[Steve_American]

More evidence against the ‘trickle down’ orthodoxy in macroeconomics
From Bill Mitchell's blog of 12/22/2022.

On December 10, 2014, I wrote this blog post – Trickle down economics – the evidence is damning. The discussion was about how inequality undermines growth and that redistribution of national income towards higher income groups does not stimulate income growth for lower income groups. It provided evidence that destroys the basic tenets of mainstream economics and supports a wider social and economic involvement of government in the provision of public services and infrastructure, particularly to low income groups. The ‘trickle down’ fiction was propagated in the late 1970s and early 1980s by the likes of Margaret Thatcher and Ronald Reagan and dovetailed with the emerging dominance of supply-side thinking. Behind ‘trickle-down’ was a nasty neo-liberal plot to undermine state activity and rewind the gains made by the workers under the welfare states and unionism over the course of the C20th. Now a new report from researchers at the London School of Economics – The Economic Consequences of Major Tax Cuts for the Rich – repeats the evidence, and, perhaps because we are further down the road in realising how deficient mainstream macroeconomics is, new evidence of something that we have known since the ideas first came out of the sewers, might push the paradigm shift a little further.

This supports my contention that tax cuts for the rich "do not cause or correlate with economic growth that could make the cuts 'pay for themselves'."

The main results of the [new LSoE] study include:

1. “major tax cuts for the rich increase the top 1% share of pre-tax national income in the years following the reform … The magnitude of the effect is sizeable; on average, each major reform leads to a rise in top 1% share of pre-tax national income of 0.8 percentage points.”

2. “The results also show that economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich. The estimated effects for these variables are statistically indistinguishable from zero, and this finding holds in both the short and medium run.”

3. “our analysis finds strong evidence that cutting taxes on the rich increases income inequality but has no effect on growth or unemployment.”

4. “tax cuts for the rich are associated with rising top income shares.”

5. “Our findings on the effects of growth and unemployment provide evidence against supply- side theories that suggest lower taxes on the rich will induce labour supply responses from high-income individuals (more hours of work, more effort etc.) that boost economic activity …”

6. “income tax holidays and windfall gains do not lead individuals to significantly alter the amount they work …”

7. “lower taxes on the rich encourage high earners to bargain more forcefully to increase their own compensation, at the direct expense of those lower down the income distribution.”

Links to the 2 articles bolded above.
Trickle down economics – the evidence is damning => http://bilbo.economicoutlook.net/blog/?p=29678

The Economic Consequences of Major Tax Cuts for the Rich => http://eprints.lse.ac.uk/107919/1/Hope_ ... lished.pdf
.

[Unthinking Majority]

I would think giving the rich more money would lead to more investment, spurring innovation. Whereas giving more money to the middle class and poor would lead to more consumption.

So giving it to the rich would lead to us having better stuff, but giving it to the non-rich would lead us to having more stuff.

There's also the possibility that innovation could lead to more business efficiencies and therefore some things could become cheaper for all, therefore increasing wealth.

Overall giving more money to the non-rich makes more sense economically, since it would make workers richer and also make the rich richer by the workers buying more of their products/services.

[Steve_American]

The primary effect of investment when demand is low is to cut the cost of production by replacing people working with machines using electricity.
Only when demand is high (because workers make more money) are investments made to increase production.
If you can't sell all you are making now, why would you spend more $$ to make more stuff before you know the demand will be there.
Remember "demand" means both people want to buy AND they have money to buy. So, reduced money is reduced demand.

The thread title is flawed, because not enough space. It should be that tax cuts for the rich don't stimulate the economy..
.

[Wolvenbear]

As is typical with you, you take a factoid and insist it means something other than what it says. For the purposes of explaining this continuing problem with you, I will simply deal with why your claims are misleading, rather than debating their correctness, which I will assume for the sake of argument.

[b][size=130]
The discussion was about how inequality undermines growth and that redistribution of national income towards higher income groups does not stimulate income growth for lower income groups.

Allowing people to keep their own money is not "Redistribution", so you start from a false premise. And the fact that allowing rich people to keep more of their own money does not instantly make the poor rich does not mean that the tax cuts do not spur economic growth. And the fact that poor people do not benefit as much in actualy dollars as the rich does not mean they do not benefit. Moreover, even if tax cuts do not pay for themselves, in that economic growth does not lead to higher revenues than before, this does not mean that growth does not occur.

