Home > Economics > Do Tax Cuts for the Wealthy Stimulate Jobs?

Do Tax Cuts for the Wealthy Stimulate Jobs?

September 15th, 2013
For the past thirty years and some, conservatives have claimed that the best way to create jobs and stimulate the economy is to cut taxes for wealthy people. From “trickle-down” to the recent drive to cut or eliminate the capital gains tax, the idea is that if you put more money into the hands of wealthy people, they will invest in business, thus creating jobs, leading to a stronger economy with more people paying taxes on greater incomes. Presto! A revived economy and more revenue collected by the government. This has always struck me as one of the most obviously stupid ideas I have seen. Let me paint a little scenario with two variations.
Let's say you have a depressed economy. People are not buying products, let's call them “widgets.” They want to buy widgets (who doesn't?), they just don't feel they can afford to. Then there's a Wealthy Person, who has tens or hundreds of millions of dollars. That person wants to invest in what will give the best return on his investment. Variation One: you cut the taxes of the Wealthy Person. Both income tax and capital gains tax. The Wealthy Person gets a few million dollars extra that he would have otherwise paid in taxes, adds it to his pile of wealth. So, what happens? Will the Wealthy Person invest that money in a widget factory, thus creating jobs? No: nobody is buying widgets. Investing in a widget factory would be a stupid investment, bound to fail. Cutting capital gains will not lead the Wealthy Person to invest in a business which will fail. It's not like the Wealthy Person did not already have lots of money to invest; if they weren't putting it into widget factories before, why will adding a little more to their fortune change anything? The Wealthy Person will take that money and instead apply it to investments designed to increase his personal wealth even further, not to investments that are designed to create jobs or stimulate the economy. Result of Variation One: the economy is still depressed, you have less tax revenue, and more debt—and some very pleased Wealthy Persons. Variation Two: you don't cut the taxes of the Wealthy Person. In fact, you raise his taxes to a marginal rate of 50%. Then you take that money, add it to the money that would have gone to the Variation-one Tax Cuts for Wealthy Persons, and apply all of that to give tax cuts to the lower-middle class and assistance to the working poor. Suddenly, the people who want to buy widgets have enough money to do so. They start buying widgets, and suddenly demand outstrips supply. Building a widget factory is suddenly a prime investment. What about your Wealthy Person? You just raised his taxes. He won't have enough money to invest in the widget market, right? Wrong. He's a Wealthy Person. Which means he has lots of money. He doesn't need a government tax cut. You can raise his tax rates to much higher than 50%, that's not going to stop him from wanting to make more money. He's got piles of cash, so no matter what, he'll want to invest that in whatever gives the best return. When people start buying widgets, he's going to build widget factories. And even if somehow his assets are all tied up somewhere, there are things called “banks.” These banks love lending money to people with lots of collateral and who want to invest in a booming business. In short, no matter how high you raise his taxes, the Wealthy Person will not have any problems investing in a booming market. Result of Variation Two: a revived economy, more jobs, stable revenue—and Wealthy Persons who are still making money and increasing their overall wealth.
Where am I getting things wrong here, beyond the simplicity of the scenario? How does this math not work out?
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  1. Troy
    September 15th, 2013 at 10:19 | #1

    Where am I getting things wrong here, beyond the simplicity of the scenario?

    that the entire field of economics has been corrupted to defend the position of the wealthy.

    http://homepage.ntlworld.com/janusg/coe/!index.htm

    Secondarily, it must be said that there is, actually, a scarcity of worthwhile investments to be made relative to the capital savings of the wealthy.

    This is why the ten year treasury is under 3% and Japan’s ten year bond is under 1%.

    The rich have all the money now and have nowhere to put it.

    But the larger problem I see with just cutting taxes on the masses is that the result will be higher housing rents and home prices, since the first thing the masses bid up is the cost of housing, either by force via the landlord’s demands or voluntarily via the housing market.

    The Nordic countries have gone absolutely nuts bidding up the cost of housing there.

    Japan of course has its own recent history of this affliction, and if you ask me prices there are still 2X or more what they should be (and what they *would* be with a higher tax regime).

    5 years ago there was very little available online about the income disparity issue — I know because I was searching for it in my various internet arguments.

    I do sense something of a seachange coming in the discussion. Republicans have been engaging in last ditch defenses since 2010. A lot is riding on the 2014 and 2016 elections, however. We dodged a bullet with Romney, but we’re not out of the woods yet. Hell, we don’t even have a map to get us out of the woods yet.

  2. Luis
    September 15th, 2013 at 14:22 | #2

    At some point, the demographics will tilt enough so that perhaps we’ll start seeing something different. However, the ability of the Koch brothers to so completely hoodwink the Libertarian movement, to get people angry at government taking their money and compromising their privacy, and instead support corporations, who take even more of their money and compromise their privacy even more thoroughly, and give them back far less… Well, it’s not promising.

    Good link: 11 questions to see if libertarians are hypocrites.

  3. Troy
    September 16th, 2013 at 03:48 | #3

    from the link:

    “The Virtue of Production” without ever defining what production is

    Ayup, this is what I pound on online, too.

    http://research.stlouisfed.org/fred2/graph/?g=mpj

    shows that half our wages are going to housing and health care now . . .

    where’s the “production” in housing? It’s sheer rent-seeking, along with the $8000+ per-capita healthcare costs, twice that of everywhere else.

    http://kff.org/health-costs/issue-brief/snapshots-health-care-spending-in-the-united-states-selected-oecd-countries/

    Now, I consider myself a “left-libertarian” in that I think libertarianism is great, except the part about wealth concentration, since in the pure “right” libertarian — aka “glibertarian” world there are no checks against that.

    We had the right libertarian utopia — it was the 19th century. What followed was the popular reaction to the excesses of wealth concentration and its “got mine f— you” mentality.

