woensdag 22 september 2010

Taxes for the rich.

Today in the US, there is a lot of debate between Republicans and Democrats, and between "strong" Democrats and "weak" Democrats. It all about tax cuts whoop tie do. When Bush came to office, he did a number of things, one was take vacation, another was tax cuts. To be fair, he not only gave them to the rich but also to the middle class (I do not mind that because the middle class will consume most of that which will have a positive effect on the economy). Now the duration of these tax cuts are coming to an end. But not if the Republicans have anything to say about it. They want to extend the tax cuts for the rich. This also goes for the majority of the so called "weak" Democrats because those people tend to look out more for the Republican side.

In this post I shall be explaining why giving tax cuts to the rich is in every way a very stupid thing to do, and why the defenders of the tax cuts for the rich are lying to you.

First I'll just explain how the tax cuts work because there seems to be a lot of confusion about it. What a lot of people think is a tax cut works like this. you pay 1000 dollar in taxes, you get a 10 percent tax cut, so you will only have to pay 900 dollars. So what happens is practically that the government just takes less money from you. But in reality it works more like this. You pay 1000 dollars in taxes and get a 10% tax cut and you get that refunded by the government. When you look at this it seems like its the same thing. But it turns out it is totally different. It would seem totally logic for the government to assume alright we got 1000 dollars but we give them a tax cut so we give them 100 dollars back and add 900 dollars to our own budget. But what they do is, they add a 1000 dollars to their budget and loan the 100 dollars from a bank, often the central bank, and give that to the tax payer. Because most people do not do adequate research, they just think that tax cuts pay for themselves.

The (mind my hipster language) ironic thing is that the Republicans, the deficit hawks, the "hayeks", those who say the defecit is Americas #1 problem actually want to continue these tax cuts that only add to the deficit.

If the tax cuts for the rich are continued, these tax cuts for 2% of the population will add approximately 700 billion dollars to the deficit.

Just watch the first two and a half minutes.

Now let me tell you something about class warfare before I continue my rant on the tax cuts.

Because I find it interesting, because, I think there actually is class warfare in the country. It's just that the rich are doing it to you instead of the other way around. So lets take a look at some numbers, Here is the share that the top 10% of the country has had as a share of the national income.

As you see the top 10% are doing great until the great depression, then we have an enormous crash. Then things kind of even out, but after a while the class warfare begins again, and the rich start accumulating a higher percentage of income, then what happens in 2007-2008? Another giant crash. But the top 10% is still kind of broad, what if we narrow it down to top 1 percent.

Share of National Income for Top 1%
1915          18%
1928          24%     This is just before the great depression.
1953-1980  9%-11% The glory years of America.
2008          24%     Guess what happened.

But what the rich might not realize is that in order to sell your products your workers need to have enough money, but during the last couple of decades, when you adjust for inflation these workers have hardly had a pay raise. This is one of the structural faults of the system.

For example from 1980-2005
80% of increase in national income went to the top 1% and stayed there, I do not have the facts to back it up but I'm pretty sure we can confidently guess where at least 15% of the remaining increase in national income went.

So that trickle down system where rich get money and create jobs etc DOES. NOT. WORK. You can safely say it gushed up instead of trickled down. Perhaps its more correct to say that the middle class had class war committed upon them instead of the other way around.

Countries like France, Spain, but also Nicaragua and Guyana have more equality that the US. We used to call those countries "third world countries" because they had less equality than us. Now we are lower than them.

And I am not saying that all of this is just because of the tax cuts, but it is nothing less than fair for us to make the rich pay just as much taxes, because in the current state the most wealthy people in America pay less taxes than their secretaries.

So lets continue on the tax cuts.

The Republican argument can be divided into three parts, Small businesses, incentive and job creation.

Small businesses.

They say that If there are less tax cuts for the rich there will be less money for small businesses, and that those little companies will start to struggle. Unfortunately they forget to mention that over 95% of small business owners are not in the top percentage of the country. Over 95% of small businesses will not be affected negatively if these tax cuts come to an end.


A well known argument is that if taxes are increased, there will be less incentive because less gain is to be made. People often say that our policy should be changed from democratic to Ronald Reagan's (a former US president) fiscal conservative policy. And the strange thing is that me, being what most people would consider a far lefty, totally agree with that. Because what clueless people seem to forget is that their great hero Reagan, who lowered taxes and made the economy boom, set taxes that were way higher that that they are now. These people do not realize it themselves but they are actually advocating for higher taxes, because when we have taxes that are sometimes 15% for huge amounts of income, were 50% back in the days of conservative hero Ronald Reagan. And do not forget before that, when the economy was booming, there were marginal tax rates of nearly 90 percent and it turns out that small businesses were doing great at that time.

A theory of mine is that perhaps because of the high tax rates people are more stimulated to leaving the wealth inside their company because they they would not have to pay that tax. And when its in the company it is more often used for new business incentives such as expanding and creating new jobs. But I am no economist so lets carry on.

Job creation.

People often call the rich people "job creators" and we should not punish them because then they will not continue to create jobs. And that is partially true, a New York Times article noted that in the past few years when trillions of dollars were given to the wealthiest of America, 1.9 trillion dollars in jobs were created. IN OTHER COUNTRIES. They took the wealth and did the expectable and invested it abroad, such as factories in china. And I consider myself a fair guy and yes those people deserve jobs just as much as Americans, but, do not say that giving tax cuts to the rich stimulates the economy because thats a complete lie.

According to studies, giving tax cuts to the rich is pretty much the worst thing you can do to stimulate the economy. Actually raising taxes is better because the money ends up with the government that, in most cases, spends it wisely. So then the economy grows with more that just the amount of money that was added. It is called a multiplier effect, but as it turns out, giving money to rich gives a 0.25 multiplier, that means that if you give 100 dollars to a rich person, 75 dollars leaves the American economy. But if you raise the taxes and use them as a stimulus package such as obama did, more money will be added because if you spend money wisely there will be a multiplier higher of one, therefor the GDP increases and overall wealth increases. But with these tax cuts to the rich, the money only does three things.

- It goes abroad.
- It just sits in the bank
- They do with it what is most profitable and do things like speculate, and that just brings greater risk to the economy.

So it basically comes down to this: vote Republican if you are rich, but strangely the Republicans still manage to get way more than just a couple percent.

I guess people vote with the assumption that they will get rich sooner or later in life, instead of voting for the party that will give them the larger social mobility to make that actually possible.

I realize this might not be an adequate defense of suspending the tax cuts for the rich so please post your arguments in the comments.

In the upcoming days Ill make a new post arguing how it is fair for the rich to pay more than the less fortunate, but as with everyone, I can only stay focussed for so long.


13 opmerkingen:

  1. everybody, equal share for everyone!!!

  2. Ron Paul for example, there are also many fiscal advisors including some on president Obama's commision.

  3. I agree with your main concept here and everything, but it's kind of white noise at this point. This 'trickle-down' system's been pretty much condemned since halfway through bush's term. I'm definitely looking forward to something being changed someday though.

  4. I'm going to need an hour or two to process all this..

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