Again With the Trickle Down!?!
If your only tool is a hammer, everything looks like a nail. That's what came to mind this AM when I read that John McCain's plan to address the ailing economy includes a big cut in the capital gains tax rate, from 15% to 7.5% for the next two years.
How wrongheaded is this? Let me count the ways.
First, the McCain folks may have missed this, but asset values have been falling, big time. Remember, John?... That whole financial mess that folks have been talking about? When capital assets, like stocks or bonds, lose value, that's a capital loss, and it's already deductible from your taxes.
OK, but there's probably a few folks out there who've realized some capital gains, or will do so at some point in the next couple of years. What's the point of giving them a tax break? What itch does that scratch?
The vast majority of realized capital gains--that's the money you make, for example, when you sell a stock for more than you paid for it--go the richest families, so they're the ones who benefit from this. The good number crunchers at the Tax Policy Center examined who would benefit from the McCain proposal. The middle fifth of families end up with all of 0.2% of the benefits. That's not a typo. The tax break would lower their annual tax bill by $4.00. OK, that is a gallon of gas, but it's not what you'd call a game-changer.
The top 20% end up with 98.3% of the benefits of the cut, and the top 1%, with income above $600,000 get 75% of the gains, for an average benefit of $37,600. The average tax savings for the top 0.1%--income above $3 mil--is $244,000. In other words, this isn't a recipe for helping families hurt by the financial crisis and the recession. It's a recipe for more income inequality.
So why do it...why cut the rate? You guessed it: good old trickle down. It's yet another example of that supply-side fairy dust that worked so well for Bush that McCain and Co. want to see the Bushies and raise them.
If cutting taxes for the wealthiest households boosted job creation, we'd know it. The Bush cuts, originally opposed by John McCain by the way, were sold on this premise. Yet before we began to shed jobs this year, employment growth in the Bush years was the worst on record.
If you want to provide income and job opportunities to people who are hurting, your best bet is to do so directly, through tax cuts targeted at them, and through infrastructure investment designed to create new, quality jobs. That's what Obama aims for in his recently announced package.
Finally, and this is important, does anyone really believe that this allegedly temporary cut will really sunset in two years? Like Dr. Phil says, "this ain't my first rodeo!" That's the tripwire in the Bush cuts. They end in 2011, but anyone who wants to let them do so is accused of supporting the "largest tax increase in history."
If we're foolish enough to sign onto this cut in the capital gains tax rate based on our understanding that the rate will reset in two years...well, as Bush himself put it, "fool me once, shame on...shame on you. Fool me...you can't get fooled again." In fact, here's a quote from a straight-talking Republican Senator back in 2003 when he opposed Bush's capital gain and dividend tax cuts based on these illusory sunsets: "...the problem with that is it's gimmickry. It makes a mockery out of the whole budgetary process..." Listen to yourself, Senator McCain.
So we are yet again left with John McCain getting it wrong on economic policy. There is absolutely a need to help struggling families right now, but if this is the best he can come up with, we'd all be much better off if he put the hammer back in the tool shed and left the policy construction to others.
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I'm SOOOO frustrated with this. The Right wing has been fighting the inflation bogeyman for 30 years. When these nuts first claimed they could have inflation free growth they were laughed at. They've since proven this and they believe that proves they were right. THEY WEREN'T! There is one way to achieve inflation free economic growth. Since they consider ALL wage increases inflationary...let me say that again...ALL WAGE INCREASES INFLATIONARY, if the vast majority of the population do not see real dollar increases in their wages, then you can control inflation.
Mr. Bernstein, the average Alabama good 'ol boy who votes for Bush/Cheney or McCain/Palin will never listen to dry explanations of economics, learn something, and then FINALLY vote in his own best interest. This argument FINALLY needs to be put in terms that people can understand. People on opposite sides arguing which plan will create more jobs is just noise. Telling people that the Right-wing plan REQUIRES them to not share in the trickle that is supposed to rain down their back, just might...finally...get their attention.
i agree.
