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Author Topic:   Trickle Down Economics - Does It Work?
crashfrog
Member (Idle past 1715 days)
Posts: 19762
From: Silver Spring, MD
Joined: 03-20-2003


(1)
Message 331 of 404 (660492)
04-26-2012 11:30 AM
Reply to: Message 329 by New Cat's Eye
04-26-2012 10:27 AM


I think you're over-applying your 'spending is the coolest' principle.
I'm just saying, if you're going to increase the amount of wealth you own on any kind of meaningful basis, it has to be by permanent transfers of wealth from other people to you. Going into debt doesn't make you any wealthier, because you have to give it back. Usually with interest, so when you do give it back, it takes a bunch of your wealth with it. That's making you poorer, not richer.
I'd have to borrow the money to spend it.
No, you wouldn't. You could spend the money you already have.
You're conflating two entirely separate financial transactions - the money you borrow from counterparty A, and the money you lend to counterparty B. Only one of those transactions actually made you money, and that was the money you lent, not the money you borrowed. If you had only lent your own money, you would have made even more of a profit because you wouldn't have had to pay interest on it.
Now they are making more money, I'm making more money, and so is the bank. The bucket didn't leak a drop.
It absolutely did. Your leveraged investment (that's what it's called when you invest borrowed money) didn't create any money; you simply transferred money from the customers of the business back up the bank and kept a little bit along the way.
Lending doesn't create money and it didn't create any wealth in this instance; you indebted yourself to the bank at one interest rate, you indebted a company to you at a higher interest rate, you paid the bank from the interest on your investment, and the company either took the hit in profits or raised prices on its consumers. Ultimately, your wealth came from spending, not from debt.
Because moving the money over there made that company much more prodiuctive and profitable so that they made more than enough money to cover the interest.
But they didn't make money by being in debt; they lost money by being in debt. They made money because people spent money on their business, and they were able to increase the amount that their customers were spending on them, either by finding additional customers or increasing prices. If they'd done exactly the same thing without having to go into debt with you, they would have made even higher profits yet.
Now, of course, you have to spend money to make money, as the saying goes (see how it all comes back to spending, not debt?) and if the business didn't have the money to spend, then they did have to borrow it. Not having access to capital - illiquidity - is a restraint on the growth of an economy. But it's just as likely that the business might have taken your investment and then failed to raise any profits at all with it. The presence of your investment didn't cause an increase in their profits, it only allowed an increase in their profits. Spending, ultimately, was the source of their profits and yours. Not debt.
I have more equity that I can turn into money when I do sell. That's wealth.
Sure, but it's wealth that came entirely from spending. Not debt.

This message is a reply to:
 Message 329 by New Cat's Eye, posted 04-26-2012 10:27 AM New Cat's Eye has not replied

  
Straggler
Member (Idle past 314 days)
Posts: 10333
From: London England
Joined: 09-30-2006


Message 332 of 404 (660496)
04-26-2012 11:52 AM
Reply to: Message 330 by New Cat's Eye
04-26-2012 11:00 AM


CS writes:
You're the one implying their contribution is low.
I'm saying that unless their contribution to productivity is greater than the share of it they receive you have trickle up rather than trickle down.
If the wealthy are receiving more wealth than they are creating what is it that is trickling down?
CS writes:
And how do you measure whether or not the majority are better off? I figure if the economy is better off then everybody is better off.
Better off than what?
For every 100 pounds of growth in the UK economy over the last 30 years the top 0.1% have seen 14 and the bottom 50% have seen 12.
Are the bottom 50% better off than they would have been if policies which didn't concentrate wealth at the top had ben implemented instead?
Straggler writes:
Can you see how that action of an increase in your income by using his wealth could be called "trickling down"?
Straggler writes:
Can you see that actively making the wealthiest wealthier so that you can both in-debt yourself to them and then give the bulk of your increased productivity to them as well leaves you in a inferior position to having that same money redistributed such that you can increase your own productivity and retain the fruits of that productivity?
CS writes:
You didn't answer the question.
Look if you give all the money in the US to the richest person and then everyone borrows from him to do anything productive you could in a very fucked-up-way say that this individual was responsible for ALL of the economic activity and that anyone who received any benefit at all from economic activity did so because of his enabling role.
But that would be bonkers wouldn't it?
Yet in percentage terms that is pretty much what is happening....
CS writes:
The idea, I think, is that if you make the wealtheist welthier, then that wealth will trickle down to the rest of the people because the whole economy is doing better.
Why does focusing policy on making the wealthiest wealthier rather than the middle or the bottom wealthier produce more economic benefit for society as a whole?
If it doesn't - Then trickle down economics cannot be said to work.
And the evidence strongly shows that when trickle down economic policies are implemented it is the richest who benefit rather than anybody else.

