Why Tax cuts on the super rich does not lead to economic growth.
Psychologically when you are facing huge taxes, you will be motivated to bring in more money so that whatever taxes the government imposes upon you, you will end up not affected by it because you made enough money to go home happy without feeling that your profit has decreases because of taxes in any significant way that should make you feel you didn’t earn what you were supposed to earn from your business.
If what you earn from your business is unchecked, or unopposed, that is, nothing decreases it, you will immediately settle for whatever income you are receiving at the moment, with no desire to make anything become bigger. You will always feel guilty if you are making that kind or amount of money without contributing at all to the country which you were able to accomplish all this because of it. Running away from this guilt leads to psychosis or delusions. Some of which may include denial of reality. It is not that you do not deserve to be rich. It is how could you enjoy being that rich when the overwhelming majority of not just humanity but people of your own developed country will consider all their financial problems solved if you throw at them a hundred thousand dollars. How could you feel good because of anything when you did not play your part in decreasing human suffering, at least that which is present in your own country, when there is a chance that you can significantly contribute to decreasing it, without going through any bad effect or consequences concerning your financial freedom. Without your financial freedom being negatively affected in any degree that cannot be regarded as negligible. Charity is not the answer. You don’t have enough time to engage in charity enough to cover all the financial problems that you can solve with your money. And Charity addresses a certain niche or demographic. It does not address the majority of people in your own country. It does not necessarily cover the entire middle class. And it is random and won’t change anything concerning the well being of the entire country in the long term, and is random and will be extremely variable from one rich person to the other, and will be dependent upon how kind your heart is, which is not guaranteed to be present in all super rich people out there, leading to whatever contribution you will make to give back to society not become added to an equivalent contribution back to society from all other super rich people out there, and thus reducing the amount of help that results from your gracious payments, because when becoming singled out, they don’t change enough. Only when everything that you can pay back to society is added to what all the other rich people are able to pay back to society will the resultant amount become huge enough to make a significant and huge positive effect and impact on the developed country that you are a citizen of.
Again, if you are not giving back to society at all, that is, you pay zero percent of your income and profits from your big business in taxes, you will feel guilt on an unconscious level, that will hold you back from expanding your business enough to increase your profits, because deep down inside you feel you are taking more than your fair share of financial freedom, and there is no point in growing your business any further.
But if the country is taxing you severely enough, you will feel that no amount of profit you make will be enough, and there would be a continuous motive, interest, desire, and urge to expand your business, and grow your big business further to no end, because the more your business grows, the more you pay in taxes, and the more you will earn in profit as well, but not enough increase in profits that might make you settle and stop raising your standards. And that makes you feel important, and makes you feel you are contributing enough to society by any kind of growth, expansion, increase, and improvement that occurs in your Business.
This is from a psychological point of view or perspective. If you do not think that this should be the basis upon which our politicians should base their decisions upon, then the following here should cover that aspect of this discussion.
The following is from an article by Patrick W. Watson on Forbes.com
Theory vs. Reality
The Republican plan’s centerpiece is a reduction in corporate tax rates from a 35% top bracket to only 20%. That would put the U.S. more in line with other countries.
What you seldom hear is that most other developed countries also have value-added tax (VAT), a kind of consumption tax. The U.S. doesn’t. Our tax system will remain different, and not necessarily better, under the new proposal.
Anyway, the theory is that lower tax rates will entice businesses to bring back operations they currently conduct overseas. They will build new factories and hire more U.S. workers. Those workers will spend their higher incomes on consumer goods, and we’ll all be better off.
Unfortunately, that thinking has several flaws.
For one, as we saw in the NFIB Small Business Economic Trends report, business owners say that finding qualified workers is their top challenge right now. Reducing corporate tax rates won’t make new workers magically appear, nor will it improve the skills of those already here.
What increasing labor demand might do is spark that inflation the Federal Reserve has wanted for years. There’s also a good chance it could spiral out of control, forcing the Fed to hike interest rates even faster than planned—which could offset any benefit from the tax cuts.
Fortunately, such added labor demand will appear only if businesses respond to the lower tax rates by expanding US production capacity.
Will they? Let’s ask.
A Corporate Tax Cut Won’t Incentive Businesses to Expand
This month, in one of its regular business surveys, the Atlanta Federal Reserve Bank asked executives, “If passed in its current form, what would be the likely impact of the Tax Cuts and Jobs Act on your capital investment and hiring plans?”
Only 8% of the executives surveyed said the bill would make them increase hiring plans “significantly.” Only 11% said they would significantly increase their capital investment plans. A solid majority answered either “no change” or “increase somewhat.”
Other surveys reached similar conclusions.