Suggestions: The MORE the MORE, the more the top 1 % have, the more they get from McCain and Republicans
FOR ROW and for the rest of us, The LESS, the LESS, ( ROW -- the Rest of the World)
History note the early 20th century classical economists (Alfred Marshall etc.) believed in Say's Law - short form was that Supply Creates it's own Demand. John Maynard Keynes (IMO greatest economist in 20th century) turned Say's Law on it's head with his revolutionary book "The General Theory of Employment, Interest and Money" (1936)
Keynes argued that recessions or depressions are NOT likely to correct themselves. The Classical Economists were all strong Laissez-Faire (or the smaller the goverment the better). And Keynes argued that government should plaly an active role in the economy and in stabilizing the economy.
IMO we are painfully relearning the lessons of the 20th century's Great Depression with the not so "Great Recession" of the 21 st century.
You've got fan. Cheers.
applause!
Nice article.....
I am just HOPING that mccain actually goes into the debate and announces he wants to cut capital gains tax....that would just be too....
precious.
Obama will have a field day with that, right there.....
There really is such a thing as a Republican and Republican economics always have and always will favor the moneyed classes. The rich in this nation make up the bulk - in numbers and monetary support - of the Republican Party, always have and always will. To believe that a Republican politician would suddenly abandon his life-line to get elected is completely antithetical to common sense.
I have a modest account with a mutual fund that pays capital gains and dividends at the end of the year. Currently I get taxed at 25 % on about 4,000 dollars of capital gains. Why does the government deserve 1000 dollars of money that I am risking. If I lose money they don't send me a check. It is my money not the governments. I am so sick of people saying fairness.. What is fair about reaping rewards from my work and risk ?
Why are you paying 25% cap gains tax when the curent rate is only 15%?
The 15% rate only applies to long term capital gains. Short term gains are taxed at your highest incremental tax rate. Another reason to dislike the 15% rate: it tends to benefit wealthy people more than middle class because the rich can hang on to capital assets for long periods. Why? They are rich and have no need to sell today, unlike some of us who are suffering.
SOT
Since you ask a simple question (unlike most repubs here) I will try to answer.
"What is fair about reaping rewards from my work and risk ?"
The simple answer? Your rewards did not occur in a vacuum. The regulation of the financial system (imperfect as it may be) that allows you to trade requires taxes. The police that protect the property where the company is located require taxes. The roads that allow for shipping the products it makes require taxes. Safe guarding the food supplies of the employees who work there require taxes. And so it goes for the schools that teach the employees, the judicial system that protects the companies legal status, and so forth.
Your $4,000 came at the end of a LONG line of services that made it possible, and SOMEBODY has to pay. Sure, nobody likes to pay for taxes, but you are more than happy to benefit from the system that makes that investment possible.
The fairness issue comes in when looking at who should pay less taxes right now. For eight years, we've cut taxes for the investor class- told that it was the surest way to prosperity for everyone. It hasn't worked out that way (even before the latest crisis). So the idea of cutting your taxes, while doing nothing for the middle class, is becoming much more difficult to peddle.
The middle class received significant tax cuts too. A lot of folks who consider themselves middle class don't pay any federal income tax at all. As for capital gains, the tax cuts is for "long term" capital gains. Regular cap gains is considered regular income and taxes at the same rate. Re: wondering why we have to pay cap gains at all is a good question, because taxing cap gains on stocks usually just results in taking money out of stocks and giving it to the government, which suppresses stock prices. If there was no cap gains taxes at all, the market would be much higher now.
That was an excellent answer, and indeed uncommon sense (I think it was George Carlson who said, if it's common sense, why is it so uncommon? But, I may be wrong).
Carlin, not Carlson.
You've got fan. Cheers.
But you guys always mention taxes as they apply to utilities....you never mention the portion of taxes that is taken from a producer and given to a non producer. That type of transfer of wealth does nothing to grow the economy. If fact it leads to lower growth as those who produce lose the incentive due to hih taxes required to support this robbing of Peter to pay Paul.
I have no problem paying taxes for roads and police and whatnot. I do have a problem when my taxes go for so called "wars on poverty' and other excuses for social engineering that has never been shown to produce results.
Time to consider a fund with less churn (and lower fees). Common folk like me (and perhaps you) only pay taxes on the internal sales of stock -- not on the year-over-year increase in value-per-share.
