.


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Dr Adequate
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Posts: 12679
Joined: 07-20-2006
Member Rating: 2.4


Message 41 of 404 (659226)
04-13-2012 1:52 PM
Reply to: Message 40 by Straggler
04-13-2012 1:44 PM


Re: Data Data Data....
Surely if this is true there is a whole heap of economic data that supports this view? If so where is it?

What am I missing?

Well, we could compare a lot of different countries, and see if (for example) socialized healthcare invariably leads to ruin.

What we can't do is take a statistically significant number (say, 1000) of Americas, divide these Americas into two randomly selected groups, govern one group one way and the other group another way, and then have someone blinded as to the precondition decide which of them is doing better. We have to make do with what we have.


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Dr Adequate
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Posts: 12679
Joined: 07-20-2006
Member Rating: 2.4


(1)
Message 46 of 404 (659250)
04-13-2012 5:26 PM
Reply to: Message 42 by Straggler
04-13-2012 2:06 PM


Re: Data Data Data....
Is the graph I stole from RAZ the be-all-and-end-all of evidence against trickle down theory? Or is there more?

If so what is the core evidence that refutes trickle down economic theory?

Well surely the fact that wealth does not actually trickle down refutes the trickle-down hypothesis.

For more data, I suppose one could graph disparities of wealth against mean or median GDP and see if the correlation is positive, negative, or non-existent.

But really, what we would need is for one of the proponents of the trickle-down "theory" to list some of its predictions. Note that "If you cut rich people's taxes this year we'll be better off next year than we would have been if you didn't" doesn't count, 'cos of the absence of a control group. That would be more in the nature of a dogmatic assertion.


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Dr Adequate
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Posts: 12679
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Member Rating: 2.4


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Message 54 of 404 (659270)
04-14-2012 12:13 AM
Reply to: Message 51 by Percy
04-13-2012 10:27 PM


The government's inability to hit what it aims at is well established.

Well, it's widely asserted. But it's probably not true.

I don't even think that people who say it think it's true. I've said this before, and I'll say it again, please let me hear, just once, some conservative asserting that the Army should be disbanded and that national defense should be provided by hiring competing companies of private mercenaries in a free market.

Well, I'm still waiting. While I wait I have to conclude that their reasons for wanting defense in the hands of government but not (for example) healthcare is that they care about the former but not the latter. When they want something doing, and doing well, they turn as one man to the government. When they don't want something doing well, they will bang on about the virtues of free markets, the supposed inefficiency of government, and the evils of "socialism", but if they really believed the ideology by which they claim to be guided they'd want to privatize the Army.

You picked these at random?

Again, you picked these at random?

Very little about my posts is random. And your point is?

The rich generate economic activity by spending their money, which creates jobs. Even if they just bank their money they're helping the economy because unless they're keeping it in a mattress it funds other economic activity, which creates jobs. Governments need to provide social safety nets with programs for welfare and health care and retirement, but they do not do a good job of creating jobs.

Well, the government also spends money, which, as you say, create jobs. They aren't throwing money down a pit and burying it, it all gets back into the economy somehow. However, in addition to that they are contributing to the social good. They produce things such as federal highways, literate children, an absence of Chinese armies occupying California, etc, etc. The rich sometimes also act for the social good, as when they invest their money in building factories; but sometimes they don't. When a rich man pays for an oil-painting of his favorite poodle, then to be sure the painter gets paid, but it hasn't added value to the infrastructure so much as if the same money had been spent by the government on repairing pot-holes.


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Dr Adequate
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Posts: 12679
Joined: 07-20-2006
Member Rating: 2.4


Message 55 of 404 (659271)
04-14-2012 12:17 AM
Reply to: Message 50 by Percy
04-13-2012 10:14 PM


It isn't a question of whether trickle down works or not. Of course it works.

In what sense does it work, and why "of course"?


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Dr Adequate
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Posts: 12679
Joined: 07-20-2006
Member Rating: 2.4


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Message 64 of 404 (659295)
04-14-2012 9:42 AM
Reply to: Message 62 by Percy
04-14-2012 9:18 AM


Tax rates on the rich have risen consistently since Reagan ...

I have no idea why people believe this.

