Explain to me “Trickle down economy” concept (read the whole question first).?
So, trickle-down economy is being promoted as some sort of an economic panacea. Give tax breaks to high income earners and they’ll create jobs the thinking goes… I do not see this effect at all.
I run a small business currently with 38 employees. First of all, every penny I pay in salary and benefits are direct business costs paid pretax. Strictly speaking, my personal or business taxes have no effect on my ability to pay the employees no matter what the rate is. It simply does not come into account until I get to the bottom line.
Now, would higher taxes on the net income cause me to lay off people? This could be rephrased like this: would I choose not to make profit if I get to keep only 50 cents instead of 55 cents. The only way I could see that happening is if I was some sort of a nutcase anti-tax activist willing to suffer for the cause. Business activity is driven by pretax profits in general.
Well, would the higher tax force me not to buy new equipment required for expansion? After all, I’d probably end up with less capital to spend due to taxes. However, almost all capital spending is eventually tax deductible. I may have to go through depreciation and other tricks, but, still, I get to deduct most of the spending eventually. Besides, most equipment is leased or financed in the first place, so it’s paid pretax anyway.
Would the higher tax cause me to spend less personally? No. I spend about 10% of my income. More money will not cause me to spend more. Less money would have no effect unless it cuts into the 10% I need for my living expenses. I know literally hundreds of people who are in the same situation as I am. The rest of the money is invested.
Would I invest less outside of my business? Yes. But, a certain portion of my investments is tax-sheltered, so it does not matter what the tax is. As for the rest, for the last 10 years it went straight overseas. US did not benefit from a single investment penny from me. China and other emerging economies did. Why? The returns are higher there.
What would cause me to hire more people? Here’s one thing: if my customers, who are mostly middle class and below, have more money to spend. If each customer spent 5% more, I’d be able to double the number of my employees and double my profits. And, I’d be happy to pay more tax on those profits.
Now, I am not even touching issues like the national debt and the obvious failure if this policy over the last 8 years. Pretend that these issues don’t exist. I just want to understand the thinking behind it.
So, please provide a solid logical explanation of how lowering taxes on businesses and 0k + earners leads to more jobs (jobs in China don’t count). Provide facts, academic research, anything that supports this idea without partisan BS. The most logical explanation gets 10 points.
Mail this post
comments
9 Responses to “Explain to me “Trickle down economy” concept (read the whole question first).?”
Leave a Reply
The whole point of the trickle down economy is that by lowering taxes on the rich will increase jobs for the middle class like you said. Their logic is that the more wealth a business owner (like yourself) has, the more likely they will create jobs to help the middle class.
But there is a fundamental problem with this effect. It assumes that business owners will invest in the US economy. And this simply won’t happen like you described, because the returns for investing in the US economy are not as high compared to foreign markets.
What you described is trickle up economics, where if the middle class has more money to spend, they will spend it, as opposed to the more wealthy upper class, which choose more times than not to invest their surplus funding.
It has been proven time and time again that trickle down economic theory does not work. Bush, Reagan, Kennedy all advocated this policy, but really only the middle class ended up worse off.
Check out this link:
http://en.wikipedia.org/wiki/TEFRA
Enacted by Regan who supported trickle down economics.
Truly transformative change comes from the bottom up, not from the top down.
"A leader is a dealer in hope."- Napoleon Bonaparte
As I understood the original trickle down theory during Reagen’s years, the lower taxes on your business will allow you to do more business, like you described in the 3rd-to-last paragraph. Also, letting the Rich spend more of their personal income, they will theoretically spend it on things from small business’s like yours and activate the economy. More money moving around means more taxes that the gov gets from every salary.
The problem as I see it is that the rich buy a lot of foreign cars and other import items which don’t stimulate our economy. The super rich invest in foreign oil. None of that circulates in your small business.
You pay your taxes that goes to the private Federal Reserve, then Congress passes a bail out for billions for the bankers. The bankers then hoard the money, don’t issue more loans and piss on the American people. The piss then trickles down.
Nobody can argue with your logic, so don’t expect any answers to contradict you (I’d be anxious to see them,too).
It sounds like you have a pretty good grasp on the subject. Trickle down is called ’supply side’ economics. It says that if you provide cheap capital to producers, they will over-produce and lower costs will result in cheaper goods, increased consumption, more jobs and more velocity of exchange, which increases GDP.
‘Demand Side’ economics says that if you put more money in the hands of consumers, they will purchase more goods, which will cause more producers to enter the market create more jobs and velocity of exchange which increases GDP.
Deficit spending creates prosperity in the short run and it seems to me that both schools rely on deficit spending in the hope that the future will be better. I don’t know if that is true. Certainly it creates higher velocity of exchange, but it also creates inflation. You know that inflation was virtually unheard of in this country before the 1940s.
Inflation is like a tax that takes back the increases in a stealthy manner. Eventually, someone repays the debt, though not always the same people who incurred it.
In any event, economics isn’t political. Lowering taxes is the same as giving handouts of cash. if the money is spent on shoeshines, the shoeshine boys will profit. if the money is spent on plant and equipment, consumers profit by cheaper supplies. If the money is spent on $400,000 hotel bills, hotels prosper. All of this is just wealth re-distribution (which can stratify or equalize). As long as the merry-gp-round doesn’t come to a complete halt, it is business as usual.
WELL, you are trying to use logic to solve this problem, but the tax cut nuts are not logical…they are ideologue…they want it just because. with them its a principle…..
how many times have you even heard them say ..cut those taxes for the big corporations or they will be justified in closing down factories and move to countries where the taxes are lower? it so happens that US corporations actually in reality pay very little taxes due to all the loop holes they have. But I digress. they say thats its ok for an american company whose tax goes from 25 % to 35% is justified in closing a factory here in USA and laying of 10,000 workers and go open a factory in china…because they can make more money making the goods there and bringing them back in USA to sell to americans.
They say..its ok,, and the american company has every right to do so.
It does not cross their minds that this could easily be stopped by the govt simply saying ..no ..you cannot do that…we are not going to let you close a factory here make the goods in china and come back here to sell them. If I was president, I would say fine..do that but I am going to slap a 20% penalty to all your goods that you bring back in the country. But then I am actually patriotic and I care about my country and my fellow citizens. I also care that the govt has enough money to run and I want a balanced budget….I dont want more money borrowed from china. But the ideologues? they dont care about the details that you mentioned or the details that I just mentioned….they just want their tax cuts..they want more money in their pockets and devil may care about everyone else and the country.
There isn’t a logical explanation that would be any better than what you just said. You should get the 10 points
I am also a small business owner but I don’t have employees - just me. I’m the travel industry and we are really starting to feel the pain. Many of the small business owners that I know are having the same issues. The reality is that most small business rely on one thing - customers! If our customers are hurting then our ability to sell is damaged. Right now I would gladly pay slightly more taxes to get back my business. Things were MUCH better under Clinton and all Obama is talking about is going back to the tax structure of that time, for the upper bracket. It really is pretty simple. Trickle down doesn’t work, trickle up does. Economies do much better under Democrats, especially in job creation and retention. The opposing arguments just don’t hold water.
On a personal note - you sound like an honest business owner that cares about your employees. We need more of those and less of big box businesses that just want to outsource or treat employees like cattle. I’m hoping that with an Obama presidency more focus will return to the small business that make this country great!