Question about raising taxes on the wealthy

Economics in general is a weak subject for me, thus the following question..............this is NOT a flame bait thread, and I'm not trying to pin any side down.

What I don't understand is the connection between raising taxes on the wealthy, and it's connection with investment climates in the US.

What I understood is....the Bush tax cuts...which have been recieving so much attention...apply to the marginal personal income tax rates for nearly all U.S. taxpayers.

Which means were talking about personal income tax, not taxes on businesses.

I also understood, and correct me if I'm wrong, that most investment or start up capital, or cash infusions from shareholders, is other people's money, and doesn't come from the personal income of wealthy investors or entrepreneurs.

If this is true.....how could the personal income of a wealthy person affect jobs?.....if that income isn't spent on anything but personal property and services for that wealthy person?

Don't get me wrong, wealth is good, and so are toys, yachts, trips, and nice houses or cars. I don't want to take away anything from the wealthy

But if a wealthy person nets $500,000,000 a year, instead of $550,000,000 a year if those tax cuts sunset...how does that $50,000,000 get back to the economy and if it would otherwise go into the wealthy person's personal checking accout, or whatever?

I just don't understand how the Bush tax cuts could have ever produced jobs, like the Republicans always say they do.

Help a novice.....

 

A tax cut (to the general population) can temporarily increase demand and thus require businesses to increase production to meet the demand. However if the taxes stay "low" money may tend to pool with the business owners and therefore reduce demand again (Because the general population has less disposable money, and spending returns to the necessities. Note: if the wages from the jobs created are sufficiently high the demand will may remain even with the low taxation -This is because we are bypassing the government roll of redistributing wealth) .

But you right, giving a rich person more money doesn't help the situation. If the demand for a product is there a business will take a loan for the required capital. A large bank account is not necessary to start a business (Although it can't hurt).

 

I theory is that it would be a boom to investment and expansion. The theory is broken like the current theories that most economists use. Dollars don't create dollars when they leave the country.

 

Rich people care about their children too, so they do not want give up any money.
The rationale is simple, pay 1 million to your congressmen and get 49 millions in tax breaks.

 

Everyone had to learn at some point. No one started off intuitively understanding all but the most basic of economics.

Those wealthy investors and the people who provide start up capital are one and the same. Remember, rich people (for better or worse, depending on the model) save a higher percent of their income then poorer people. Also it motivates people in high incomes careers to work more/harder. If a doctor decides he want to work 45 hours a week up from 40 because he'll keep more of his money, he will try to employ more staff so he can work those extra 5 hours a week.

Getting those services and the like is what motivates a rich person to invest. So cutting taxes could have a double raise in demand one for increasing investment (as the rich person's marginal returns increase) and due to increased conspicuous consumption.

Don't get me wrong, wealth is good, and so are toys, yachts, trips, and nice houses or cars. I don't want to take away anything from the wealthy

The idea is this increases the amount of capital available to businesses to start up. Where do you think banks get their reserves to lend out? Of course, you are abesoutely correct in that banks (or the wealthy) could choose to sit on these reserves, by demanding to be compensated for the loss of liquidity, if they invest.

To save republicans oversell the benefits of taxes cuts is quite possibly the biggest understatement of public policy. The effect I mentioned earlier in the post answer the question as to why. They are however
over-exaggerated by our conservative friends (this is just a matter of fact, comparing claims by conservative politicians with research).

 

The problem with raising income taxes, is that the money goes to a Federal government that proven, over decades, and regardless of party, that it has no concept of fiscal responsibility. And IMO, until we can find a way to force the Federal government into fiscal responsibility, no amount of tax increase will solve our problems.

 

This is wrong. One of the reasons we began to run massive deficits is we cut taxes, without cutting spending first. Raising taxes is actually correlated WITH spending less. Why? When people see their taxes go up, they demand that congress cut spending. Borrow hides this costs on society. People are unable to easily see the costs of budget deficits. Consider the evidence from Cato (Which is a RIGHT WING THINK TANK), that admits the starve the beast metaphor is inconsistent with the facts.

"I found no significant relation between the change in the current federal spending share of GDP and the lagged federal deficit as a percent of GDP.
In sum, there is no significant evidence that a recent high deficit ever had an effect similar to that of reducing a child’s allowance"

Niskanen, W. A. (2006). Limiting Government: The Failure of 'Starve the Beast'. Cato Journal, 26(3), 553-558.

Right the article for yourself, right here

 

And that's absolutely true. But realize we did have a tax increase in the 1990s yet spending increased as well. Although at a slower rate, it still increased. So nobody is gonna sign on to tax hikes on the right if nothing is done about the annual budget increases that happen no matter what. There should be no reason outside of population growth (off the chart growth) that a budget should increase by 5% plus every year. Many countries wipe out the GDP increase by spending increase so debt ratios never go down. US and Europe is a prime example of this.

 

Right, this would still explain the positive correlation between taxes increases and fiscal responsibility.

This could be one reason that they are correlated. When we actually make taxes hikes, right wing politicians will ACTUALLY cut spending, instead of talk non stop about it..

Right, but I feel that taxes hike make politicians actually feel the pressure to cut spending, as the voters can actually see the cost of the spending unlike when it is borrowed.

 

I'd love for taxes to be raised high enough to cover all of our expenditures, perhaps then we'd get serious about reducing the size of the federal government. Trouble is, the things that need to be reduced the most, entitlement programs and the military, are the most easily used against you in a political race.

