Neocon-Artist Tax Cuts

The rationale for the Neocon-Artist tax cuts has always been dubious. Though there's some theoretical basis for the tax cuts, the reality does not support their tax cuts.

Tax cuts put more money back into the private sector of the economy. Part of the money goes back into the economy as either consumer spending or capital investment. (This is if imports and exports are excluded.) The part that goes into savings does not go back into the economy. Savings do not cause economic growth. In fact, increased savings shrinks the economy.

Whether the tax-cut money goes into consumer spending, capital investment, or savings depends on what tax bracket receives the tax cuts. The more the tax cuts are slanted toward the affluent, the more that goes into capital investment and savings. The more the tax cuts go to the less affluent, the more that goes into consumer spending.

Cutting taxes on the exclusively on the non-affluent would stimulate consumer spending mostly. Cutting taxes exclusively on the affluent would mostly increase capital investment or savings.

If tax cuts were overly slanted toward the affluent, and consumer spending did not increase any, the tax cut money would go disproportionately more into savings than to capital investment. This is because consumer spending is necessary to create demand for capital investment. Consumer spending is necessary to create demand for the production that capital investment would facilitate.

If high-income tax cuts cannot be productively invested, they "leak" out of the economy as savings. Thus, the degree of economic stimulation from tax cuts is determined by how much of it is recycled into the economy. The benefits of the tax cuts are greater if given to those who will spend it, rather than save it. (Again, this explanation excludes money "leaking" in or out of the economy through foreign trade.)

The benefits of tax cuts on the wealthy is to create more capital to increase investment. The benefits are limited by investment opportunities. These investment opportunities are limited by anticipated returns on that investment. Anticipated returns are determined by anticipated demand for the production the investment facilitates. Demand for production is created by consumer spending, and to a lesser extent by demand for capital equipment. (However, demand for capital equipment is also limited by consumer demand for the production of that capital equipment.)

The markets are currently "glutted with capital" according to the Wall Street Journal. Other sources maintain that the markets are "awash with cash." Earlier this year Warren Buffet stated there was a lack of investment "opportunities." All current indications are that there is abundant investment capital at present, but a lack of places to invest it. This argues against any further benefits to our economy by further tax reductions on the "investor" class. In contrast, it argues for reducing the tax burden on consumers.

unlawflcombatnt
EconomicPopulistCommentary

The economy needs balance between the "means of production" & "means of consumption."

if the problem is that demand is strong but capital is tight, then public spending and/or tax cuts for the rich/investments helps get the economy investing in satisfying the strong demand. meanwhile tax cuts for the poor only aggravates the already strong demand.

conversely, if the problem is that capital is aplenty but demand is weak, then a tax cut for the poor will increase demand and create those investment "opportunities" that the capital is trying to find. meanwhile, a tax cut for the rich/investments only furthers the easy capital, which creates the kind of asset inflation problems we've been seeing.

the economic justice angle is different, but highly relevant, take on the whole issue. but in terms of just the economic impact, the solution depends on the problem you're trying to address.

Unblock,

I agree completely. The excess of investment capital has allowed for overinvestment and overvaluation of assets, most notably home prices at present. The overvaluation of stocks during the late 90's has been replaced by overvaluation of real estate.

The relative ease with which consumers have been able to borrow has obscured the basic error of cutting taxes on the affluent. Consumers have simply been able to maintain spending through borrowing while their wages have declined.

unlawflcombatnt
EconomicPopulistCommentary

The economy needs balance between the "means of production" & "means of consumption."

real estate is a bit like a battleship. it's mammoth in size but it just doesn't turn around quickly. so as the fed finally reverts interest rates to their historical mean, the asset bubble will finally go away.

of course, anytime there's a bubble, the media looks excitedly for a burst, but real estate rarely crashes. it's possible for mammoth declines, but there's much wealth of the rich involved, so the fed won't let that happen. more likely, real estate will simply stagnate until time catches up with the too-quick increase in prices.

in other words, nothing dramatic, but real estate will be a very boring investment for a loonnnng, long time. fortunately for the rich, real estate is diverse enough to permit them their pockets of opportunity, and certain regions and/or property types will still make good coin. but "average home price" isn't going to be one of them (ESPECIALLY if they start cutting into the tax breaks for mortgage interest and property taxes!)

so the building craze will abate, and the rich will take their money out of real estate and move it to .... ah, that's the million dollar question!

The part of their argument that just kills me is “double taxation” of dividends and capital gains. It’s “not fair” say whining RWers. IF we go with their premise and pretend that corporations pay anything close to what is fair on their profits, then you have to consider the argument my dad made to me the other night: His investment is farm ground. This gets taxed in property taxes, not twice, but EVERY YEAR. Double taxation is for weenies in light of this. If he sold all his farm ground and bought stocks, then he wouldn’t have to pay taxes if the repukes get their way. They pretend they want people to make their own choices free from government involvement. Well, they’re telling us what to invest in. They’re telling us how to earn a living. They’re saying that investing in the stock market is better than working for a paycheck or investing in farm ground. It’s time the government stopped telling people what to do for a living and taxed ALL income the same way.

sorry that's a bit off topic, but that's the rant I was set up for today!

if it adversely affects the rich, it's allll about fairness.
the so-called marriage penalty affects them, so that's unfair. nevermind the fact that two married people running one household is not at all the same as two unmarried people running two households.

of course, if something adversely affects the poor, then suddenly fairness is something we can't afford, or it would give them an incentive to cheat or be homeless or something....

That's a perfectly understandable (and reasonable) rant. I don't think it's the slightest bit off topic. The Reich-Wingers don't want to pay any taxes at all, but they want all the Corporate Welfare they can possibly get. They essentially believe in magic. If you "invest" enough, no one will even need to buy production. Profits will materialize out of thin air without any sales taking place. This must be the so-called "new" economy. The one created out
of NeoCon-Artist hot air.

On a lighter note, I ran into this picture at another site.



unlawflcombatnt
EconomicPopulistCommentary

The economy needs balance between the "means of production" & "means of consumption."

But I think it is better expressed and read spelled this way.. Neo-Conartist.

Thanks for the suggestion. I'm still working on a good way to write it out.

unlawflcombatnt
EconomicPopulistCommentary

The economy needs balance between the "means of production" & "means of consumption."