Index funds, pardner, index funds.
Also, per below comment, loosely put, you get taxed on dividends at your marginal income tax rate; on capital gains at the capital gains rate.
No one likes paying taxes, but the fairness issue is more with respect to the uber-rich paying 15% on most of their winnings for the year (on capital appreciation), while you and I pay 25% (on income).
Cheers.
UncommonSenz has said it well. We have fabulous opportunity as Americans, but only because we as a society finance a legal, physical, social and financial infrastructure that makes that opportunity possible.
And, as Monte intimates, if you're paying 25% tax on income from an investment, the income is probably dividends rather than capital gains. If not, you should be seriously thinking about firing your accountant. And, if your income is dividends, then McC's captial gains tax cut won't change your situation.
First, you DON'T get taxed for capital gains at 25%. You get taxed at no more than 15% (the upper limit of capital gains taxes under the booosh tax cuts).
Second, you have a modest account making $4,000. My daughter has a job making around $4,000. My tax increases (at MY rate of more than 20%!) because she is making money that must be counted. Why, then, should you NOT pay taxes on that INCOME that you are getting by risking money?
You get taxed at your income bracket for capital gains, which could be 35%, 31%, 15%, or nothing for low income folks. The 15% rate is for long term capital gains.
In case liberalloons is a paid troll, I won't reply directly. In either case, the logic is...well, terrible.
Asking those who earn the most to pay their fair share, especially on income accumulated, rather than earned through labor, is NOT punishment. This is a tired line. Removing an undeserved advantage is not punishment, it is simply fair. And in this case, the author wasn't even talking about removing an advantage...but merely rejecting the idea of ADDITIONAL undeserved benefits--only through a skewed prism would you equate not handing out huge amounts of unearned cash to those who don't need it with "punishment", as you have tried to do.
It's amazing that you would still try to defend trickle down, as if it wasn't clear to most Americans that nothing is trickling. Further consolidation of wealth does not a healthy economy make.
But the ultimate question is does the rich person (or any individual for that matter) utilize this this wealth better than the government? I say in most cases the answer is no.
This is my reasoning. Most of what government decides to spend money on is motivated more by culling favors and getting re-elected and gaining power. I don't think that motivation often results in wise expenditures. Do you?
You ask a question, then decide that the answer is no, then go on to explain how the answer was correct, since you answered yes.......
Anyways, let's see here. The govt spends money on MANY things that you don't even see. Clean Air. Clean Water. Safe airplanes. Safe flights over your house many times a day. Roads. Safety in your car. good food. schools for your children. Roads. our ENTIRE ECONOMIC SYSTEM!!!
You cannot have all these things without a govt providing them (private industry SUCKS at it!!!) and therefore taxes MUST be paid!
It's shocking Senator McCain came up with such a plan, especially after consulting with the likes of Carly Fiorina and Phil Gramm.
In the global economy of the 21st century, there is no "Trickle Down," there is "Trickle Out" ...out and far away...
http://faculty.chicagogsb.edu/austan.goolsbee/research/cps.pdf
According to Obama's Senior Tax Policy Adviser, a large percentage of the corporate tax burden is borne by WORKERS. Up to 40% of the corporate tax burden is borne through a stunting of wage growth for employees, and especially for production workers, uneducated workers, and union workers.
Capital gains taxation also feeds into this problem, with a significant portion of those taxes again being borne by the WORKERS.
The US Treasury published a report with the same findings in December 2007.
http://www.ustreas.gov/offices/tax-policy/library/ota101.pdf
So, Obama's plan to increase capital gains taxes and increase taxes on corporate profits would be expected to stunt Middle Class wage growth, and stunt job growth.
Again, these aren't untested hypotheses, they are proven through actual economic data from the US economy.
Obama has argued that the nominal corporate tax rate doesn't matter, because there are so many loopholes that the effective tax rate is low. And then he spins around and tells people that he's going to close every tax loophole in the code! Is this guy for real?
I seriously believe that the only reason Obama is able to get away with his ridiculous pandering and class warfare is that the average voter isn't smart enough to see through the house of cards, and that exposing it doesn't translate into a 10 second sound bite.