It's no coincidence that every year the democrats say the republicans want to take medicare away from old people and republicans accuse democrats of making use less safe by reducing the size of the military. Sadly, as always, politics stands in the way of reason.

 

and public choice problems prevent voters from demanding politicians actually balance the budget. It simply isn't worth it for them to inform themselves and turnout to vote.

 

Why should voters inform themselves? Moreover, why vote? If we were (we aren't) completely reasonable people who maximized our time efficiently, we'd never vote. Statistically any one vote is completely irrelevant and even less relevant to the political outcomes. The time you'd have to spend to be completely informed is astronomical and in almost all cases, your time would be better spent doing almost anything else.

But we aren't rational and despite our protests to the contrary, we enjoy being grouped and associating with like minded people, hence why parties have so much more influence than good ideas, regardless of the source.

 

Getting back to the OP, giving tax breaks to the superwealthy does not increase aggregate demand or investment, for well known and obvious reasons. Paris Hilton isn't waiting around for a tax break in order to buy her chihuahua another new diamond studded tutu. In contrast real tax cuts for working people do increase aggregate demand and investment.

The GOP knew that. The tax cuts for billionaires was not intended to transfer wealth from working people to the wealthy and actually cause more financial insecurity for working Americans, not less. The more insecure working Americans are, the less negotiating power they have at work, and the more wages can be suppressed, which is the whole agenda of conservatism: wage suppression, wealth transfer to the rich.

There's no there there except that.

 

Thanks to all for an interesting bunch of viewpoints.

I'm starting to see a picture forming where this personal income tax issue doesn't have direct quantifyable affect on jobs per se'....but that it could affect the "mindset" of the wealthy, which might then, or might not, affect how many jobs that "job creators" create.

The slightly demoralizing part of these opinions.....

Righties seem to have more faith that the personal income tax rate for the wealthy affects our economy, and directly inhibits job growth, and our recovery, once it starts.

Lefties pretty much think that most Americans will never see any part of a wealthy person's paycheck trickle down to them, after the wealthy get it, no matter how much the wealthy pay in taxes

Conservative media VS Mainstream media, right down the line...mostly.

Another demoralizing point......is what a bunch of whiney babies some of these wealthy job creators might be, if they decide not to create jobs for thier fellow Americans who desperatly need them because they might bring home $500,000,000 in 2012 instead of the $550,000,000 they brought home in 2011. I can't imagine thinking that way, and the more I try to mentally digest that scenario, the more it seems like BS to me.

There has to be something else to this.....some other definable reason why that tax increase for the wealthy really makes the wealthy turn the corner and shut off. What percentage are we talking about here?.....I've heard like 3% or 7%?

 

So name a time spending was cut in the last 30 years when taxes were raised.

 

I have an honest question I don't know the answer to. Has an established modern government ever contracted in size/scope?

 

The size/scope of governments are directly, and neccessarilly, proportianal to the size/scope of the country

 

Not what I was asking, my query is whether or not, once established, has a government ever decreased in its size and scope. So once reaching a certain size, has it ever moved in the other direction, contracted.

 

It's very simple,
The rich spend a much lower percentage on consumption than do people lower down the ladder. The rich have very little reason to just take the money that they get and stick it under their mattress, so to speak, and a large incentive to invest it back into the economy. This need not be done through direct investment, but could simply be performed by sticking this money into a bank. This then lowers the interest rate and increasing net investment.
This is inherently more productive than simply consumer spending because the interest rate affects the amount of investment and investment changes long term output by, in the most simplistic of terms, making it more profitable to invest in things like machinery and other capital goods, whereas consumption realistically only affects current output or future output only insofar as what is gained through profit is then saved and invested.
EDIT
Also the idea that taxation in and of itself is what causes unemployment is bunk. Tax changes cannot in and of themselves affect long term employment opportunities except through other affects in the economy. For instance let's say that working preferences and job tasks don't change with the increase in capital accumulation. This means that eventually wages will rise as the marginal productivity of labor rises (a fancy way for saying labor becomes more valuable per person) and so frictional unemployment will return to previous levels.

 

When an extra $50 million is put in the bank, that money is lent out to investors. So, of course tax cuts increases investment.

 

Part of the issue people see is that wealthy people don't waste their money on petty consumables - that is part of how they become wealthy.

They do spend their money almost as quickly as it comes in, they just don't spend it on worthless junk, they purchase things that will increase in value. Unfortunately the things that increase in value don't add money to the economy nearly as quickly as worthless consumables do. Of course most worthless consumables do send the money overseas, while the better investments tend to keep it in the US. But still, there tends to be a bigger short-term bump in the economy when the poor are given more money, but there is a slower, but stronger increase in the economy when the rich get more money.

This fact confuses people who expect rapid jumps in the economy when taxes are cut.

 

Rich invest majority of their money overseas (BRICS countries).
Tax break should be given only to those who invest in U.S. That is all that needs to be done.

 

Yeah; but that may violate a trade agreement.

 

Gotcha.....and as far as I know.....no......no government has ever contracted is size/scope while the country increases in size/scope/population

 

Not if the $50M is put in a hedgefund, which produces nothing.

Further, loans from banks are notoriously skewed toward certain kinds of investments, since generally only the wealthy can get loans (leaving aside home loans which have been made more available due to government intervention). Those investments tend to involve high risk and hence, are skewed away from the production of real goods and services (which tend to involve low returns). In short, most loans go to people who already have capital, rather than those who don't. defeating the goal of expanding the economy.