This message is a reply to:
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Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 333 of 404 (660498)
04-26-2012 12:00 PM
Reply to: Message 280 by Dr Jack
04-24-2012 1:48 PM


Re: There was a rising tide. But it didn't lift all boats.
Mr Jack writes:
Yet many countries successfully tax the rich to much higher levels than the US, and nearly every developed nation is less unequal than the US (my own country scores badly here, but not as badly as yours).
I'm not familiar with the British tax system, but it's the effective tax rate that counts, not the rates in the tax tables. Earlier in this thread we used presidential candidate Mitt Romney's income as an example. Last year I believe he paid around 15% on $20 million income. Our top marginal tax rate is 35%. He paid only 15% because he is able to funnel income from his investment company through tax loopholes that magically transforms it into long term capital gains, which are taxed at the lower 15%. The justification for the loophole is the acceptance by investors of the risks normally associated with long term investments, but in reality the way investments qualifying for this loophole are normally managed eliminates most risk.
So I can see that your capital gains rates can be as high as 56.25%, and your income tax rates can be as high as 60%, and your VAT rates can be as high as 20%, and insurance tax rates as high as 12%, but how much do the rich actually end up paying? I'm not trying to imply anything, I'm just asking if you know. Here in this country such information is hard to come by. Romney as a presidential candidate found it politically expedient to make last year's tax return public, but very few of the rich ever do.
But while I do not know the answer, I'm sure my suspicions are obvious. I suspect the rich in Great Britain are as successful at avoiding taxes as they are here.
Anyway, the rational for keeping tax rates low is that the higher the tax rate the less the motivation to take risks or exert effort to earn money. If you're in the 10% tax bracket then you get to keep 90% of every dollar you earn, but if you're in the 90% tax bracket of the 1950s then how much effort would you be willing to exert or risk to endure if you only get to keep a dime of every dollar? This is the lesson of the Laffer curve.
The idea that the rich are untouched and untouchable is rubbish.
I don't understand why so many in this thread are into hyperbole, or why when they echo back what they think they heard it's also in terms hyperbole that didn't appear in the original.
The claim is not that the rich are "untouched and untouchable." The claim is that the evidence suggests that attempting to increase the amount the rich pay in taxes is fraught with peril because their wealth gives them great influence over those responsible for tax legislation.
--Percy

This message is a reply to:
 Message 280 by Dr Jack, posted 04-24-2012 1:48 PM Dr Jack has replied

Replies to this message:
 Message 334 by Rahvin, posted 04-26-2012 12:24 PM Percy has replied
 Message 337 by Straggler, posted 04-26-2012 1:03 PM Percy has replied
 Message 339 by Dr Jack, posted 04-26-2012 4:33 PM Percy has seen this message but not replied

  
Rahvin
Member
Posts: 4059
Joined: 07-01-2005
Member Rating: 9.4


Message 334 of 404 (660501)
04-26-2012 12:24 PM
Reply to: Message 333 by Percy
04-26-2012 12:00 PM


