By Jack Jodell, Aug. 22, 2011
Below is part two of a letter sent by a large group of clear-thinking and unselfish millionaires calling for higher taxes on their incomes. The letter was sent July 21 to the Republican House and Senate membership, and can be viewd in its entirety over at http://patrioticmillionaires.org/…
The Republican Party and conservative ideologues no longer even attempt to justify tax cuts to the wealthy in terms of normal macroeconomic policy or principles. Instead, they contend that tax cuts to the wealthy are necessary to encourage work and to stimulate “entrepreneurial risk-taking.” According to the Right, taxes reduce economic growth because they tax “job-creators,” “work,” and “entrepreneurship” thereby reducing “economic incentives” to “create wealth” and “jobs”. However, despite the empirical evidence to the contrary just reviewed, the proclaimed direct connection between taxes and work and taxes and economic growth presents a serious conceptual problem: It is not derived from any obvious economic theory or economic principles. In fact, no credible economic study has ever been undertaken or relied upon to establish these connections in any remotely scientific fashion.
Wealthy people receive two kinds of income: 1) earned income from their occupations and 2) unearned income from investments and inheritance. Studies show that, contrary to conservative rhetoric, for people who receive earned income, taxes may actually encourage work because such people may have an after-tax income target which causes them to work harder to make up the income lost to taxes. Moreover, because, by definition, ‘unearned income’ is received without working, taxes would have no effect one way or the other on their incentives to work.
At best, it seems that the direct relationship posited by the Right between taxes and work is indeterminate or may exist only under special circumstances or with the caveat of “all things being equal.” But in the real world, general conditions overwhelm special cases and all things are never equal. As we have seen, whatever positive or negative relationship exists between taxes and work and taxes and economic growth, it is likely to be overwhelmed by other effects such as economic conditions of the business cycle or other economic relationships.
It is similarly unclear that taxes have any effect on individual entrepreneurial risk taking. As we have seen, at some point wealthy people save most of their income rather than consume it. Saving leads to investment. However, wealthy people do not as a rule invest their savings (and, hence, their incomes) directly in new businesses or in job-creating activities. They may invest some of their wealth in this fashion; but most of their wealth is invested in financial assets (including U.S. government obligations (!)), not in new businesses, and is invested globally rather than in the U.S.
In general, the only conclusions which economic thinking supports are: 1) tax cuts stimulate personal consumption expenditures and 2) tax cuts stimulate investment in financial assets. As we have seen, for the wealthiest Americans, the effects of tax cuts on personal consumption expenditures are minimal, if any, and increased investments are typically in financial assets not directly in “job-creating activities.” Again, even if there were minimal job creation effects due to the increase of investment in financial assets, these would – – if they exist at all – – be overwhelmed by changes in economic conditions in the business cycle affecting capital investment and other economic relationships. In conclusion, because work, risk-taking and job creation are affected by a multitude of factors, at best, the effects of taxes on incentives is indeterminate without clear scientific findings to the contrary – – systematic study of which has never been attempted.
Whatever the alleged effects of taxes on “incentives,” the incentives have nothing to do with or have no appreciable effect on aggregate supply, so-called “supply-side” effects. In economic thought, aggregate supply is the conceptual counterpart to aggregate demand and has a very precise meaning in the economic literature: Aggregate supply relates to the economy’s overall potential to produce goods and services and to produce economic growth. It is usually expressed as a potential growth rate of the economy at full employment levels of activity – – of which principal interest is the long-run, non-inflationary potential growth rate of the economy. Normally, determinations about the potential growth rate of the economy assume constant technology and are dependent on two factors: growth of the labor force and growth of labor productivity. Thus, if the labor force expands by 1% and labor productivity increases at 2 ½%, the economy can grow in real terms at a non-inflationary, long term rate of 3 ½%. The goal is to keep the growth of labor productivity as high as possible, so that the potential rate of growth is as high as possible (as the growth of the labor force changes slowly and is dependent on demographic factors over which there is little control). Labor productivity is a function primarily of the level of training and education of the labor force and of capital investment. Capital investment, in turn, is a function of interest rates, returns on investment and aggregate demand growth.
Tax cuts, in theory, can increase the pool – – and, therefore, the supply – – of investible funds flowing to the financial markets which, also in theory, could affect interest rates. Such effects on interest rates, if any, through individual tax savings would likely be highly diluted by the myriad uses which would be made of such funds. Accordingly, in general, the effects of tax cuts on interest rates would be small in comparison to the other more traditional (and dominant) influences on interest rates including general credit creation of the financial system and actions by the central bank to control interest rates. Other than small, indeterminate effects on interest rates, nowhere do tax rates – – and associated cuts – – to the wealthy figure, even in an inconsequential way, in the labor productivity story. Moreover, since, by definition, supply-side tax cuts are never paid for, the money necessary for the government to finance them must be borrowed, thereby off-setting entirely any interest rate reduction effects. Thus, it is difficult to see how taxes and various incentives attributed to them can affect aggregate supply. The so-called supply-side connection between tax cuts and growth, let alone job creation, is dubious at best.
