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The Trickle Down Mantra

Henry3

by Henry Oliner

‘Trickle down’ is the preferred pejorative of the left towards any tax cut that benefits those who actually pay taxes.  The people who use it sound like idiots to anyone with a basic knowledge of economics.  It is a tool for those who prefer a demon to any understanding.

Money trickles downs, trickles up, and spreads around.  It pays taxes, funds welfare checks, hires employees, buys equipment and funds consumer purchase. It flows where it is least impeded and most welcomed and respected.  Money is an accumulation of a vast network of human action.

When you pay a thousand dollars for a new iPhone are you any poorer? You have willingly decreased your cash and increased your personal equipment. You may be joyful on your purchase or you may be resentful, but if the phone was not worth more than the money you spent you would not have bought it.

Our limited economic measurements may record a transfer of wealth from you to the shareholders of Apple.  But you are no poorer from the transaction.

Would you work an additional 20 hours a week for a substantial pay if the tax rate on your additional earnings was 100%?  Would you be more likely to take the job if the tax rate was cut to 40%?  If your answer is yes to the second question, then congratulations, you understand basic economics and the Laffer Curve.

We can debate the proper rates and the tax system. Claims are made from the right that all tax cuts pay for themselves. This is untrue and is as ignorant as the ‘trickle down’ mantra.

“Trickle down” may or may not be true based on numerous other factors. Regulatory and legal burdens, inconsistency and political uncertainty, debt loads, monetary policy, international competitiveness, unemployment levels, and other factors will impact the effects of tax policy.

But ‘trickle down’ is always an incomplete picture, meant to mislead  by a few, but more often a simple and obvious display of economic ignorance recited as a mindless mantra.

The Real Loser from Tax Reform

From my article in American Thinker, Save the Swamp:

I call the difference between the statutory rate and the actual rate the ‘special interest spread’.  It is the difference between the official stated rate and the actual rate paid after deductions and credits.  True tax reform should seek to reduce this spread to zero. 

But there remains a great benefit to meaningful reform in the form of simplification.  The influence of the Federal government is less because of its growth in size that because of its proxies in the private sector. Nonprofits, state and local agencies, and special interests do the work of the federal government and much of this is done through tax preferences and benefits. These proxies will all be fighting to retain their part of the swamp. 

Taxes should be low and broad based, as simple and as permanent as possible, while minimizing the ‘special interest spread’ and the marginal rate.

Such a reform castrates much of the federal power over the economy, requiring the separation of operating revenue requirements from their desire to engineer and design social outcomes. Any transition to such a system will not be equally shared and there is no need to pretend otherwise.  Many who lose their mortgage deduction will make it up in lower rates, but some will not. This is the problem with reforming complicated systems with an accumulation of special provisions.

The benefit to the economy, however, would be so strong that those who are comfortable in the swamp should not be allowed to derail it. 

The Lobbying Principle

From my article in today’s American Thinker, Save the Swamp:

If the per capita cost of government is x, then every deduction, credit, and tax benefit awarded to one party comes at the expense of another.  The main function of lobbyists is to exploit their influence to get tax benefits for their clients.  They exist because of the basic principle of lobbying: focused benefits and dispersed costs.

The benefit to an industry or a specific company from very specific legislation and regulation can be substantial, making the lobbyist’s generous expense account easily justified. The costs, however, are dispersed over millions of taxpayers and are too inconsequential per voter to justify spending political capital to oppose. 

 

 

The Big Questions

from Gene Epstein’s departing column at Barron’s- Keep Asking the Big Questions:

Compared to what? At what cost? Who pays? And, what happens next?

It’s the responsibility of economists to ask and answer questions like these—and the job of economics columnists to relate and explain the discussion. I’ve been doing that for a quarter-century as the proprietor of this column, and now have a what-next message of my own: I will soon be leaving Barron’s, with a plan to write long-form articles and books. But first, a few thoughts about the economics lessons I’ve learned.

Economists often shirk the big questions because the answers can bring unwelcome news. Since many economists yearn to sit at the tables of power, they avoid discouraging talk, the better to preserve their standing with politicians who can appoint them to powerful jobs.

When economist Milton Friedman told President Richard Nixon that Nixon’s price controls were a bad idea, Friedman was permanently banished from Nixon’s presence. Similarly, economist and outsider Thomas Sowell once wrote that, when it comes to society’s problems, “There are no solutions. There are only trade-offs.”

But once you face those trade-offs, a look at recent and distant economic history allows you to bring quite welcome news. Bred in the socialist tradition (my mother was a card-carrying Communist—I have her FBI file to prove it), I grew up to ask the most fundamental compared-to-what question: capitalism or socialism? I eventually learned that prosperity for the masses depends on free-market capitalism. Apart from the fundamentals of economic reasoning that support this claim, the evidence stares you in the face.

The stunning leap in general living standards from 1870 to 1920 took place in the U.S. despite two facts: Both labor unions and government intervention in the labor markets played a negligible role, and tens of millions of poor immigrants were flooding the markets in search of work. In the past few decades, the turn toward freer markets in the poor countries of the world has coincided with lifting more than a billion people out of grinding, one-dollar-a-day poverty.

Politics as Performance Art

From National Review Kevin Williamson writes McHealthcare Deluxe- The Affordable Care Act is a failed political product.

There are better and worse ways to fail, and it pays to be conservative when trying out new products, most of which fail, or investing in a new business, most of which fail. Learning to do that well is what makes a wise venture capitalist successful and an innovative executive effective. It’s also why conservatives like federalism, using the states as 50 “laboratories of democracy,” as Louis Brandeis put it. Trying it out in Utah and failing costs less than trying it out coast to coast and failing — and what works in Utah may not work in New Jersey. The more robust and immediate feedback mechanism of local democracy is also why conservatives like subsidiarity, mitigating problems at the lowest effective level of government rather than treating everything as a national question.

Feedback matters. One of the reasons the private sector often is so much more effective than government is that market competition forces firms and entrepreneurs to admit error or suffer dire financial consequences. Capitalism will slap you upside the head if you do something dumb — ask President Trump’s bankruptcy lawyers about that. In the marketplace as in nature, the instrument of evolution is death: Bad products and bad ideas don’t make it, and capital eventually flees bad firms and bad investors. A good company doesn’t punish an executive for trying something new and failing — it punishes him for refusal to admit failure when that failure is obvious and for continuing to shovel precious resources into the bonfire of his vanity.

Politics should be more like that, but it’s getting less like that. Because our political identities are shaped by tribalism rather than by reason, creating a political culture that embraces healthy experimentation and iterative, incremental reform is difficult for us to do. What we do instead is put together unwieldy bundles of legislation that promise to solve a particular problem for now and for all time — and then accuse the other side of being evil for opposing it. That isn’t government — it’s performance art.

HKO

The health care debates is so contentious because it focuses the differences in political and economic philosophies into a single issue. Does this require a central government solution or is it better served  by solving it locally in the 50 laboratories we call states?

One of the greatest advantages of market solutions is not that it always picks better solutions, but that it recognizes failures quicker and better. The opposite happens in government. Self serving bureaucracies institutionalize failures.  Instead of admitting failure and redeploying assets into better and different solutions we institutionalize failures and increase their funding.

Trying to agree on component solutions is so arduous that we think that systemic solutions is the preferred path. But these solutions are so plagued with compromise that it has become impossible to make them effective. One side wants to build a bridge, the other side does not. We compromise by building half a bridge, spending 90% of the money and failing to provide the perceived need to cross the river.

The unwillingness to admit failure and implement corrective action is a big reason to be skeptical of expensive central solutions.