Split Thread Trickle-down economics

[McHrozni]

How does it work exactly?

The exact same way it is advertised, it gives the rich more incentive to invest their money to generate more return, which generates jobs for the less fortunate, improving their lot.

The trick is it doesn't work in a country full of super-rich people with massive income inequality, where lack of investment capital isn't an issue. It works if the conditions are right - if the income inequality is low and the potential for investment is hampered by high taxes. Then trickle-down economics can do wonders, just look at China FFS.

Once that bottleneck is cleared, tricke down economics don't work any more. That doesn't mean the policy is bad per se, just that it was utilized for longer than it was useful. Socialist countries did the same mistake but in reverse, extremely low income inequality in itself causes massive damage to the economy all by itself and policies that ensure it also cause obvious damage to the economy.

McHrozni

 

[The Great Zaganza]

The exact same way it is advertised, it gives the rich more incentive to invest their money to generate more return, which generates jobs for the less fortunate, improving their lot.

The trick is it doesn't work in a country full of super-rich people with massive income inequality, where lack of investment capital isn't an issue. It works if the conditions are right - if the income inequality is low and the potential for investment is hampered by high taxes. Then trickle-down economics can do wonders, just look at China FFS.

Once that bottleneck is cleared, tricke down economics don't work any more. That doesn't mean the policy is bad per se, just that it was utilized for longer than it was useful. Socialist countries did the same mistake but in reverse, extremely low income inequality in itself causes massive damage to the economy all by itself and policies that ensure it also cause obvious damage to the economy.

McHrozni

i disagree.
low- to mid-income people pooling their savings (in fonds, etc.) can invest just as much as the rich can with any surplus they have - there is no advantage to have the money in the hands of few compared to many as long as they invest it.

In my opinion, trickle-down allows for people to early-adopt and test products that might become useful (and affordable) for the the general population if mass-produced. High-tech companies can develop products with tiny production numbers in the expectations that the super-rich will want their stuff more for prestige than function. Technology developed for high-end cars, computers, private planes etc. (and funded by their oversized budgets) usually end up in the consumer market, given time.
Of course, this doesn't apply for real estate or stupid luxuries like yachts.

 

[The Don]

Tricke down is no myth, it works if the economy has significant levels of equality. It makes the rich richer faster than it makes the poor better off, that's a negative side effect and a reason why the policy must be discontinued at a certain point when the difference grows too large.

You say the highlighted as if it is a simple incontrovertible truth but there's not unanimity among economists (of course there never is on any subject). It's clear that you think it works but then again other economies experienced similar, or greater, growth in the 80's without trickle down.

It's hardly unique in this regard, the same thing holds for policies that work to reduce inequality just as well. At a certain point they must be discontinued or else they will strangle the economy one way (high taxes strangle investment) or the other (no one wants to work in hard jobs, because they all pay about the same anyway). The only difference is this is clear to pretty much everyone involved whereas it is not clear in regards to trickle down economics.

Once again opinion presented as fact.

In countries with high taxes, investment can be high, not least because it can be government driven (look at the postwar period in the UK).

Money isn't the only reward, there are "vocational" careers that attract people despite the financial inducements and at least a proportion of people are more concerned about prestige than cash - at least beyond a certain level of financial security.

IMO it has more to do with the structure of certain societies. Scandinavia has been tolerant of high taxation for the common good because they seem to have a greater sense of community. The UK used to be more like that but has become increasingly Americanised w.r.t. selfishness though regrettably without the American sense of self-sufficiency.

There is no reason why it can't be replicated today. You can invesnt catchy phrases for any modern policy, if you don't when you need them that's your own incompetence.

The thing is that it's not just a matter of finding a good catch-phase, the policies also have to align with public sentiment. The policies of the "left" tend to involve people doing things which may be involve delayed gratification in the short term but for the long term and/or common good. Current desires are for instant gratification and selfishness.

I think Trump will produce the crisis in question. In fact I hope he does, the sooner it happens the less damage it will do.

McHrozni

I disagree, the US is sufficiently robust to withstand 8 years of President Trump, especially as he is mostly empty rhetoric. Sure if the tax cuts get through there'll be a spiralling of the debt that the Democrats will have to deal with if they get the reins of power and race relations will be put back a decade or three and healthcare may be an even greater mess but the US will trundle on.

 

[Belz...]

The exact same way it is advertised, it gives the rich more incentive to invest their money to generate more return, which generates jobs for the less fortunate, improving their lot.

The issue I have with the idea is that since it's not a reliable source of income, large business owners are not likely to invest that but rather to stash it somewhere or pocket it.

So my question is essentially: do you have any evidence that it works?

 

[The Don]

The issue I have with the idea is that since it's not a reliable source of income, large business owners are not likely to invest that but rather to stash it somewhere or pocket it.

I tend to agree - IMO trickle-down isn't cut and dried.

Depending on the tax laws, lower taxes (personal and/or corporate) can even act as a disincentive to invest in business. If I can pull money out of a business without having to pay very much tax then I may do so. OTOH if investment is tax efficient then I may be more inclined to invest - especially if I don't need the money right now.

 

[The Great Zaganza]

It is also far from clear whether an economy is better served by few people investing in companies or many people investing in expanding their skills.