It's how politicians make a living. Of course none of it makes any sense, but when your constituency is economics illiterates, you say what you have to. He can tax whoever he wants to, but the middle class always ends up paying it anyway.
Well THAT'S a logical statement.
No matter what, the middle class pays. So there is no economic policy possible to help the middle class? Well, gee, thanks for shedding light on that.
You calling anyone "economics illiterate" is the height of irony.
The plan was that if the Corporations have to pay less taxes, then the workers will all get a share of the profits the Corporation keeps and wages will be increased.
That didn't happen. Wages didn't even keep up with inflation, but Corporate CEO's pay increased as much as 300%.
The GOP has been trying to scare workers into believing that if we tax Coporations we will loose our jobs, but if we let those at the top have all the money then they'll share some of it with us.
There needs to be a more equitable relationship between the CEO's and the workers. That is what made America strong and good. That is being Patriotic. That is putting Country First. What has happened to this Country since the Republican awakening? This is not Conservative...it's criminal.
Vote for a Strong & Good America! Vote Obama 08
CEO pay is a drop in the ocean.
Sure, there's nothing wrong with making it more "equitable", but it's 99% politics, and 1% economics.
Seriously, you guys are a wonder! You take one piece of a comprehensive tax policy and describe how it will 'ruin' our economy. But your argument is made null and void when you look at the big picture - ie job creation, etc.
On the other hand, your guys have actually WORKED TO WRECK the economy, so I think giving Senator Obama's policies a fair shot is probably a good move right now. If they fail, then we'll talk. As it is, we're halfway over a cliff thanks to the GOP's deregulatory stance - and we're not even sure we won't plunge to the ground by the time all is said and done.
You guys need a new act. Cutting taxes for the richest members of society just didn't work they way you wanted it to. It's time to live in the real world, and offer real solutions - not more rhetoric.
Well, Reaganonmics worked when it first started simply because the economy was such that it was viable. Products were still being made in America, and the jobs stayed there. Now, with the excessive de-regulation that has happened over the years, nothing there is nothing to "trickle down" to. And in any case, I think money is always left best in the hands of the middle class because they are the real foundation of the economy.
Wrong. Reaganomics never worked. They SEEMED to work due to a combination of factors. First was that ronnie raygun DOUBLED the OASDI tax, and then used it to offset the deficits he was running. The second was the fact that the economy was growing, mostly due to the fact that raygun spent MASSIVE amounts of money manufacturing the tools of war.
CONTINUED FROM EARLIER COMMENT
And so -
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 ( 22% savings).
The tenth now paid $49 instead of $59 (16% savings) (Note: the richest man gets the largest $ discount but the smallest % of savings!)
Each of the six was better off than before. And the first four cont i nued to drink for free. But once outside the restaurant, the men began to compare their savings.
"I only got a dollar out of the $20,"declared the sixth man. He pointed to the tenth man," but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"
"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"
CONTINUED ON NEXT COMMENT
very apt. good work.
The argument that the reduction in the capital gains will spur investments in the U.S. and free up capital is spacious. There is nothing from a curretn tax rate to stop an investor to bring investments into our markets. In doing so they will,on a long term gain ,get a reduced tax bill. The argument I am hearing now is by further reducing the rate it will bring new investments to the U.S. The real point is that for those investors with long term gain,if any in todays market, will cash those in and reinvest. Would they do this for the reduced tax or would they take their currents investments and look overseas for safer havens or more return? By reducing the tax we may actually drive investment out of our capital markets.
Exactly....
Most rich people I know (I know a few) are the cheapest SOB's on the planet. Any savings they would get are quickly stashed overseas. I'm sorry but the trick down theory has always been the rich pissing on the middle and poor classes.
One of the first thing American companies cut these days is the R & D departments. It costs too much and cutting sure makes the bottom line look impressive. I not sure I know of a single company that has increase their R & D budgets. All the CEO's (and other investors) are interested in is short term profits and F--k the future of the company.
That reminds me of the B-52 and the Joint Strike Fighter. Back in the 40s, Boeing won the contract to build the plane, and then spent all their OWN money on the R&D to design it. Once they had a final design and built the prototype, the USAF accepted it, and THEN paid them!
