Do Tax Cuts for the Wealthy Stimulate Jobs?
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?