Re: There was a rising tide. But it didn't lift all boats.
Anyway, the rational for keeping tax rates low is that the higher the tax rate the less the motivation to take risks or exert effort to earn money. If you're in the 10% tax bracket then you get to keep 90% of every dollar you earn, but if you're in the 90% tax bracket of the 1950s then how much effort would you be willing to exert or risk to endure if you only get to keep a dime of every dollar? This is the lesson of the Laffer curve.
...
Because 10% of a million dollars is still $100,000, which is still a lot of money, more by far than I make in an entire year.
I get to keep about 75% (as I recall, I'd have to look up my tax return to be precise) of my ~$65,000 annually (just state/federal taxes), so I get to keep around $48,000.
So if I could invest a million dollars, I'd still get to keep about double what I take home right now.
In short, "Yes, please."
A person can only reasonably spend so much money. You can only buy so many houses and cars, hire so many maids, have so much jewelry. You only need to eat so much food. There are only 24 hours in a day in which to find ways to spend more money. The utility of money scales down even as the ability for money to make more money scales up. There is a reason that the wealthiest 5% will not spend nearly the percentage of their wealth that the bottom 5% will, and that is that the bottom 5% need every single penny of what they have just to get by, and the top 5% do not.
I don;t necessarily advocate a 90% tax rate for those making a million dollars or more per year. Personally, I think it would make more sense to address some bits of the tax code that were clearly written before such incomes were nearly so common - like the fact that social security tax stops after around $300,000 of income (so a person making ten million dollars per year will pay the exact same dollar amount in social security taxes as a person making $400,000, which seems rather off), or the fact that the progressive tax brackets just stop at a little over $380,000 (a person making ten million dollars per year will pay the same percentage of tax as a person making $400,000).
I think we should simply continue the scale of progressive tax rates; don't change anything for those making $400,000, but maybe the guy making $750,000 should pay 40% instead of 35%, and maybe the guy making ten million per year should pay 60% instead of 35%.
The rationale behind progressive tax brackets, after all, is that those blessed with greater income can better afford to have higher tax rates; 10% taken from a man who earns $30,000 means far more for him than does even 50% taken from a man who earns ten million dollars. And the wealthiest are also those who most benefit from living in this country - the more wealthy you are, the more you owe the other citizens, both those living and those who came before and created the system you were able to take advantage of.
I'd also like to see massive increases to inheritance taxes, possibly even caps on the amount that can be inherited:
quote:
"What is most important for democracy is not that great fortunes should exist, but that great fortunes should not remain in the same hands. In that way there are rich men, but they do not form a class." - Alexis de Tocqueville, French writer (1805-1859)
The "idle rich," the "trust fund kids," and the super-wealthy dynasties living on the fortunes of their forbears who produce nothing of value on their own should be a thing of the past.

The human understanding when it has once adopted an opinion (either as being the received opinion or as being agreeable to itself) draws all things else to support and agree with it.
- Francis Bacon
"There are two novels that can change a bookish fourteen-year old's life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs." - John Rogers
A world that can be explained even with bad reasons is a familiar world. But, on the other hand, in a universe suddenly divested of illusions and lights, man feels an alien, a stranger. His exile is without remedy since he is deprived of the memory of a lost home or the hope of a promised land. This divorce between man and his life, the actor and his setting, is properly the feeling of absurdity. — Albert Camus
"...the pious hope that by combining numerous little turds of
variously tainted data, one can obtain a valuable result; but in fact, the
outcome is merely a larger than average pile of shit." Barash, David 1995.

This message is a reply to:
 Message 333 by Percy, posted 04-26-2012 12:00 PM Percy has replied

Replies to this message:
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xongsmith
Member
Posts: 2620
From: massachusetts US
Joined: 01-01-2009


Message 335 of 404 (660503)
04-26-2012 12:31 PM
Reply to: Message 325 by crashfrog
04-26-2012 8:37 AM


Re: Correcting Misapprehensions about the Rich
Crash - focus only on that part of the plot that corresponds to the Reagan years (1981-1988) - it's the only segment that is roughly flat. Percy was only referring to that segment with his characterization of "flat".
Note that the steepest segment of the curve is the very last part - well within the Obama years.
A lot of people in this thread seems to have misconstrued Percy's statement that wealth trickles down. He is basically arguing that the value of the trickle-down economic is similar to a simple equation:
Value = A - B
When he says that trickle-down happens, he is merely stating that A is greater than zero. He says nothing in that moment about B, which is the detrimental aspect of the equation. He has later abundantly demonstrated, that, in his opinion, B > A, so that the total value of trickle-down economic theory is negative.

