Split Thread Trickle-down economics

[Meadmaker]

Reps are not universally promoting arbitrary tax decreases as revenue positive.

The current house plan involves a statically scored $1.5Trl deficit over 10 years. If the revised tax system results an a sustained 0.9% added GDP growth, then it becomes revenue neutral over the same 10 years, and an advantage beyond that. That's simple math you can do with a spreadsheet or whatever.

It sure is, and it's the same math that they always do. Oh, the numbers change a bit here and there, but it's always the same. We will cut taxes and the deficit will go down because it will cause economic growth. I can never recall a time in my adult life, which began in 1980, where the GOP was not saying that. And you are demonstrating above a perfect example.

You say that there are good reasons to assume that increased capital spending would improve US GDP. Ok. Fine. Has that always been the case at all times in the last 37 years, because GOP rhetoric hasn't changed during that period. Blame the knuckle draggers if you wish, and grant that voters could not grasp the reality behind the real effects of tax changes, but the GOP panders to those knuckle draggers. (The Dems have their own pandering, but that's in a different thread.) Moreover, the GOP pitches their policy to those knuckle draggers, as you yourself have shown. This recent tax plan had elements which you think would increase capital formation and therefore raise growth, but it includes other provisions, the "candy" you referred to, that would undermine the effect.

So, why pass it? They are still putting it forward. Why? Because they themselves don't understand it at even the basic level. What they understand is "tax cuts good".

 

[Brainster]

In summary, there is no empirical evidence that tax rates affect economic growth, so long as the rates are contained within the range of historic post-war rates in the United States.

By the way, there were oodles and oodles of things going on in the 1980s, too.




Ok. It's not hard, so do it, or point me to someone who has done it.

You can't. You can't, because not only is it impossible to prove, there is no reason to believe it at all.

What you can do, or at least a lot of economists have done in those papers I was reading, was to construct a model that has a certain set of assumptions, and then insert numbers into the model and show that, based on the assumptions of the models, raising taxes will lower economic growth. I've seen lots of papers that do that. The thing that is missing from all of those papers is the part where they provide any evidence for their assumptions. Every one of them that I have seen makes assertions that are unfounded, and generally involve restating their conclusion as a premise. The most common error that I have seen involves some form of assertion that individual productivity will be less if taxes are high, and then their model shows that economic growth, which is just the rate of change in the sum of individual productivity, will be less. Well, duh. If you assume your conclusion, it's pretty easy to prove your conclusion, based on your assumption.

In fact, a simple thought experiment proves your assertion wrong. You said, "higher tax rates lead to lower economic growth" You didn't provide any qualifiers to the statement, so clearly the highest possible growth would occur if the government stopped collecting any taxes at all. (We'll assume that direct payments from government are not really "negative taxation, so the lowest possible tax rate is zero.)

Do you really think the way to foster economic growth is to eliminate taxation? That the highest possible growth would occur if we got rid of taxes? If not, then your assertion must be false.

Yes, absolutely we would get the fastest economic growth if there were no taxes. However, we might not like the world we live in. Taxes and government are a necessary evil; there are lots of things that the government does which would be difficult or undesirable to turn over to private individuals or groups--things like primary education, defense, a justice system, maintaining and building infrastructure.

Let me flip your reductio ad absurdum around on you. If taxes don't have an impact on economic growth, do you think growth would continue unabated even under 100% tax rates? Or do you think investors would say, hell no, I'm not taking any risks with my money, because if I lose, I lose, and if I win, the government takes all the winnings away. Do you see the problem with that?

1. I don't know the answer to the first question. I strongly suspect that it is something that is true in a typical case, but not always.

2. As for the second question, you may as well ask why tax rates do not have the same impact as batting averages. Why should tax rates and interest rates have the same effect?

I'm going to guess that you've never looked at a P&L statement in your life if you ask that. There is no line item under expenses for batting average; there is almost always an interest expense and a taxes expense.

Because a increase in interest rates results in less money available for a company to invest in new products and services, it tends to slow down the economy. An increase in taxes has the same effect--less money available to invest. Hence it also tends to slow down the economy.

And nobody with any economic credentials argues otherwise. The argument for keeping taxes where they are, or even raising them does not depend on willfully ignoring the negatives involved. It involves pointing to the good that the tax money can do. A whole lot of government spending actually contributes to the future success of the economy--spending on infrastructure being a pretty obvious example.