Moreover, your following findings undermine most of your arguments:

1. “major tax cuts for the rich increase the top 1% share of pre-tax national income in the years following the reform … The magnitude of the effect is sizeable; on average, each major reform leads to a rise in top 1% share of pre-tax national income of 0.8 percentage points.”

In laymans terms, this means the economy grew. If tax cuts mean that rich people make more money regardless of taxes, then economic activity has increased. This is the only possible way to interpret the data. Thus the 2nd point is obviously a lie, and need not even be addressed.

3. “our analysis finds strong evidence that cutting taxes on the rich increases income inequality but has no effect on growth or unemployment.”

Income inequality is irrelevant to the question of whether growth occured. Moreover, it doesn't even show that poor people are worse off. And since increased profits are impossible without growth, the post is deceptive again.

And so on.

Ultimately, even if I accept the arguments, on face value they mean nothing. Much like asserting that tax cuts cause deficits, without addressing spending, such analysis is inherently useless. Moreover, when someone asserts things that are obviously untrue from their own data, there is no reason to take any oftheir claims seriously.

[Steve_American]

@ Wolvenbea, almost all of the post you quoted was not mine. It was a quote from Prof. Bill Mitchell's recent blog post. He's a funding MMTer. The numbered points were quotes from a study that Prof. Mitchell was quoting.

So, please stop addressing me as if I wrote it.

As for point #2 from the study that Prof. Mitchell was quoting, your refuting of it makes no sense. Take it up with the professional economists who wrote the study. Maybe read the actual study that I provided a link to, and then you can call point #2 a lie.

But, please, stop phrasing your remarks as if I had written the parts that are in "quote format". Do you need me to explain in simple terns so you can understand me, what quote format looks like on this site?

A note to the Lurkers. You be the jury. You decide which arguments make sense.
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[Skynet]

Tax cuts for all stimulate the economy. Especially for the poor they spent all money, do not have the ability to save.

[Rugoz]

In laymans terms, this means the economy grew. If tax cuts mean that rich people make more money regardless of taxes, then economic activity has increased. This is the only possible way to interpret the data. Thus the 2nd point is obviously a lie, and need not even be addressed.

No, that's the point of the paper, obviously. There's no effect on growth. The increase in pre-tax income is either due to (less) tax avoidance/shifting or more aggressive bargaining.

[Unthinking Majority]

Hasn't trickle down been disproven for at least 2 decades?

[Rugoz]

Hasn't trickle down been disproven for at least 2 decades?

If you increase the marginal tax rate by say 1%, tax revenue increases by less than 1% because the tax base shrinks. This can be due to less economic activity, e.g. people working less hours, or other behavioral responses such as tax avoidance. With the rich it's mostly avoidance.

In the 80s some were under the illusion that an increase of the marginal tax rate would not increase tax revenue, but rather decrease it. Vice versa, lowering the marginal tax rate would increase revenue. That of course is nonsense (except under extreme circumstances). I don't think it was ever a mainstream view though.

If "trickle down" means an income increase for lower income groups. That depends on how the government spends the tax revenue.

[Wolvenbear]

No, that's the point of the paper, obviously. There's no effect on growth. The increase in pre-tax income is either due to (less) tax avoidance/shifting or more aggressive bargaining.

The increase in PRE-tax income (meaning before taxes) cannot be due to tax avoidance. Your argument is wrong on it's face.

"He made 150k in 2019, but he made 200k in 2020. His pretax increase of 50k is clearly due to the 5k in tax breaks he got." Nope. Sorry.

@ Wolvenbea, almost all of the post you quoted was not mine. It was a quote from Prof. Bill Mitchell's recent blog post. He's a funding MMTer. The numbered points were quotes from a study that Prof. Mitchell was quoting.

So, please stop addressing me as if I wrote it.

When you post something, and you say "this proves what I have been saying", you are endorsing it. Thus, for the purposes of debate, you have said it. Shaking my head at your dishonesty.