The above analysis demonstrates that “supply-side economics” or “supply-side” tax cuts as applied to the top 1% are, at best, ineffective policies for stimulating economic growth either on the aggregate demand side or on the aggregate supply side of the economy and, at worst, are disastrously counterproductive because of unwanted – – but entirely foreseeable – – negative feed-back fiscal effects. On the demand-side and as a policy for stimulating the economy, they are ineffective because the top 1% saves an overwhelming proportion of their income, rather than spending it on personal consumption and, hence, adds nothing to aggregate demand.
On the supply-side, other than interest rate effects, proponents of supply-side tax cuts lack even any conceptual framework in modern economic thought which explains the relationship between tax cuts and the potential full employment growth rate of the economy and how changes in taxes change labor productivity or capital investment. Interest rate effects would be completely off-set by borrowing necessary to pay for the tax cuts. Moreover, and in any event, the top 1% invests a disproportionate amount of what it saves in financial assets and not directly in “entrepreneurial” or “job creating” activities or invests in financial assets outside the U.S.
In sum, the conservative economic orthodoxy that trumpets the value of tax cuts for the very wealthy borders on an intellectual fraud of the highest order.
IN LIGHT OF THE NEARLY NON-EXISTENT EMPIRICAL AND CONCEPTUAL SUPPORT FOR SUPPLY-SIDE ECONOMICS AND SUPPLY-SIDE TAX CUTS, ALLEGIANCE TO THESE IDEASTRANSCENDS RATIONALITY. TAX CUTS TO THE TOP 1% PRODUCE LITTLE OR NO ECONOMIC GROWTH AND DISASTROUS BUDGET CONSEQUEENCES. IT IS CRITICAL THAT WE END THE PROPAGATION OF ECONOMIC POLICY FALSEHOODS WHICH HAVE LED THE COUNTRY TO THE BRINK OF ECONOMIC RUIN.
WE REPEAT: IN LIGHT OF THE ECONOMIC EMERGENCY CREATED BY THE FINANCIAL CRISIS AND THE SQUANDERING OF THE SURPLUS WHICH COULD HAVE BEEN AVAILABLE TO CUSHION BOTH THE COSTS AND FALL- OUT OF THE FINANCIAL CRISIS OF 2008 AND SUBSEQUENT ECONOMIC COLLAPSE, THE BUSH TAX CUTS MAY BE CONSIDERED THE GREATEST SINGLE ACT OF ECONOMIC MISMANAGEMENT IN THE HISTORY OF THE COUNTRY.
A Word About History
Although beyond the scope of the specific policy position of the Patriotic Millionaires – it is important to put the current debate in a broader historical context. IN THE HISTORY OF IDEAS, KNOWLEDGE SHOULD PROGRESS WHILE OUT-OF-DATE OR CLEARLY DISPROVEN IDEAS SHOULD FALL TO THE WAYSIDE. MUCH OF THE COUNTRY’S POLITICAL, ECONOMIC, AND SOCIAL HISTORY IN THE 20TH CENTURY HAS CONSISTED OF REJECTING THE ADVERSE SOCIETAL AND HUMAN EFFECTS OF JAISSEZ-FAIRE CAPITALISM AND FREE MARKET FUNDAMENTALISM – A DOMINANT IDEOLOGY IN THIS COUNTRY IN THE 19TH CENTURY AND THE EARLY PART OF THE 20TH CENTURY – AND GRAPPLING WITH NONE OF THE MORE OBVIOUS FLAWS AND DEFICIENCIES OF MARKET CAPITALISM. THUS, IN THE HISTORY OF IDEAS, THE REVIVAL OF LAISSEZ-FAIRE CAPITALISM AS AN IDEOLOGY IS SOMEWHAT SURPRISING.