By contrast, Boeing was involved in the bidding for the F-35 Joint Strike Fighter. The govt asked several companies to build prototypes with their minimum requirements. The govt then paid each company that was involved in the bidding process (without even knowing who would make the plane finally!) for all their costs, plus a reasonable profit. Boeing lost the contract (which went eventually to Lockheed Martin) but was not only not out any money, but was AHEAD, since they had earned a profit on the deal!!
Tell me what's messed up with that?!?!?!?!?!?!?!
Our tax system is like:
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) pay $0
The fifth pay2 $1.
The sixth pays $3.
The seventh pays $7.
The eighth pays $ 12.
The ninth pays $18.
The tenth (the richest) pays $59.
That's what they decided to do. The ten drank every day and seemed quite happy with the arrangement, until the owner threw them a curve. "Since you are all such good customers, I'm going to reduce the cost of your beer by $20. " Beer now cost just $80.
They still wanted to pay their bill the way we pay our taxes, so the first four were unaffected, drinking for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
CONTINUED ON NEXT COMMENT...
On the other hand, the one who is richest is also getting the most out of the system, so the men who pay nothing are actually getting very little from the govt, while the man who is paying $59 is actually getting more than $70 back!
Yes, but that is becuse he worked the hardest....in most cases...or he worked the smartest....that is valid too.
Trickle down economics has proven itself almost as great a folly as communism. Americans need the Employee Free Choice Act passed ASAP, so that US Workers can form Unions and once again take charge of their destinies. Greedy Wall Street fat cats, including those that serve as McCain’s advisors, absolutely cannot be trusted.
http://www.freechoiceact.org
I call it tinkle down. The Republicans p## down our backs and call it rain. The key point is it helps the rich Republican base that still have their millions. How does this help in jpb creation it does not. Tie this to his mortgage plan that benefits the lenders and his health plan that benefits the insurance companies and you know why all he has left is hatred and ignorance to run on. Thanks John " Marley" McCain. You will be wearing the chain of ignorance, hate and fear around your neck for the rest of your political life.
70% of the counrty's GDP is made up of consumer spending. The top 10% of household earners make up 30% of all consumer spending. So why take money away from those who actually spend it?
Plus, majority of income earners that make over 250K, are business owners. Why punish those who provide wealth and jobs to others?
Under Bush, the economy has actually grown 20% with this trickle down effect. He can't be blammed for the consequences of the Clinton administration.
You mistake a fatal assumption. I have yet to meet that business owner making over 250K who can't wait to hire more people. Businesses across this country that fall into this category are setting budgets to force current employees to work harder and increase revenue at current or lower staff levels. I'm management in one of these companies. It makes me sick.
Trickle Down Economics is the biggest farce ever forced upon the American working class. This is the reason the republican party is going down.
The reason republicans will lose is becuase people want their income redistribution checks for 5,000 dollars or how ever much. That is no where near enough to successfully have a trickle up effect especially with the lower social classes.
You made the point for me about businesses. Give them finacial relief and let them keep more of the money they earn to hire new people, expand, and lower prices.
Its not a hard concept to understand. People who are tight on money aren't the ones going out and buying stocks and products. When they get their check, they are going to bank it or use it to pay bills.
If we give those people relief, plus give people with money relief, then the economy will bounce back.
Plus theres no way Obama can introduce half the things he wants to do and expect the upper class to pay for it all.
If in fact your statistics cited in paragraph one are current, please excuse the other 90% of us for having to pay our bills first. I would like to see proof of these stats.
Nice try... Your propaganda looks nice, too bad it's all lies.
Every single claim you make is bogus. Find a subject that you actually know something about.
Wrong, we had the best economy in the last 28 years under Clinton who raised taxes. The rest of the 28 years (since 1980) we have been trickled on by Republican tax cuts that benefit the wealthy. Clinton also had a budget surplus for the last two years as opposed to the Republicans who have run increasingly large deficits every year of their administrations.
Not only should we raise the top rate on income earners, we should also re-enact the tax on stock transactions - there was a blog topic on this a couple days ago - which may help to slow the speculation and wild gyrations in the stock market.
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