As for point #2 from the study that Prof. Mitchell was quoting, your refuting of it makes no sense. Take it up with the professional economists who wrote the study. Maybe read the actual study that I provided a link to, and then you can call point #2 a lie.

My point does make sense. So either you simply don't understand basic logic or you refuse to acknowledge weaknesses in your link.

But, please, stop phrasing your remarks as if I had written the parts that are in "quote format". Do you need me to explain in simple terns so you can understand me, what quote format looks like on this site?

A note to the Lurkers. You be the jury. You decide which arguments make sense.
.

Goodness, Admin Edit Rule 2 Violation. You posted something, explicitly stated that you agreed with everything it said, and stated that it backed up what you already argued. And, now that it is wrong, you claim that your posting of it cannot be attributed to your explicit endorsement.

No rational lurker would agree that your refusal to defend your own Admin Edit Rule 2 Violation is somehow a credit to you. Heck, you didn't make a single point in your entire post. Admin Edit Rule 2 Violation.

[Steve_American]

(In reply to Rugoz) The increase in PRE-tax income (meaning before taxes) cannot be due to tax avoidance. Your argument is wrong on it's face.

"He made 150k in 2019, but he made 200k in 2020. His pretax increase of 50k is clearly due to the 5k in tax breaks he got." Nope. Sorry.

(In reply to me)
When you post something, and you say "this proves what I have been saying", you are endorsing it. Thus, for the purposes of debate, you have said it. Shaking my head at your dishonesty.

[I had said that his point didn't make sense.]

My point does make sense. So either you simply don't understand basic logic or you refuse to acknowledge weaknesses in your link.


Goodness, you are a shameless liar. You posted something, explicitly stated that you agreed with everything it said, and stated that it backed up what you already argued. And, now that it is wrong, you claim that your posting of it cannot be attributed to your explicit endorsement.

No rational lurker would agree that your refusal to defend your own idiocy is somehow a credit to you. Heck, you didn't make a single point in your entire post. Dishonest hack.

I guess I was unclear in the post you quoted. I was asking you to clarify.
Until I understood your point I felt that I could not argue with it.

I still disagree that agreeing with someone else is the same as being a shameless liar.

I do agree that your point to Rugoz is correct. However, this has little effect on the claim in the study that tax cuts on the rich increase the GDP. Increasing the GDP is the definition of "growing the economy".

BTW -- you have not shown that point #2 is wrong. AFAIK, you mostly just asserted it is false because of "something". I don't understand your argument, so I have not yet accepted that it is false.

The point in contention reads, 2] “The results also show that economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich. The estimated effects for these variables are statistically indistinguishable from zero, and this finding holds in both the short and medium run.”
. . . Here your disagreement seems to be with the part that says, "... economic performance, as measured by real GDP per capita ..." is not affected in a significant way.
. . . Note the word 'real', meaning adjusted for inflation. Note also the phrase 'per capita' meaning adjusted for population growth. Note the word 'significantly' meaning more than a trivial, or maybe, small way.

In you 1st reply you dismissed this result as obviously a lie. Not just wrong, but knowingly making a false statement. You provided little explanation of how you decided it was false, and none for how you know the authors had known it was false. Then you said I lied. and you again provided no evidence to support your claim that I knew it is/was false.

One more point, you have not apologized for your error in claiming the *after* Reagan slashed taxes on the rich in 1981 (and cut them or others) that tax revenues increased in every year; I provided you a link that showed and showed you that in 1983 they went down. And this was before any adjustment for the 3.2% inflation that year or the 6.2% inflation in 1982. Please note, that I'm not using the word 'liar' to describe you conduct in making that incorrect statement.
Nor have you commented on my assertion that lumping in FICA & Medicare tax revenues with "income tax revenues" is not really fair. So, the data I found for years after 1983 proves nothing about your implied assertion that "income tax revenues" went up after the tax cuts on the rich.
But, on the internet, no one ever admits when he was wrong, they all just disappear or ignore it like you have so far. [No one but me, and a few others.]
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[XogGyux]

I would think giving the rich more money would lead to more investment, spurring innovation. Whereas giving more money to the middle class and poor would lead to more consumption.

So giving it to the rich would lead to us having better stuff, but giving it to the non-rich would lead us to having more stuff.