 

[Fast Eddie B]

How does it work exactly?

If people are left with more discretionary income, they will tend to either spend or invest it. Both cases have stimulative effects on the economy.

Not saying it’s always good to let people keep more of their money - their can be economic downsides as well. But the basic premise seems so self-evident as to be inarguable.

 

[Spindrift]

If people are left with more discretionary income, they will tend to either spend or invest it. Both cases have stimulative effects on the economy.

Not saying it’s always good to let people keep more of their money - their can be economic downsides as well. But the basic premise seems so self-evident as to be inarguable.

Isn't there a third option? They will pay off existing debt. Which does not have a stimulative effect.

 

[Belz...]

If people are left with more discretionary income, they will tend to either spend or invest it. Both cases have stimulative effects on the economy.

We've seen that they tend to stash it offshore, where it doesn't stimulate _our_ economy.

The idea is to give money to those who will spend it, one way or another, or on condition that they do.

 

[SezMe]

...In 2001 the bottleneck of the economy was a lack of investment, not consumer spending.

Wait! A lack of investment was caused by a lack of consumer spending. Companies don't invest in new capacity unless there is evidence of unmet demand which, in other words, is consumer spending. The two are so tightly coupled that I question if your attempted distinction is valid.

 

[SezMe]

Tricke down is no myth, it works if the economy has significant levels of equality.

Please explain the reasoning behind this statement.

...(high taxes strangle investment)...

Really? Extremely high marginal tax rates in the Eisenhower years did not strangle investment. In fact, one can argue that high marginal rates encourage investment. Please explain your reasoning.

 

[The Don]

Wait! A lack of investment was caused by a lack of consumer spending. Companies don't invest in new capacity unless there is evidence of unmet demand which, in other words, is consumer spending. The two are so tightly coupled that I question if your attempted distinction is valid.

....indeed, supply-side economics depends on one particular view of that relationship holding. If one believes in the effectiveness of supply-side, then by necessity speculative investment has to come first - a tough ask when shareholders seem to want "jam today" instead of the delayed gratification of investment followed by "jam tomorrow"

 

[Fast Eddie B]

Extremely high marginal tax rates in the Eisenhower years did not strangle investment. In fact, one can argue that high marginal rates encourage investment.

I would put forth that the extremely high marginal rates gave birth to an industry whose sole objective was to avoid paying said taxes. As such, wealthy investors were in fact driven to invest, but to invest in things designed primarily to avoid taxes. This created inefficiencies in the marketplace.

My dad was involved in one such scheme, which bought airliners and then leased them back to airlines, with the goal of being able to log large depreciation on said airliners every year to offset other income. I think some of these schemes ended up being shot down, but the “rich” were driven to extreme lengths by the high tax rate - no rational person would volunteer to only keep a dime out of every marginal dollar earned.

 

[Cl1mh4224rd]

...but the “rich” were driven to extreme lengths by the high tax rate - no rational person would volunteer to only keep a dime out of every marginal dollar earned.

This would happen regardless of the actual tax rate, because having to give up any amount of that dollar will motivate businesses to find ways to avoid doing so.

That people keep pointing out such a basic observation as the one you've made here is frustrating to me, because it's so empty. People constantly use it as justification for tax breaks without even acknowledging that a person who gets away with only paying $0.10 for every $1.00 isn't going to suddenly start paying $0.25 simply because they were supposed to be paying $0.50 before.

 

[Fast Eddie B]

This would happen regardless of the actual tax rate, because having to give up any amount of that dollar will motivate businesses to find ways to avoid doing so.

Surely you would not contend that the larger the tax rate, the greater the incentive to avoid or minimize it.

 

[Cl1mh4224rd]

Surely you would not contend that the larger the tax rate, the greater the incentive to avoid or minimize it.

No, which just goes to my point about your observation being empty. There will come a time when the ROI for tax avoidance makes it worth it, regardless of the tax rate.

Maybe you'd like to argue that if the tax rate hadn't been so onerous in the past, that point might still be in our future, but so what? That's not our current reality. The horse is out of the barn; closing the doors now won't incentivize the horse to return willingly.

 

[Fast Eddie B]

No, which just goes to my point about your observation being empty.

I think your position is that tax rates do not influence behavior.

I guess we’ll just have to disagree.

 

[Cl1mh4224rd]

I think your position is that tax rates do not influence behavior.

I've expanded on my response.

 

[Fast Eddie B]

I've expanded on my response.

Thanks.

Clearer with the modification.

 

[barehl]

The exact same way it is advertised, it gives the rich more incentive to invest their money to generate more return, which generates jobs for the less fortunate, improving their lot.

Okay, but 2/3rds of the jobs are small business so aren't you only talking about 1/3rd of the jobs? Also, I'm not sure it works in practice. Often the tax abatement for companies to build large stores or factories is so high that the local economy ends up breaking even at best and is sometimes worse off. For example, when Ken Ham built the Ark building, he suggested that the local economy would be booming. That hasn't happened.

Then trickle-down economics can do wonders, just look at China FFS.

China has brought foreign money into the country because of its fanatical export, growth model. That model is now failing.