Two debates down. Two more examples of how clueless politicians can be on basic economics.
It’s understandably tough to debate economic policy in two-minute blurbs and equally limiting retorts. After all, even adult-aged students in a basic economics course spend days discussing, reading, and learning a single chapter from their textbooks.
But our elected leaders aren’t students. They are expected to be our best and our brightest. Yet, we still see one party making the same arguments against “tax cuts for the rich” and “trickle-down theory,” along with equally unfulfilling ripostes from their opponents.
I can understand why so many are misled. Politicians, pundits, and media personalities get the limelight and politicians, pundits, and media personalities are the ones who invented and propagate the term “trickle-down” to describe their understanding of the philosophy behind tax cuts.
Don’t believe me? I challenge anyone to name an economist, any economist, who has advocated a “trickle-down” theory. (Let me save you some time: there isn’t one.)
What you will find are political advocates, like FDR’s speechwriter Samuel Rosenman and our current President who describe how proponents of tax cuts purport to help “wealthy Americans” in the hopes that their prosperity will then filter down to the rest of us mere peasants, as our Lords see fit.
Unfortunately, there are too many Republicans and Conservatives who advocate the same, perpetuating the ignorance. I used to be one of them.
That’s not how it works, however. Companies, and wealthier individuals, need the incentive to invest in economic capital, research and development, expansion, and employees before receiving the reward of profitability that is supposed to “trickle down.”
What we find throughout our economic history is that tax cuts have actually brought more money into the Treasury by providing that incentive. I know, it may seem counter-intuitive, but it is logical.
During the soaring income tax rates under Woodrow Wilson, which reached as high as 73%, savvy “rich people” did what they do today, what they’ve always done, and what any intelligent, rational person would do: they put their money into legal tax shelters such as tax-exempt municipal bonds.
Today, there are even more legal tax shelters (I continue to emphasize “legal” because you can’t blame someone for taking advantage of the opportunities afforded to them) than ever, creating an increasingly attractive opportunity for money to be removed from the private economy as taxes increase.
When Presidents Wilson, Carter, and Roosevelt, and now Joe Biden and the Obama Administration, insisted on or attempt to raise taxes on higher-income individuals, those reporting higher incomes seem to magically disappear. After “tax cuts for the rich” were implemented during the JFK, Reagan, and “W” administrations, those “rich” people suddenly started paying a larger total amount of taxes as well as a higher percentage of those taxes.
Rich people don’t react this way because they want to make their favorite politicians look good. Once tax cuts are implemented, their behavior is influenced to invest in more prosperous opportunities within the private market, which offer high enough potential returns to counteract the taxes they will also have to pay.
The question of why our system allows for so many tax shelters, loopholes, and other means for reducing tax burdens has been asked a thousand times. But, one step into a politician’s mind and you will see why it’s beneficial to advocate for higher taxes on the wealthy (enticing to lower incomes, and the majority of voters, who receive the most benefit) while simultaneously creating loopholes for the wealthy and businesses (enticing to campaign contributors). The votes of the people are needed, but it’s also very expensive to run a campaign.
In reality, tax increases actually end up disproportionately hurting lower-income people, who are also disproportionately made up of minorities. Wealthy people will always have the means and extra income to find and invest in securities and shelters that reduce their tax burdens—especially in our increasingly global economy—which leaves the remainder of the burden on those who can’t afford to do so: middle- and lower-income Americans.
As Calvin Coolidge so succinctly put it: “The first object of taxation is to secure revenue.” Why then do so many insist on policies that have, and always will have, the opposite results?
For some reason, Joe Biden-types continue to make statements affirming their intention to allow for the increased tax burden on the “wealthy.” If re-elected, Bush tax cuts could expire, resulting in one of the largest tax increases in history, while the Obama Administration consistently advocates for an increase in taxes on the individuals with incomes over $25o,000.
Is Obama-Biden really advocating for what basic economics, and history, tells us will result in less investment in our economy, an increased burden on poorer people and minorities, and a continually stagnant economy?
Personally, I think they are just economically clueless.
JUSTIN VELEZ-HAGAN is Senior Contributing Writer and Commentator for Politic365.com. He is also an Adjunct Instructor of Economics at the University of Maryland-University College and the National Executive Director of The National Puerto Rican Chamber of Commerce. He can be reached at Justin@Politic365.com.