Myths That Are Destroying America

Myth #3: Tax Cuts For Rich People Are Good For Middle Class & Working-Class Americans

By David Grace (www.DavidGraceAuthor.com)

The Big Lie

Millionaires and politicians who equate taxes with stealing have been lying to us for almost forty years by saying that cutting taxes for rich people and big business is good for working and middle-class people.

It’s been called trickle-down economics or supply-side economics, but it’s the same scam, namely, the lie that lower taxes on rich people and big corporations will make middle-class and working-class Americans better off.

That’s not true.

What Do Rich People Do With More Money?

Think it through.

If you put an extra million dollars in the pocket of someone who already has ten million dollars, what will he/she do with it?

Buy stocks?

The vast majority of stocks are bought from other individuals who own stocks, not from the companies themselves. When you buy Apple stock, the money doesn’t go to Apple. It goes into some individual seller’s pocket. What is that investor likely to do with the money?

Buy other stocks. None of that benefits ordinary citizens.

But maybe they’ll buy a building.

When you buy a commercial building or an apartment house or a rental property you borrow most of the money by placing a mortgage on the property you’re buying. That means that the building will have a bigger mortgage after the sale than it had before the sale.

That bigger mortgage means that in order to make the same amount of profit as the previous owner the buyer is going to have to raise rents in order to cover the larger mortgage payments.

The sale of a building at a profit almost always means that after the sale rents will increase. That makes the tenants, either individuals or businesses, poorer not richer.

Maybe the rich person will spend part of the extra money on an expensive vacation. Good for Paris or London hotel owners but not so much for working-class Americans.

When you go down the list of what rich people do with extra money we pretty quickly see that little of that extra money will end up increasing the wealth of middle-class and working class Americans.

“But wait,” you say. “What if they use that money to start a company or directly invest in a business? Won’t that help the average American?”

Not so much. Will that investment mean a wage increase for existing employees? No. Companies don’t spend investment capital on voluntarily making their labor costs higher.

If you have a large pool of unemployed people who will only get jobs because of the investment then that might be helpful, but most of the people that a startup will hire are professionals who already have jobs or can get jobs elsewhere. The effect of that investment on ordinary workers, especially unemployed workers, will be relatively small.

Most of that extra million dollars that the rich person gets from that tax cut will never come close to making a middle-class or working-class person better off.

Mostly, it will go to other stock market investors, other owners of commercial real estate, people who already have good jobs and the sellers of luxury goods and services.

What Do Middle Class & Working Class People Do With More Money?

Instead of giving one person who already has ten million dollars an extra million dollars, what if instead you gave that same million dollars to a thousand middle and working-class people at the rate of one thousand dollars each?

They would all spend every last penny of it.

The positive effect on businesses and jobs would be immediate and material.

The best thing you can do to increase the economy and economic growth is to increase the income for people in the bottom 50% of the population. The richer the middle class and working class get, the better the economy will do.

But the right wing is ruthlessly opposing any increase in the minimum wage. Why? Because they think that “those people” don’t deserve to be paid that much.

Basic Economics — The Marginal Propensity To Consume

Many decades ago John Maynard Keyes pointed out that as a person’s income increases the percentage of their income that is consumed decreases and the percentage of their income that is saved increases.

In short, rich people can’t spend all their high income on “stuff” because there is only so much stuff that they can consume. So, the richer you get the higher percentage of your income you save and the poorer you get the higher percentage of your income you spend.

An economy needs access to adequate investment capital, but once the economy has obtained access to an adequate level of investment capital each additional dollar of investment capital has a smaller and smaller incremental effect, which means that once there is enough money available to fund reasonable business expansion and creation, additional amounts of extra capital don’t do all that much extra good.

Making rich people richer increases stock prices and real estate prices and saving. Up to a point the economy needs that extra saving but beyond that point it doesn’t help the economy very much.

Making working class and middle-class people richer directly improves the economy and also makes rich people richer because it increases the sales and profits of the businesses they’ve invested in.

Businesses Don’t Voluntarily Raise Wages

Increasing a corporation’s profits does not make its employees richer.

The basic fact of life about businesses is that they never raise non-executive pay just because they’ve had a good year.

United Technologies or General Electric or Bank of America never go to their non-executive employees and say, “Hey, guys, the government has cut our taxes which means we’ve made a butt-load of extra money this year so we’re giving everybody a 10% raise.”

Never, ever happens.

In fact, increased profits just make companies press even harder for yet more profits next year. Please recall that Carrier was profitable. It’s parent company United Technologies was profitable. What did Carrier do? It chose to send 2,000 good-paying jobs to Mexico so that it could be even MORE profitable.

Higher corporate profits do not trickle down to non-executive employees.

Where Do Higher Corporate Profits Go?

That extra corporate profit goes, first, to highly compensated executives as bonuses.

Second, it goes to shareholders as part of a stock re-purchase plan.

Third, it goes to shareholders as dividends.

Fourth, it gets put in the bank.

