Trading your cow for their magic beans
In fact, this is no surprise, for several reasons:
1) Supply Side assumes that the rich have a zillion other uses for their cash and thus have to be lured into investing it! Now ponder that nonsense statement. Roll it around and try to imagine it making a scintilla of sense! Try actually asking a very rich person. Once you have a few mansions and their contents and cars and boats and such, actually spending it all holds little attraction. Rather, the next step is using the extra to become even richer. Naturally, you invest it. Whatever the tax rates, you invest it, seeking maximum return.
Instead of enticing the rich to invest, these super low dividend and capital gains rates simply used money taxed from middle class wage-earners to give bonuses for speculations wealthy folks were doing anyway. If anything, the only major effect, other than budget deficits, was a pumping up of asset value bubbles.
2) Now to be sure, some of the rich … a few… put a fair amount of their wealth into truly bold and risky new enterprises. I know such men and women, who engage in Venture Capitalism or starting up creative new enterprises. And just so you know that I’m no socialist I believe this kind of investment truly should be encouraged by taxing it at a very low rate! Not only because of the risk, but also because equity shares that are bought de novo directly from a new firm actually deliver nearly all of that value directly into capitalization and company development.
In contrast, most exchanges through the NYSE or NASDAQ are purchases from other stock-owners who happen to disagree with you about prospects for future capital gains and dividends. It is just as much a betting/gambling system as any Vegas casino. Your trades may marginally raise or lower the posted price, allowing the company to raise a little capital on the side, but almost nothing from your stock transaction actually goes to the company itself, or into new products or plants and equipment.
(Hence, that kind of investing – by far the largest portion – helps industry only at appallingly low levels of efficiency, but diverts management into spending nearly all its time trying to bribe stockholders with short term benefits, ignoring long-term company health.)
No wonder Adam Smith himself expressed contempt for passive investments that he called “rents”… compared to investments in which the owner actually gets involved in starting up or entrepreneurial development of long term company or enterprise health.
Regarding supply-side economic theory, the author states, “Their experiment has been run, now, for more than three decades, and never once has their core predication come true… that cutting taxes on the rich will result in increased overall revenues and a vanishing federal deficit.” This is a straw man.
The fact is this: that as the Reagan-era Kemp-Roth income tax cuts were phased in over three years, revenue to the Federal treasury grew by substantially more than the static economic models used by the Congressional Budget Office (CBO) predicted. This makes intuitive sense.
The premise of the supply-side economics and the Laffer Curve isn’t hard to understand. At tax rates of both zero and 100%, government revenue would be zero with there being some optimum range to maximize revenue – further, to the extent that lower levels of taxation encourage economic activity, the economy will grow at a more rapid rate, thus increasing the base from which government draws taxes. This concept was considered so elemental that Ibn Khaldun, an Arab scholar writing in his book Al Muqaddimah” (“The Introduction”) in 1377, thought it common sense: high taxes destroys economic activity which destroys the state.
Back to the author’s straw man. Revenue did grow after the tax cuts by a substantially greater amount than the critics said they would. The reason for the deficits wasn’t a lack of revenue. Rather, then, as now, deficits are due to the rate of spending increases exceeding the rate of economic growth.
Look it up. The data is easy to find.
Sorry, Chuck, but it doesn’t work that way. You don’t just get to make a completely baseless statement like “The fact is this: that as the Reagan-era Kemp-Roth income tax cuts were phased in over three years, revenue to the Federal treasury grew by substantially more than the static economic models” without some sort of reference.
Simply saying “Look it up. The data is easy to find” doesn’t cut it.
You want to win an argument, you come to the table with a lot more to back up your “facts” than a simple “because I say so”.
Jeremy, Chuck is right, a little bit: during the Reagan era, we experienced an economic expansion that increased tax revenue. Chuck, you are only right a little bit: the Reagan budget deficits were, at the time, the biggest in our nation’s history, fueled by good old fashioned New Deal pump priming: a massive spending binge. While you may applaud the freedom-loving/evil-squashing/God-Bless-America reasons for this huge spending blitz, the fact remains that it was pure Keynes (who ironically published his most famous work the year after the Gipper got a C- in his only econ course at Eureka Junior College). I disagree with the author a little bit: I maintain that supply side has never been tried, because we always seem to find a reason to lob a wad of massive spending into the mix in order to make sure of the result (Reagan held the record for biggest deficits in the nation’s history until George W. crushed him).
Chuck, your discussion of the Laffer curve is cogent, correct, and valid at the top portion of the curve. Now look down. What happens at lower tax rates? That’s right, revenues go down. The same logic that applies at a 95% marginal rate does not necessarily apply at a 50% rate (or more accurately, the logic explained in the full theory — the part politicians seem to lose interest in before getting to). Or a 39% rate, or 15. Measurements show that we are faaar away from the decreasing total revenues part of the curve, and were in the Reagan era as well.
Imagine standing behind Albert Pujols at batting practice with a great BP pitcher in a hitter’s park — with a wand in your hand that you wave and say “abracadabra” every time he connects. Do you really think the reason the baseball left the field was the magic in the wand?
Does your answer change if the wand is painted “supply side red”?
Are you sure?
“Instead of enticing the rich to invest, these super low dividend and capital gains rates simply used money taxed from middle class wage-earners to give bonuses for speculations wealthy folks were doing anyway”
Let’s pretend the capital gains tax rate is 20%.
Now let’s pretend evil conservatives cut the rate to 15%.
How does that reduction “use(d) money taxed from middle class wage-earners to give bonuses for speculations wealthy folks were doing anyway”?
Please show all your work.