 

[The Great Zaganza]

Yes, absolutely we would get the fastest economic growth if there were no taxes.

no, we wouldn't.
Companies depend on infrastructure and infrastructure maintenance. They also depend on a healthy, educated workforce.

If all infrastructure was privatized, there would be massive friction for companies to do business - only dystopia megacorps who can do everything in-house would thrive.

 

[The Great Zaganza]

Let me flip your reductio ad absurdum around on you. If taxes don't have an impact on economic growth, do you think growth would continue unabated even under 100% tax rates? Or do you think investors would say, hell no, I'm not taking any risks with my money, because if I lose, I lose, and if I win, the government takes all the winnings away. Do you see the problem with that?

which 100% tax rate are you talking about?
As long as not ALL taxes are at 100% there would still be ways to make money from investments.

 

[Brainster]

no, we wouldn't.
Companies depend on infrastructure and infrastructure maintenance. They also depend on a healthy, educated workforce.

If all infrastructure was privatized, there would be massive friction for companies to do business - only dystopia megacorps who can do everything in-house would thrive.

Which is why I am not a libertarian. Perhaps you missed reading this part of my post?

Taxes and government are a necessary evil; there are lots of things that the government does which would be difficult or undesirable to turn over to private individuals or groups--things like primary education, defense, a justice system, maintaining and building infrastructure.

(Italics added)

 

[Brainster]

which 100% tax rate are you talking about?
As long as not ALL taxes are at 100% there would still be ways to make money from investments.

And if ALL taxes are at 100%? Would there still be (legal) ways to make money from investments?

 

[The Great Zaganza]

Which is why I am not a libertarian. Perhaps you missed reading this part of my post?

(Italics added)

I didn't. I was taking exception at your "fastest growth" statement.

And, btw., for the economy it doesn't really matter if the investment comes from the private sector or the state: if very high taxes are used for public projects and investments, the result might be more economic growth since less money might be siphoned off for profit.

 

[Fast Eddie B]

...if very high taxes are used for public projects and investments, the result might be more economic growth since less money might be siphoned off for profit.

But remember that those profits may themselves be spent or invested, also stimulating economic growth.

 

[The Great Zaganza]

But remember that those profits may themselves be spent or invested, also stimulating economic growth.

highlight: my point exactly.
More importantly, these investments might very well be made outside of the country, or used to buy foreign products. For the benefit of the domestic economy, government spending might be much more effective at stimulating domestic growth than private investments.
This is especially true for investing in and sheltering nascent industries.

 

[Meadmaker]

Yes, absolutely we would get the fastest economic growth if there were no taxes. However, we might not like the world we live in.

It's not just that we wouldn't like the world. That world wouldn't have good economic growth. Government couldn't function, and without government, economies would falter. Zero taxes would result in less economic growth.

Let me flip your reductio ad absurdum around on you. If taxes don't have an impact on economic growth, do you think growth would continue unabated even under 100% tax rates?

I didn't say that taxes have no effect on economic growth. What I said was a lot more nuanced than that, and the most important nuance of all was that I limited to tax ranges that have been present in the United States post WWII. There were other differences as well.

100% taxation would be impossible, although communism is a reasonable approximation, and it doesn't work worth a hoot.

Because a increase in interest rates results in less money available for a company to invest in new products and services, it tends to slow down the economy.

Tends to. Important words.

An increase in taxes has the same effect--less money available to invest. Hence it also tends to slow down the economy.

That's where you're wrong, although it's a false assumption shared in many of those papers I've read. Several of the models act as if tax revenue vanishes from the economy. It doesn't. It is spent by government, and the manner in which it is spent may fuel economic growth, or it may have no effect, or it may actually inhibit economic growth.

Government policy can have a great deal of influence on economic growth, but it isn't as simple as "tax cuts good".

ETA: TGZ expressed some of the same thoughts before I did.

 

[Brainster]

It's not just that we wouldn't like the world. That world wouldn't have good economic growth. Government couldn't function, and without government, economies would falter. Zero taxes would result in less economic growth.

The libertarians argue otherwise. But let's just take it as given that a certain level of government and taxation is good and useful.

I didn't say that taxes have no effect on economic growth. What I said was a lot more nuanced than that, and the most important nuance of all was that I limited to tax ranges that have been present in the United States post WWII. There were other differences as well.

I just assumed that when you said this:

What I found was that within the range of tax rates that existed in the United States during the modern era, which I would define as starting with the end of WWII, there was no connection. We've had high growth with high taxes, and high growth with low taxes. We've had high growth following tax cuts, and high growth following tax hikes. Likewise with low growth. The two just aren't connected.