There's also the possibility that innovation could lead to more business efficiencies and therefore some things could become cheaper for all, therefore increasing wealth.

Overall giving more money to the non-rich makes more sense economically, since it would make workers richer and also make the rich richer by the workers buying more of their products/services.

Really? So if the middle class/poor that has "more consumption" according to you, you don't think that more consumption is also going to be more money into businesses that will allocate that extra income into improvement into their production/infrastructure, otherwise known as investments? Unlike blindly giving tax breaks to corporations that then spend their money on buybacks of their own stocks to make their investors look artificially smarter and/or richer for a while but does not garantee that this new resource will naturally flow to profitable companies.

When the consumer is the one driving the investment, that is an efficient system, you buy more bicycles, bicycles are on demand, bicycle sellers get richer, they realize they got richer by selling bicycles, they create more bicycles until such point demand/supply reach equilibrium.
However... take for instance what happened with the last tax cut. Huge companies got massive tax breaks. You had the largest airlines getting their own stocks... not because those stocks all of the sudden became better buys... but because doing so drives the prices up, and investors are happy because they perceive the company as a stronger one. However... covid happened, and they basically wiped all savings in a matter of days.
It is not like this is something that "we didn't see coming" sure... we didn't see covid coming in particular, but we have seen many downturns for airlines before... remember 911? or that time when airlines were in the golden age and we got huge companies like PANAM basically disapear?

[late]

Hasn't trickle down been disproven for at least 2 decades?

Laffer was always something of a joke.

[Unthinking Majority]

Really? So if the middle class/poor that has "more consumption" according to you, you don't think that more consumption is also going to be more money into businesses that will allocate that extra income into improvement into their production/infrastructure, otherwise known as investments?

Yes of course I agree with you. From the last line from what you quoted from me:

"Overall giving more money to the non-rich makes more sense economically, since it would make workers richer and also make the rich richer by the workers buying more of their products/services."

[XogGyux]

Yes of course I agree with you. From the last line from what you quoted from me:

"Overall giving more money to the non-rich makes more sense economically, since it would make workers richer and also make the rich richer by the workers buying more of their products/services."

Listen, overall I have no quarrel with the rich. I myself expect to be rich sometime in the near future. Perhaps I might even enjoy an expensive car or a beautiful house. I will certainly dine at an expensive restaurant from time to time. I do not enjoy paying my taxes any more than you, or the most "libertarian" of libertarians. However... if a road needs to be built, and we as a society need to contribute... I expect bezos is paying more of it, than me, and In turn I expect to pay more of it than the teacher barely making 40k who in turn I expect will pay more than the starving single mom working 2x minimum wage jobs. Hence... this idea of "tickle down economy" as far as I am concerned, is a mirage to fool people into ignoring what it truly is.

[Unthinking Majority]

Listen, overall I have no quarrel with the rich. I myself expect to be rich sometime in the near future. Perhaps I might even enjoy an expensive car or a beautiful house. I will certainly dine at an expensive restaurant from time to time. I do not enjoy paying my taxes any more than you, or the most "libertarian" of libertarians. However... if a road needs to be built, and we as a society need to contribute... I expect bezos is paying more of it, than me, and In turn I expect to pay more of it than the teacher barely making 40k who in turn I expect will pay more than the starving single mom working 2x minimum wage jobs. Hence... this idea of "tickle down economy" as far as I am concerned, is a mirage to fool people into ignoring what it truly is.

Trickle-down and free trade are BS pushed by the rich and powerful class because it's in their interests. Nobody has given a crap about the average worker for 40 years.

[XogGyux]

Trickle-down and free trade are BS pushed by the rich and powerful class because it's in their interests. Nobody has given a crap about the average worker for 40 years.

Nobody ever did.
Certainly it didn't happen when most of the world was being ran by monarchy/feudalism... Unrestrained capitalism gave us the abusive tycoons from the late 1800's and early 1900's and dictator and totalitarians such as lenin, stalin, later fidel, etc certainly poisoned communism just as much. We keep re-living this endless cycle of rich oppress poor, poor takes it for a while, eventually poor fights back violently and resets the system, then some of the leaders become the rich, and repeats itself. French revolution, the Russian revolution, Cuban revolution... even the American independence wars was the same cycle repeating itself just with different "evil figurine" but it is essentially the same thing.