    Online I like wheeling out this essay:

    http://geolib.com/essays/sullivan.dan/royallib.html

    since it nails right-libertarians to the wall.

    Sadly, while I consider left-libertarianism to be viable (in a hopeful sense), maybe out of twenty people share this ideology with me.

  4. Luis
    September 16th, 2013 at 10:29 | #4

    One of the ills I imagine being foremost is the free-market philosophy of charging all that the market will bear–that price caps and controls are inherently evil. Funny, then, that apartment rents are one of the only common costs that often have strict controls. The reason is clear: the prices for necessities that are limited will, uncontrolled, expand until they suck every spare dollar out of people’s incomes.

    My brother and his wife are experiencing this with their apartments. Thy signed a 6-month lease, and discovered the reason for such a short lease was that the price could then be jacked up, from $1335 to $1405 for a small studio apartment in the SF Bay Area. They left the place for a few months, and when they asked about availability again, the price was $1650.

    Some years back, I was visiting the US without traveler’s insurance, and got a bad nosebleed. Three doctor’s visits incurred a $1500 bill. When I went back to Japan, they said they would cover it–but only at the costs that were set for such services in Japan. Came out to a few hundred bucks.

    Seems like we need two things in the U.S.: rent and health care price caps and controls. The government sets a fair top price for both. Might be tricky with housing rents, as there are so many variables that determine price–but I would imagine that tying it in with property costs would be eminently fair.

    I would even go one further: cap the level of profits for various goods, especially those related to energy production.

  5. Troy
    September 16th, 2013 at 11:08 | #5

    Rent controls add their own weirdnesses.

    The best policy in the end has to be forcibly increasing the supply across the board, to give renters the whip hand in rent negotiations via vacancy factors.

    One thing I expect to be happening in Tokyo, actually. When I was looking for a place back in ’95, the rental agents structured my experience such that I had a selection of 4 or 5 units, and had to pick one.

    When in reality they probably had 100X that number on file waiting for tenants!

    But now with the internet, I think renters in Tokyo have a lot more power, even in the population of Tokyo hasn’t fallen much (just this past year Chiba’s population actually declined for the first time).

    Japan does actually institute tough price controls on the medical sector. While its low price can’t be denied, I think I’d rather pay the ~$400 per month (+$2000/yr deductible) for access to the Blue Cross/Blue Shield system.

    But, damn, $5000/mo for insurance is a lot of money! (People making $30,000 actually pay half that thanks to “ObamaCare”)

    Norway caps their resource sector by operating its own oil company. If the multinationals don’t want to play ball and refuse to bid on projects, Norway can just throw the project to StatOil, and let them take all the profit.

    The really, really funny thing is that you can find video of Sarah Palin waxing enthusiastically about Alaska’s citizen dividend, which is in fact the naked collectivism of which we speak.

  6. Troy
    September 16th, 2013 at 11:22 | #6

    (and by “forcibly increasing the supply” I’m talking kodan-type development)

    but, alas, Japan’s record here is a mixed bag. I guess the kodans they threw up in the 50s through 70s got them through their baby boom OK, but these buildings did not prove to be a lasting form of investment (they cheaped out on them too much), and ISTM there was a lot of graft and stupidity going on, and the government agency charged with running its successor doesn’t seem that competent, either.

    UR places are still pretty expensive, they tend to be more than market price from what I can tell.

    I think Sweden, Germany, and Finland have better public housing histories, but I need to do more research here I guess.

  7. Luis
    September 16th, 2013 at 11:26 | #7

    One thing I expect to be happening in Tokyo, actually. When I was looking for a place back in ’95, the rental agents structured my experience such that I had a selection of 4 or 5 units, and had to pick one. When in reality they probably had 100X that number on file waiting for tenants!
    That was probably more the result of the gaijin wa dame syndrome. I had the same experience in Toyama: the rental agencies would show me the exact same three damned apartments; when I pointed out the insanity that in a city of 300,000 only three units were available, and pointed to blocks and blocks of apartments we had not looked at, the agents would say, “Oh, they’re filled with yakuza and mizushobai.” Yeah, right.

    Interestingly, in Tokyo, I never got that. They were more direct, and all used the exact same expression: gaijin wa dame. The result was the same: although I found a hundred or more open units, all but four or five would not allow foreigners, no matter how well I spoke Japanese, no matter what references I offered.

    I imagine most Japanese people did not have the same problem. The problem before was that demand way outstripped supply, so we had the 2-2-1-1 system (2 months’ gift money, 2 for deposit, one for agent’s fee, one advance rent) and rather high rents generally.

    Now, I think the lower land prices, lower youth population, and the general recession have made things a lot easier for tenants, more than just Internet-assisted searches.

  8. Troy
    September 16th, 2013 at 13:25 | #8

    http://research.stlouisfed.org/fred2/graph/?g=mqb

    is an interesting chart comparing age 15-24, US (blue) vs Japan (red)

    Japan’s postwar baby boom was sharp (over by 1950) so they’re out of phase with us.

    Their baby boom echo arrived in the early 1990s, while the US’s is just peaking now.

    The loss of 40% (!) of the youth population since 1990 is pretty stunning tho.

    So for the next few decades the US has to house its current population plus make room for Gen Y.

    Japan has a different story, one of demographic decline.

    That sounds awful, but I think it will work out fine for you guys.

    Fewer people mean fewer resources, less capital investment needed.

    This is NOT good if you’re trying to sell goods and services to Japanese young people, but at least most of the decline is done now.

    Tokyo is not going to empty out much, but Japan’s marginal places sure are.

    Kinda hoping to retire to some marginal place with scenic beauty, out in Yamaguchi or somewhere, we’ll see.

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