- xongsmith, 5.7d

This message is a reply to:
 Message 325 by crashfrog, posted 04-26-2012 8:37 AM crashfrog has replied

Replies to this message:
 Message 338 by crashfrog, posted 04-26-2012 4:24 PM xongsmith has replied

  
xongsmith
Member
Posts: 2620
From: massachusetts US
Joined: 01-01-2009


Message 336 of 404 (660506)
04-26-2012 12:44 PM
Reply to: Message 322 by Percy
04-26-2012 7:33 AM


Re: Correcting My Misapprehensions about the plot
Percy reposts the plot:
Look again at the line for productivity growth during the Reagan years:
It's flat.
Ah! Wait - Crash, I apologize. The X-axis is HORRIBLY presented in slanting numbers that are shifted left. The flat period seems to be shared by Carter & Reagan's first term.
Poor Gerald Ford!
Edited by xongsmith, : period

- xongsmith, 5.7d

This message is a reply to:
 Message 322 by Percy, posted 04-26-2012 7:33 AM Percy has replied

Replies to this message:
 Message 344 by Percy, posted 04-27-2012 5:32 AM xongsmith has not replied

  
Straggler
Member (Idle past 314 days)
Posts: 10333
From: London England
Joined: 09-30-2006


(1)
Message 337 of 404 (660510)
04-26-2012 1:03 PM
Reply to: Message 333 by Percy
04-26-2012 12:00 PM


Re: There was a rising tide. But it didn't lift all boats.
Percy writes:
The claim is not that the rich are "untouched and untouchable." The claim is that the evidence suggests that attempting to increase the amount the rich pay in taxes is fraught with peril because their wealth gives them great influence over those responsible for tax legislation.
And the evidence shows that trickle down economic policies result in ever greater concentrations of wealth at the top which gives the wealthiest even greater political influence to shape economic policies to their own benefit.
So we end up in a cycle of increasingly concentrated wealth providing ever greater political influence to concentrate wealth further.
In short a sort of plutocracy. Which is, I would argue, not a situation compatible with trickle-down economics having worked. It certainly isn't the situation that proponents of trickle down economics put forth as the end result of such policies.
Percy writes:
The claim is not that the rich are "untouched and untouchable." The claim is that the evidence suggests that attempting to increase the amount the rich pay in taxes is fraught with peril because their wealth gives them great influence over those responsible for tax legislation.
Which is kinda the same as saying the wealthy are effectively untouchable when it comes to imposing tax legislation on them that they don't like.

This message is a reply to:
 Message 333 by Percy, posted 04-26-2012 12:00 PM Percy has replied

Replies to this message:
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crashfrog
Member (Idle past 1715 days)
Posts: 19762
From: Silver Spring, MD
Joined: 03-20-2003


Message 338 of 404 (660526)
04-26-2012 4:24 PM
Reply to: Message 335 by xongsmith
04-26-2012 12:31 PM


Flat?
Crash - focus only on that part of the plot that corresponds to the Reagan years (1981-1988)
Well, ok, let's do that:
Not even close to flat. What am I missing, here?