White House Economic Advisor Gary Cohn had an awkward moment last Tuesday at a Wall Street Journal CEO Council meeting. Sitting on stage to promote the tax cuts, Cohn watched as the moderator asked the roomful of executives whether their companies would expand more if the tax bill passed.
When only a few hands rose, Cohn looked surprised and said, “Why aren’t the other hands up?”
So maybe they were distracted or needed a minute to think. Fair enough. A few hours later, White House Economist Kevin Hassett appeared at the same event and asked the same audience the same question.
He got the same result: only a few raised hands.
Higher Profit Margins Will Land in Executives’ Pockets
None of this should surprise us. Tax rates are only one factor businesses consider when deciding to expand.
The far more important question is whether consumers will buy whatever the new capacity produces.
Think about it this way: if you’re a CEO and you have difficulty selling your products profitably now, why would lower taxes make you produce more? Even a 0% tax rate is no help if you lack customers.
Former Brightcove CEO David Mendels explained how big companies view this in a November 10 LinkedIn post.
A tax cut for corporations will increase their profitability. Why we should believe that this increase in profitability will lead to wage increases when we have already seen that increases in profitability over the last 10 years did not, but rather went to stock buybacks and dividend increases that benefitted the investors?
As a CEO and member of the Board of Directors at a public company, I can tell you that if we had an increase in profitability, we would have been delighted, but it would not lead in and of itself to more hiring or an increase in wages. Again, we would hire more people if we saw growing demand for our products and services. We would raise salaries if that is what it took to hire and retain great people. But if we had a tax cut that led to higher profits absent those factors, we would ‘pocket it’ for our investors.”
By “pocket it,” Mendels means executive bonuses, share buybacks, or higher dividends. That’s what 10 years of Federal Reserve stimulus produced. A corporate tax cut would likely have a similar effect.
All Options Left Are Bad
I don’t think the House and Senate can agree on any significant tax changes. The two chambers have different political incentives they probably can’t reconcile.
So I think we’ll be stuck with the current tax system. The economy will limp along like it has been and eventually go into recession. The hope-driven asset bubble will pop, hurting many investors.
If I’m wrong and the GOP plan passes in anything like the current form, we will get higher deficits but little additional growth. The tax cuts will flow to asset owners and shareholders, probably blowing the market bubble even bigger. That will make the inevitable breakdown even more painful.
Clearly, we need a better tax system. Other reform ideas exist. Those ideas apparently aren’t attractive to Congress, though. So we’re stuck with either the current broken system or a modified one that will…
put the government even deeper in debt
blow the market bubble bigger
all without helping the economy grow.
Neither scenario is attractive, I know. But those are our choices. You can only pick one.
Or rather, Congress will pick one for you. Let’s hope they choose wisely.
The following is from an article from the Centre on Budget and Policy Priorities website:
History shows tax cuts for the rich are far from a surefire way to boost growth — and that higher taxes don’t preclude robust economic and job growth.
Job growth, economic growth, and small business job creation were much weaker following the George W. Bush tax cuts, which gave the biggest boosts to high-income households, than after the Clinton tax increases on high-income households. (See graph.)
After the Bush tax cuts for the very highest-income households expired at the end of 2012, the economy continued to grow and add jobs steadily.
In a comprehensive review of the literature, economists Bill Gale and Andrew Samwick conclude that “growth rates over long periods of time in the U.S. have not changed in tandem with the massive tax changes in the structure and revenue yield of the tax system that have occurred.”
When Kansas enacted large tax cuts overwhelmingly for the wealthy, Gov. Sam Brownback claimed the tax cuts would act “like a shot of adrenaline into the heart of the Kansas economy.” But rather than seeing an economic boom since the tax cuts, Kansas’ job growth, economic growth, and growth in small business formation have lagged behind the country as a whole.
These simple relationships aren’t proof that tax cuts are bad for growth, or that tax increases cause growth — many other factors affect the economy at the same time. But they dispel claims that large tax cuts are a silver bullet for the economy.
Research Doesn’t Support “Supply Side” Claims
Careful empirical research finds that tax cuts on high-income people’s earnings or their income from wealth (such as capital gains and dividends) don’t substantially boost work, saving, and investment — contrary to overstated “supply side” predictions.
High-income people are unlikely to increase their work hours due to cuts in their tax rates, research shows. “Overall, evidence suggests [high-income Americans’] labor supply is insensitive to tax rates,” Leonard Burman, co-founder of the Tax Policy Center (TPC), notes.
Tax cuts on capital gains and dividends flow overwhelmingly to the wealthiest filers in the country, but do little to boost saving and investment. The non-partisan Congressional Research Service (CRS) concludes that capital gains tax rate changes appear to have “little or no effect” on private saving.