You can have 2 different approaches to justify helping the lower classes. The humanist approach "I got more, you got less, I would like to give a bit of mine to help you because those extra $10k on top of my 300k income won't make much of a difference for me, but it could be the difference for you living on your car or in a house, or working 2 jobs vs working 1 and going to college so that in the future you can make more."
The selfish approach " I got quite more... and I want to keep it, maintaining the masses "happy" will help prevent future uprisings that could disturb the current status quo which is very beneficial to me, therefore, I see the benefit of giving that extra 10k on top of my 300k as a method of "buying security"."

[Rugoz]

The increase in PRE-tax income (meaning before taxes) cannot be due to tax avoidance. Your argument is wrong on it's face.

"He made 150k in 2019, but he made 200k in 2020. His pretax increase of 50k is clearly due to the 5k in tax breaks he got." Nope. Sorry.

The behavioral response in your example is extreme. Moreover, it doesn't look at the margin, so it's not a proper example for our purpose. Also, $150k is not exactly rich, certainly not for a household. In the US, you need a household income of $422k to be among the top 1%.

Whether (less) tax avoidance is a valid reason for the increase in pre-tax income depends on what data they're looking at. They write:

While our choice of dependent variable (including both capital and labour income) makes it
less likely the results are being driven by tax shifting or avoidance, we do not specifically test
the mechanisms at work.

There are other methods of tax avoidance than shifting income from labor to capital. Where I live, every tax increase/decrease for the rich is accompanied by a debate on whether they will shift their income somewhere else or move their place of residence entirely as a response.

Laffer was always something of a joke.

I found this 1982 paper with a funny intro:

What's Wrong with the Laffer Curve?

The subject of this paper first arose when the author was engaged in
teaching a principles of economics course to undergraduate students. Here
and there an intrepid soul or two began asking about the new-fangled
"supply-side" economics they had encountered in the press or in discus-
sions with friends of recent politics. My initial temptation was to slough
off such questions with a contemptuous reference to "voodoo economics";
but the quickest way to lose the respect of a class is to attempt to stifle
honest curiosity with ridicule. Incongruously enough, when I sought seri-
ously to research their queries, I discovered that some very respected
members of the economics profession had resorted to that very same tac-
tic. James Tobin, for instance, wrote in a letter to the U.S. House and
Senate budget committees concerning the Kemp-Roth bill that "the idea
embodied in the 'Laffer Curve' is as ancient as it is trivial. The mere con-
ceptual possibility of inefficiently excessive taxation is no basis for fiscal
action by serious legislative bodies."' In an even stronger letter, Robert
Solow wrote to the same committee in 1978 that "the 'analytical' founda-
tions for these proposals seem to have been discussed so far mainly in the
pages of the newsmagazines and the Wall Street Journal. It is encouraging
that we have not yet reached the stage of making policy on the basis of a
media hype." In the intervening period, we have witnessed the enactment
of a Kemp-Roth-style tax cut, and notwithstanding, serious academic
analysis is still hard to find. While there is much disagreement over what
precisely is the substance of "supply-side" economics, we shall restrict
ourselves to a deliberate consideration of the logical merits and drawbacks
of that notorious analytical construct, the "Laffer Curve." Is it a tautology,
a theory, or merely a pretext for a preordained political position?

https://www.jstor.org/stable/4225217?se ... b_contents

[late]

"Laffer Curve." Is it a tautology,
a theory, or merely a pretext for a preordained political position?

It's a pretext for politics.

Once the Reagan crowd got going, one economist said it wasn't trickle up economics, it was "flood up".

Massive tax cuts were only one part, the Reagan nuts made it both easy and safe for the rich to cheat on their taxes. There was a bunch of other stuff, but that pretty much says it all.

That, combined with a massive increase in spending, put the debt on a log curve. We quickly went from being the world's largest creditor to being the world's largest debtor.

[ingliz]

Tax cuts for all stimulate the economy.

Across-the-board income tax cuts aren’t very cost-effective. A 2010 Congressional Budget Office study found that, at best, they create 3 jobs for every $1 million in lost tax revenue.