That you meant that taxes don't have an effect on economic growth.

100% taxation would be impossible, although communism is a reasonable approximation, and it doesn't work worth a hoot.

That's where you're wrong, although it's a false assumption shared in many of those papers I've read.

Yeah, me and those idiot economics PhD's are wrong.

Several of the models act as if tax revenue vanishes from the economy. It doesn't. It is spent by government, and the manner in which it is spent may fuel economic growth, or it may have no effect, or it may actually inhibit economic growth.

And you know what? The money that companies spend on increased interest costs when rates go up does not vanish out of the economy either. But it is less money for each of those companies to put into new products, into R&D, etc., just as a tax increase leads to the same outcome.

Government policy can have a great deal of influence on economic growth, but it isn't as simple as "tax cuts good".

ETA: TGZ expressed some of the same thoughts before I did.

Most economists seem to feel that the way to go is to broaden the base but reduce the rate. In general lower rates are better, but obviously at a certain rate it becomes hard to reduce without either broadening the base or reducing costs.

 

[Meadmaker]

Yeah, me and those idiot economics PhD's are wrong.

Would that be the idiot freshwater economics PhD's, or the idiot saltwater economics PhD's?

 

[Henri McPhee]

... but I can't see much trickle-down economics with regard to this matter.

Edited by novaphile: 

Edited to remove a screed of completely unrelated text (Rule 11). Seriously, if you can't see the relevance your own post, clearly it's not relevant to the discussion at hand, you shouldn't need moderation to point this out.

 

[JJM 777]

If it's from the internet, why not include a link ?

It's the Cuban way of crediting stuff found online. The various newspapers of Cuban Communist Party, such as Granma, routinely post photos and images found from somewhere on the Internet, and credited as "source: Internet" without a link or any other explanation.

 

[JJM 777]

Let me flip your reductio ad absurdum around on you. If taxes don't have an impact on economic growth, do you think growth would continue unabated even under 100% tax rates?

OK too high taxes are problematic, at least from the viewpoint of private ownership of stock. In state-owned economy it wouldn't matter so much from which pocket to which pocket the state moves its money.

Too low taxes have their problems, because the state needs to exist and have basic security, police force, infrastucture, etc.

The golden middle way is apparently somewhere in the middle.

 

[Henri McPhee]

... but I can't see much trickle-down economics with regard to this matter.

Edited by novaphile: 

Edited to remove a screed of completely unrelated text (Rule 11). Seriously, if you can't see the relevance your own post, clearly it's not relevant to the discussion at hand, you shouldn't need moderation to point this out.

The closure of libraries and local police stations is a direct result of trickle down economics, and of just protecting the interests of the extremely rich. It's relevant.

 

[The Don]

The closure of libraries and local police stations is a direct result of trickle down economics,

I think you need to provide some evidence to support this claim. In the UK is may be a result of "Austerity" but AFAIK no UK government in recent decades has ever subscribed to the notion of trickle-down economics - the UK response to promote growth is distinctly Keynesian.

and of just protecting the interests of the extremely rich. It's relevant.

The two things can be, and in the case of the UK are, quite separate. You can look after the interests of the rich without having any belief in trickle-down economics. IMO in the UK policies which have concentrated wealth in the hands of a few have done so with no expectation that the wealth will then trickle down into the hands of the hoi polloi.

 

[Henri McPhee]

There is a bit about monetarist trickle down theoretical economics on You Tube:

https://www.youtube.com/watch?v=KgUemV4brDU

 

[kellyb]

Would that be the idiot freshwater economics PhD's, or the idiot saltwater economics PhD's?

Freshwater, which someone defended as "not an economic theology" upthread, but it kinda is.

Although, I'm starting to think these people are more scam artists than actual true believers at this point.

 

[Meadmaker]

Freshwater, which someone defended as "not an economic theology" upthread, but it kinda is.

Although, I'm starting to think these people are more scam artists than actual true believers at this point.

Yeah, that particular comment was more applicable to freshwaters.


The real point of my comment was to point out the different schools of thought. Brainster was trying to bolster an argument by pointing out that he had PhD economists on his side. I was pointing out that he also had PhD economists on the opposing side. There is so much disagreement that the various factions have managed to acquire cute labels.

Economics seems to be one of those areas where two "experts" can hold opinions that are partially or completely opposed to each other, and yet both can maintain their "expert" status. There's a huge dose of pseudoscience in that discipline.