This message is a reply to:
 Message 335 by xongsmith, posted 04-26-2012 12:31 PM xongsmith has replied

Replies to this message:
 Message 340 by xongsmith, posted 04-26-2012 5:39 PM crashfrog has seen this message but not replied
 Message 342 by Percy, posted 04-27-2012 5:03 AM crashfrog has replied

  
Dr Jack
Member (Idle past 123 days)
Posts: 3514
From: Immigrant in the land of Deutsch
Joined: 07-14-2003


(1)
Message 339 of 404 (660527)
04-26-2012 4:33 PM
Reply to: Message 333 by Percy
04-26-2012 12:00 PM


Re: There was a rising tide. But it didn't lift all boats.
But while I do not know the answer, I'm sure my suspicions are obvious. I suspect the rich in Great Britain are as successful at avoiding taxes as they are here.
Yeah, we suck. Look to Europe; especially the most successful nations. I reject the notion, fundamentally, that we can't close tax loopholes.
The claim is not that the rich are "untouched and untouchable." The claim is that the evidence suggests that attempting to increase the amount the rich pay in taxes is fraught with peril because their wealth gives them great influence over those responsible for tax legislation.
Well, gosh, maybe we should reform the system so they don't have so much influence, then?

This message is a reply to:
 Message 333 by Percy, posted 04-26-2012 12:00 PM Percy has seen this message but not replied

  
xongsmith
Member
Posts: 2620
From: massachusetts US
Joined: 01-01-2009


Message 340 of 404 (660537)
04-26-2012 5:39 PM
Reply to: Message 338 by crashfrog
04-26-2012 4:24 PM


Re: Flat?
See my apology in Message 336.
Sorry.

- xongsmith, 5.7d

This message is a reply to:
 Message 338 by crashfrog, posted 04-26-2012 4:24 PM crashfrog has seen this message but not replied

  
Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 341 of 404 (660561)
04-27-2012 4:30 AM
Reply to: Message 324 by Straggler
04-26-2012 8:29 AM


Re: Productivity Gains Vs Productivity Contributions
Straggler writes:
If increased national productivity ends up in the hands of the wealthiest disproportionately to their contribution to that increased national wealth, and such that the wealth of the nation is increasingly concentrated at the top, then what exactly is it that has trickled down?
It is money that has trickled down. And up and sideways and in all other directions.
We may have different ideas about the origins of productivity. While I suppose the source of productivity increases could be workers just working increasingly harder, that is certainly unsustainable for any prolonged period. Productivity increases mean getting more done with less effort. An example might be increasing automation, such as an auto company like GM might make on its production lines, or that supermarkets might make in their checkout and inventory processes, or that computer makers might make with just-in-time inventory and manufacturing processes. I'm afraid the argument that the rich are stealing the productivity gains contributed by the rest of us doesn't hold water.
--Percy

This message is a reply to:
 Message 324 by Straggler, posted 04-26-2012 8:29 AM Straggler has replied

Replies to this message:
 Message 347 by Straggler, posted 04-27-2012 8:03 AM Percy has replied

  
Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 342 of 404 (660562)
04-27-2012 5:03 AM
Reply to: Message 338 by crashfrog
04-26-2012 4:24 PM


Re: Flat?
crashfrog writes:
Not even close to flat. What am I missing, here?
You're missing quite a bit, actually. The focus should be on the very early years of the Reagan administration when the tax cuts went into effect, which would be 1981. Productivity doesn't begin taking off until 1983, which you conveniently obscured with your red line that extends well into the flat period of the early years of the Reagan administration (this is the stagflation period that began during the Carter administration). Here's another graph showing productivity gains where the x-axis is easier to read:
But top 5% income began rising in 1981, coincident with the Reagan tax cuts:
If the increasing income of the rich derived from increasing productivity, how did the increase begin before productivity began rising again? And since productivity has been generally increasing since statistics began, why did the rich wait until the Reagan tax cuts to begin rolling productivity gains into their income? The data just doesn't support your interpretation.
It isn't that productivity isn't part of the mix. It most certainly is, along with a host of other factors. But the most likely explanation for why top 5% income began rising in the early 1980s is the Reagan tax cuts that cut the top marginal rates from 70% down to 50%, stimulating the economy by encouraging investment, which increases income, and moving money from unproductive shelter activity into categories more easily recognizable as income.
--Percy

This message is a reply to:
 Message 338 by crashfrog, posted 04-26-2012 4:24 PM crashfrog has replied