TODAY, “LAISSEZ-FAIRE’ (UNDER THE MODERN, AMERICAN RUBRIC “TRICKLE-SOWN ECONOMICS”) POSITS THAT CONCENTRATION OF WEALTH IN THE HANDS OF AN ELITE FEW IS BOTH INEVITABLE AND SOCIALLY POSITIVE. IT IS INEVITABLE, BECAUSE MOST CAPITAL NOW RESIDES IN THE HANDS OF THE FEW AND CAPITAL MARKETS ARE FAR LESS COMPETITIVE THAN LABOR MARKETS AND, THEREFORE, THE ECONOMIC RETURNS TO CAPITAL ARE FAR GREATER THAN TO LABOR. IT IS SEEN AS POSITIVE, BECAUSE WEALTH CONCENTRATION IS BELIEVED TO BE THE PRINXIPAL “ENGINE OF PROGRESS” AND ALL ECONOMIC PROGRESS DUE TO THE EFFORTS OF THE WEALTHY. IN OTHER WORDS, WEALTH CREATED BY, OF, AND FOR THE TOP 1% WILL “TRICKLE-DOWN” TO THE REMAINING 99%.
Today, we seem to be immersed in a Second Gilded Age and a “cult of wealth” in which everything in society, politics, popular culture, (and yes, tax cuts) is by, of, and for the top 1%. You and your political colleagues are the principal proponents of trickle-down and the cult of wealth – – despite the overwhelming accumulation of knowledge in all social scientific fields (including the economics field) linking wealth inequality with every social pathology and dysfunction in modern society, and despite the fact that the history of world civilization has shown such societies to have only one inevitable – – and bad – – end.
We ask that, in this moment of reflection, in the name of decency and reason, and for the sake of the country, you do what is right.
The Patriotic Millionaires
There you have it, folks. In one fell swoop, a large group (200!) of hands-on, self-made millionaires has completely destroyed the fallacies of the hypocritical and selfish Ayn Rand and the highly errant philosophies of economic theorist Milton Friedman. These millionaires are not crackpots or wild-eyed idealists: they are ECONOMIC REALISTS who have profited from our economic system and know it as well as its flaws inside and out.
HAVE YOU BEEN LISTENING, TEA PARTIERS? HAVE YOU BEEN LISTENING, ERIC CANTOR? OR JOHN BOEHNER? OR MITCH McCONNELL? OR DICK ARMEY? OR GROVER NORQUIST? OR GEORGE W. BUSH? OR PAT BUCHANAN? OR MITT ROMNEY? MICHELE BACHMANN? RICK PERRY? ALLEN WEST? GLENN BECK? SEAN HANNITY? BILL O’REILLY? DICK CHENEY? RUPERT MURDOCH? ROGER AILES? MIKE HUCKABEE? TIM PAWLENTY? PAUL RYAN? RUSH LIMBAUGH? LOUIE GOMERT? HERMAN CAIN? THE KOCH BROTHERS? OR ANY OF YOU OTHER NUMBSKULL PROPONENTS OF FREE MARKET, TRICKLE-DOWN ECONOMICS?
YOUR THEORY WAS WRONG – FROM THE BEGINNING – IN THE 1920s – THE 1980s – THE 1990s – THE 2000s- NOW – AND FOREVER INTO THE FUTURE – WRONG, TOTALLY, UNQUESTIONABLY, THOROUGHLY – WRONG!!!
NOW WHICH ONE OF YOU STUBBORN, MISGUIDED, SELF-CENTERED IDIOTS WILL BE THE FIRST TO COME TO THEIR SENSES, ADMIT YOUR MISTAKE, END ALL THE OBFUSCATION, STALLING, OBSTRUCTIONISM AND UTTER NONSENSE, AND AGREE TO RAISE TAXES ON THE WEALTHIEST AMERICANS?
FACTS ABOUT MILLIONAIRES:
1. Only 375,000 Americans have incomes over $1 million.
2. BETWEEN 1979 AND 2007, INCOMES FOR THE WEALTHIEST 1% OF AMERICANS GREW BY 2 8 1 %!
3. DURING THE GREAT DEPRESSION, MILLIONAIRES HAD A TOP MARGINAL TAX RATE OF 68%!
4. IN 19663, MILLIONAIRES HAD A TOP MARGINAL TAX RATE OF 91%!
5. IN 1976, MILLIONAIRES JAD A TOP MARGINAL TAX RATE OF 76%!
6. TODAY, MILLIONAIRES HAVE A TOP MARGINAL TAX RATE OF 35%!
REDUCING THE INCOME TAX ON TOP EARNERS IS ONE OF THE MOST INEFFICIENT WAYS TO GROW THE ECONOMY ACCORDING TO THE NON-PARTISAN CONGRESSIONAL BUDGET OFFICE!
44% OF CONGRESS PEOPLE ARE MILLIONAIRES. THE TAX CUTS WERE NEVER MEANT TO BE PERMANENT!
LETTING TAX CUTS FOR THE TOP 2% EXPIRE AS SCHEDULED WOULD PAY DOWN THE DEBT BY $700 BILLION OVER THE NEXT 10 YEARS!!!