Tax economist Joel Slemrod concludes that, “there is no evidence that links aggregate economic performance to capital gains tax rates,” and TPC’s Burman has explained, “there’s no obvious relationship between capital gains, tax rates, and the rate of economic growth.”
The Bush tax cuts included sharp tax cuts on capital gains and dividends that proponents said would spur immediate business growth, but a recent study found “empirical evidence that the 2003 tax cuts had little impact on investment or employment.” And, in the words of The Wall Street Journal, Federal Reserve economists found the 2003 tax cut “was a dud when it came to boosting the stock market.”
Tax cuts for high-income people also aren’t an effective way to encourage entrepreneurship. In fact, on balance, research suggests that “higher tax rates are more likely to encourage, rather than discourage, self-employment,” CRS concludes. One reason why: taxes may reduce earnings volatility. The government bears some of the risk of a new venture by allowing tax deductions for losses and, in return, it taxes the profits of successful businesses.
These research findings also square with renowned investor Warren Buffett’s observation:
“I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 [they are now 15 percent] — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.”
Deficit-Increasing Tax Cuts Likely Hurt Growth
Tax cuts for the rich are likely to hurt growth if they increase deficits or are paired with cuts to investments that help working families and the economy.
Most economists conclude, based on empirical studies, that large increases in deficits reduce national saving, meaning less capital would be available for investment in the economy and interest rates would rise. While interest rates — and the cost of government borrowing — are currently low (and are projected to stay low in the near term under current policies), they would not necessarily stay low if large, long-term tax cuts were enacted without paying for them.
The drag from deficit-increasing tax cuts for the wealthy on the economy is a key reason why the non-partisan Congressional Budget Office estimated that allowing the high-income Bush tax cuts to expire and using the savings to cut the deficit would improve long-term economic growth.
Financing tax cuts for the rich by cutting productive public investments that help support growth, such as education, research, and infrastructure, can also harm the economy, research suggests.
A growing body of research suggests that investments in children in low-income families not only reduce poverty and hardship in the near term, but can have long-lasting positive effects on their health, education, and earnings as adults. Cutting programs that support low-income families to fund tax cuts for the rich could therefore also have negative long-run economic impacts.
By contrast, well-designed tax reform could spur growth by eliminating or scaling back inefficient tax subsidies and raising additional revenues to invest in national priorities and reduce deficits.
The following is an article by Derek Thompson on the Atlantic website:
Here’s a brief economic history of the last quarter-century in taxes and growth.
In 1990, President George H. W. Bush raised taxes, and GDP growth increased over the next five years. In 1993, President Bill Clinton raised the top marginal tax rate, and GDP growth increased over the next five years. In 2001 and 2003, President Bush cut taxes, and we faced a disappointing expansion followed by a Great Recession.
Does this story prove that raising taxes helps GDP? No. Does it prove that cutting taxes hurts GDP? No.
But it does suggest that there is a lot more to an economy than taxes, and that slashing taxes is not a guaranteed way to accelerate economic growth.
That was the conclusion from David Leonhardt’s new column today for The New York Times, and it was precisely the finding of a new study from the Congressional Research Service, “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945.”
Analysis of six decades of data found that top tax rates “have had little association with saving, investment, or productivity growth.” However, the study found that reductions of capital gains taxes and top marginal rate taxes have led to greater income inequality. Past studies cited in the report have suggested that a broad-based tax rate reduction can have “a small to modest, positive effect on economic growth” or “no effect on economic growth.”
Well into the 1950s, the top marginal tax rate was above 90%. Today it’s 35%. But both real GDP and real per capita GDP were growing more than twice as fast in the 1950s as in the 2000s. At the same time, the average tax rate paid by the top tenth of a percent fell from about 50% to 25% in the last 60 years, while their share of income increased from 4.2% in 1945 to 12.3% before the recession.
Here are two graphs of the top 0.1% and 0.01%. The first shows average tax rates since 1945 — down, down, down. The second shows share of total income since 1945 — up, up, up.
In short, the study found that top tax rates don’t appear to determine the size of the economic pie but they can affect how the pie is sliced, especially for the richest households.
The paper is a good reminder to be humble about taxes as a tool for growing the economy. They remain, above all, a tool for collecting revenue and tweaking incentives for specific economic behavior. Congress has cut tax rates repeatedly over the last 60 years, while the country and the global economy have undergone considerable changes that probably had a greater effect on growth. For years after World War II, the U.S. was a singular economic powerhouse with an enormous manufacturing base that employed nearly 40% of the economy. For the last decade-plus, the economy has grown at a considerably slower pace and the gains have accrued to a smaller and more elite share of the economy.
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