Replies to this message:
 Message 346 by crashfrog, posted 04-27-2012 7:46 AM Percy has replied

  
Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 343 of 404 (660563)
04-27-2012 5:29 AM
Reply to: Message 334 by Rahvin
04-26-2012 12:24 PM


Re: There was a rising tide. But it didn't lift all boats.
Rahvin writes:
Because 10% of a million dollars is still $100,000, which is still a lot of money, more by far than I make in an entire year.
I get to keep about 75% (as I recall, I'd have to look up my tax return to be precise) of my ~$65,000 annually (just state/federal taxes), so I get to keep around $48,000.
So if I could invest a million dollars, I'd still get to keep about double what I take home right now.
In short, "Yes, please."
In that last sentence I think you mean "earn a million dollars," not "invest a million dollars." If that's right then I understand what you're trying to say, but this is not an example of marginal earnings.
A high marginal tax rate, translated into your wage bracket, would be if you earned $48,000 after taxes but are now in the 90% tax bracket. You're now presented with the opportunity to work on a special project that will pay you $10,000 for 100 hours work. Since you're in the 90% tax bracket your net will be $1000 for 100 hours work, or $10/hour. Are you still saying, "Yes, please?"
We agree that the rich should pay more in taxes, and I know progressive tax rates seem like a fair way to accomplish this, but the reality is that the rich shoot approaches like this full of holes. When the highest marginal tax rate was 90% there were extremely few of the wealthy who actually had to turn to the 90% table in the tax forms. Here's a brief excerpt from a blog article titled The 90% Tax Rate Myth:
Almost Classical writes:
When there was a 94% top rate in 1944-45, there were so many deductions and exclusions that the taxable income was not comparable to someone's entire income. First, the top rate started at $200,000, which today is equal to $2,413,059.90 so the maximum EMTR would apply only to incomes of $2.5 million. But, that's still taxable income, not earned income.
In 1944, you could deduct business meals, all business travel, all forms of interest payments, and much more. You could even deduct spousal travel expenses on a business trip! (Why travel alone?) Companies could also "loan" or "provide" almost anything to an employee, from an apartment to standard benefits. It was possible to shelter tens of thousands of dollars from taxable income. Three-martini lunches and expense accounts were important realities, skewing tax calculations.
As a result of deductions and exclusions, even the theoretical maximum Real Rate of taxation at 60% in 1944 overstates taxation dramatically. The reality? On earned income, the richest U.S. taxpayers paid close to 40 percent of their earned incomes in taxes in 1944. We simply didn't count much of the compensation as taxable income.
I believe the solution is to flatten tax rates (not completely flat, just flatter), simplify the tax code, and focus on eliminating loopholes. When the rates are flatter and tax laws are simpler then loopholes and attempts to insert them in legislation will not be easy to hide.
--Percy

This message is a reply to:
 Message 334 by Rahvin, posted 04-26-2012 12:24 PM Rahvin has not replied

  
Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 344 of 404 (660564)
04-27-2012 5:32 AM
Reply to: Message 336 by xongsmith
04-26-2012 12:44 PM


Re: Correcting My Misapprehensions about the plot
It's the early Reagan years when the tax cuts happened and when top 5% income began rising that are relevant.
--Percy

This message is a reply to:
 Message 336 by xongsmith, posted 04-26-2012 12:44 PM xongsmith has not replied

  
Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 345 of 404 (660565)
04-27-2012 5:43 AM
Reply to: Message 337 by Straggler
04-26-2012 1:03 PM


Re: There was a rising tide. But it didn't lift all boats.
Hi Straggler,
Much that is "fraught with peril" is not effectively impossible, if I've captured your meaning. Fraught with peril" means fraught with peril rather than impossible, which actually means something else.
Again, I don't understand the hyperbole or the tendency toward absolute statements. I would think you'd want to avoid both in a discussion about economics.
--Percy

This message is a reply to:
 Message 337 by Straggler, posted 04-26-2012 1:03 PM Straggler has not replied

  
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