Fifth, if the company has wanted to build a new plant or modernize equipment but wasn’t able to do so because they didn’t have the money, sure, they’ll spend some of that money on expansion, but that will comprise only a fraction of the additional profits.

And only a fraction of that fraction will ever “trickle down” to benefit middle-class or working-class people.

The basic way businesses work means that between zero and a small percentage of additional profits from tax cuts will actually make their way into the pockets of middle-class and working class citizens. None of that extra profit, ZERO, will be used to increase the wages of existing non-executive employees.

Historical EvidenceIncome Growth By Economic Class

The terms “trickle down economics” and “supply side economics” became popular during the Reagan administration (1981–1989) as the justification for cutting taxes on the rich. In 1981 and again in 1986 Reagan presided over massive tax cuts for the wealthy.

Under President Bush, in 2001 and again in 2003 Congress passed more large tax cuts for the rich.

Did those tax cuts for rich people benefit the middle and working classes? No, not even a little bit.

Below is a chart showing annual income adjusted for inflation for the 0 to 20% bracket of households, 20% to 40%, 40% to 60%, 60% to 80%, 80% to 100% and the top 5% of households for the years 1967–2014.

Between 1980 and 2014 the income of the top 5% essentially doubled from about $180K to about $360K.

Between 1980 and 2014 the income of the top 20% increased from about $130K to about $195K, about a 150% increase.

Between 1980 and 2014 the income for the top 40% to the top 20% increased from about $70K to about $85K, about a 20% increase.

From 1980 to 2014 the annual income of the bottom 50% of the population did not increase at all

Through the period of all these tax cuts (1980–2014), the migration of U.S. manufacturing jobs overseas, and the ability of corporations to park over three Trillion dollars tax free in foreign countries, the income of the top 50% of the population increased by 20% to 200% while the income of the bottom 50% didn’t materially go up at all.

The Simultaneous Campaign To Make Poor People Poorer

While right-wing politicians are pushing the same false claim that cutting taxes for rich people and rich corporations will be good for everybody, they’re also telling us that the country “can’t afford” the money it’s spending on food stamps and Medicaid for poor people.

Instead of looking to boost the economy by increasing the income of the bottom half of the population, at the same time that the right is pushing for tax cuts for the wealthy it’s fighting raising the minimum wage to a living wage, something that would materially increase the income of those in the bottom 20%.

They not only want to make the rich richer, they also want to make the poor poorer.

This Is Not Really About Economics At All — It’s About The Right Wing’s Idea Of Fairness

Why is the goal of the right-wing to make rich people richer and poor people poorer?

Because this is not about economics at all. It’s about the right wing’s idea of fairness.

In their minds it’s fair that rich people keep their money and it’s fair that poor people not have any more money because the market has decided that they don’t deserve it.

OK, that’s a debate we can have, but we have to be honest about what we’re arguing about.

The problem is that the right isn’t admitting what their tax-cuts-for-the-rich campaign is really all about. They’re not admitting that it isn’t about economics at all but rather it’s about promoting their idea of fairness.

The right is hiding the real reason they want to cut taxes for rich people with the phony claim that making rich people richer is economically beneficial for the middle class and working class.

I understand that. If they were honest about it, they couldn’t sell it.

Cigarette companies don’t tell people: “Use our product for thirty years and you’ll have a really good chance of getting heart disease and lung cancer.”

That’s not an effective marketing strategy.

If you think rich people deserve to be richer and poor people deserve to be poor and you want to push that policy you’re not going to tell voters: “I want to cut rich people’s taxes because they deserve to have all that money and poor people deserve to be poor.”

That won’t sell. Middle class and working-class people won’t vote for that.

So you have to lie. You have to tell them, “Hey, making rich people richer is actually good for you. Trust me. You’ll love it. And, by the way, cigarettes are terrific.”

It’s all a scam.

My Reason For Opposing Tax Cuts For Rich People Is Not About Being Nice To Poor People

I’m not calling out the scam that tax cuts for rich people and big corporations are good for everyone because I think rich people have too much money. I’m not interested in making poor people richer because I want to be a nice guy. I’m not talking about so-called social justice.

I’m talking about what makes an economy better. What makes a society better. What makes a country more prosperous.

I’m talking about phony arguments whose real purpose is to advance someone else’s ideas about what they think is “fair.”

The bottom line here is that the country as a whole will be richer, safer, with less crime, more productive, and more prosperous when more people have the ability to earn enough to buy a decent life for themselves and that happens when there are living-wage jobs available for everyone.

It doesn’t happen when you make rich people richer and poor people poorer because you think that’s the fair thing to do.

— David Grace (www.DavidGraceAuthor.com)

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Bush Tax Cuts Have Provided Extremely Large Benefits to Wealthiest Americans Over Last Nine Years

Ten Years Of Tax Cuts Benefiting The Rich

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David Grace

David Grace

Graduate of Stanford University & U.C. Berkeley Law School. Author of 16 novels and over 400 Medium columns on Economics, Politics, Law, Humor & Satire.