You should be able to tell that I'm no friend of the rich, but demonizing them for not taking on the responsibilities that properly belong to government makes no sense ...

I didn't demonize them for not doing so. But they don't, and this is, as you say, because some responsibilities do properly belong to government. There are some things for which we don't, can't, and shouldn't trust to Adam Smith's invisible hand.

The solution is to get the government out of the business of trying to legislate fairness through the tax code.

The solution to inequities, not to say iniquities, in our tax code is to stop trying to redress them?

This would be a strange new use of the word "solution" of which I was previously unaware.

I think you have to look at the underlying principles.

Like the fact that the government is trying to spend the money for the greater good, whereas the rich (by and large) are not?


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Dr Adequate
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Posts: 12679
Joined: 07-20-2006
Member Rating: 2.4


Message 71 of 404 (659307)
04-14-2012 12:21 PM
Reply to: Message 66 by Percy
04-14-2012 9:59 AM


The reduction in the top marginal rates in the 2000's were justified by closing loopholes, in effect raising the effective tax rates on the rich. [...] They'll win every time.

Which?


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Dr Adequate
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Posts: 12679
Joined: 07-20-2006
Member Rating: 2.4


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Message 79 of 404 (659324)
04-14-2012 9:41 PM
Reply to: Message 77 by Percy
04-14-2012 8:24 PM


Re: Doesn't Work....?
First, median household income rises and falls in rough sync with top 5% income, just at a lesser slope ...

Or, alternatively, with GDP/capita, but at a lower slope.

It's that lower slope that's worrying us.

... but more importantly, look at this other graph conveniently provided by Jar:

I am still not Jar.

Actual top 5% income didn't take off. All that changed was the amount of income that people were willing to expose to the income tax.

And here was I thinking that when the Census Bureau measures income, they measure income.

I also agree with you when you say that it is the private sector that creates wealth, not necessarily just the rich, but the rich can do it on a much larger scale.

Unfortunately they seem to be creating wealth principally for themselves, hence this thread.

It's not exactly the rising tide that lifts all boats, is it?


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Dr Adequate
Member
Posts: 12679
Joined: 07-20-2006
Member Rating: 2.4


Message 81 of 404 (659344)
04-15-2012 10:32 AM
Reply to: Message 80 by Percy
04-15-2012 7:13 AM


Re: Doesn't Work....?
Income from tax free vehicles like municipal bonds is probably included as income, but the whole idea of tax shelters is to move income into categories where it isn't classified as income, or to defer income so it isn't classified as income in the year it is earned. Tax shelters of all types were a huge industry in the years before the Reagan tax cuts.

I'm sure people wouldn't report income on which they were evading tax to the Census Bureau, but not so sure that they'd withhold information about income on which they were avoiding tax. Why would they?

The right hand chart tells a misleading story.

No it doesn't, it's labelled perfectly accurately.

The question posed by the thread's title, whether trickle down works, is ambiguous. Undoubtedly trickle down happens because in general the richer one is the more one spends, and the money one spends goes into the pockets of others ...

Then we may assume that that's not what's being asked. No-one would start a thread to ask if the rich spend money.

I think the thread's title is really asking the veiled question of who is better at disposing of the wealth of the rich to the betterment of all, the government or the rich themselves.

And the presumption must be that someone who is trying to do something is more likely to actually do it than someone who is not. Few people, for example, have won an Olympic medal in the high jump by tripping on their shoelaces and falling over a pole.


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Dr Adequate
Member
Posts: 12679
Joined: 07-20-2006
Member Rating: 2.4


Message 84 of 404 (659393)
04-15-2012 6:59 PM
Reply to: Message 82 by Percy
04-15-2012 5:27 PM


Re: Doesn't Work....?
If the look at the income questions on page 11 of the 2012 Census Form you'll see that there are no lines for income from a trust ...

That would be question 47c, actually.

Try again.

Adam Smith used the term invisible hand in arguing that people pursuing their own self interests contribute enormously to the greater good.

But that's through their pursuit of profit, not their spending of their discretionary income. These are two different questions.

I know you're a believer that government can accomplish what it sets its mind to, including allocation of resources ...

How about you tell me what you believe, and I tell you what I believe?

Edited by Dr Adequate, : No reason given.


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