Trickle-Down Theory

[capsulecorpjx]

I don't think trickle-down theory works. Mostly cutting taxes and giving money to the rich won't improve the economy. They won't invest it in hiring people or making products. It would be stupid to invest it, if nobody is buying their product.

Really, as bad as it sounds, the best way to solve an economy is government deficit spending to get people employed so they can afford to consume again, to prime the positive feed back pump.

The problem these days, is most of that consumer money is going overseas, as America imports so much. But since the World is connected, I don't know maybe that doesn't matter? Again the problem is America's exports has only been Airplanes from Boeing, Financial Products (securities, bonds) and name brands like Nike. Two of those are insubstantial. One is fast becoming worthless.

I think Obama might have the right idea. Cut taxes more so for the working class. Also reward companies that decide to keep jobs in America. But then he has to worry about a trade war and protectionism from other countries as a consequence of keeping jobs from being outsourced.

Ugh this thing is too complicated.

Well if a world depression hits. On the bright side, it will drastically reduce consumption, and maybe it will reverse Global Warming before it hits a catastrophic tipping point.

Hey maybe it ends up that Bush accidently saves the entire world.

[homer13j]

I think Obama might have the right idea. Cut taxes more so for the working class.

Do you honestly believe Obama will cut anyone's taxes?

[Shaggy Hiker]

Yes, but not mine.

[homer13j]

Yes, but not mine.

Then who's?

[homer13j]

Then who's?

(crickets chirping)

[GaryMazzone]

His?

[homer13j]

Hey Gary - what is a "Gaint"??

[GaryMazzone]

Should show Giants (NY Footbal Giants.) Don't know why the s is missing

[homer13j]

Should show Giants (NY Footbal Giants.) Don't know why the s is missing

The "s" is there, you just need to switch the "a" and "i"

[GaryMazzone]

I splel rela godo



LOL

[Shaggy Hiker]

(crickets chirping)

Sorry dude, I was busy all day.

I don't think I am the demographic anybody is trying to help out with any financial packages. I would expect the benefits to go to people with less than me, or people with more expenses than me (which is roughly the same thing). I'm not rich by any stretch of the imagination, but nobody will be helping me with my mortgage since I consistently overpay it as is. Nobody will help me with college loans, as those were paid off years ago. Nobody will help me with my kids, as I don't have any. Nobody will help me with small business expenses, as I don't have any. And worse than all of those, my federal taxes just aren't all that much money. Cut it 50% and it won't make a difference to my finances. Cut it 100% and it won't do more than surprise me.

Heck, I had to go look up what was actually being deducted for federal taxes, because I wasn't sure. It was about what I expected. Therefore, I'd say that I'd need a tax cut of about 33% before it would alter my finances, and all I would end up doing is increasing pre-tax contributions to retirement acounts, because I don't have a use for more cash (unless it was several times as much as I make).

I just don't complain about taxes. The amount I make is largely up to me and the choices I have made in my life. The fact that the feds get a few percent of the amount I am content with doesn't bother me. I get loads of services for that cash. I guess I spend around 30% of that monthly amount on phone services, and the phone service does considerably less for me than my tax dollars. If I was not making enough to be content, then blaming the government would just be another way to pass the buck. I could double or triple my income by switching jobs, and I don't. Therefore, for me to whine about taxes would make me part of the problem.

[homer13j]

Sorry dude, I was busy all day.

I don't think I am the demographic anybody is trying to help out with any financial packages. I would expect the benefits to go to people with less than me, or people with more expenses than me (which is roughly the same thing). I'm not rich by any stretch of the imagination, but nobody will be helping me with my mortgage since I consistently overpay it as is. Nobody will help me with college loans, as those were paid off years ago. Nobody will help me with my kids, as I don't have any. Nobody will help me with small business expenses, as I don't have any. And worse than all of those, my federal taxes just aren't all that much money. Cut it 50% and it won't make a difference to my finances. Cut it 100% and it won't do more than surprise me.

Heck, I had to go look up what was actually being deducted for federal taxes, because I wasn't sure. It was about what I expected. Therefore, I'd say that I'd need a tax cut of about 33% before it would alter my finances, and all I would end up doing is increasing pre-tax contributions to retirement acounts, because I don't have a use for more cash (unless it was several times as much as I make).

I just don't complain about taxes. The amount I make is largely up to me and the choices I have made in my life. The fact that the feds get a few percent of the amount I am content with doesn't bother me. I get loads of services for that cash. I guess I spend around 30% of that monthly amount on phone services, and the phone service does considerably less for me than my tax dollars. If I was not making enough to be content, then blaming the government would just be another way to pass the buck. I could double or triple my income by switching jobs, and I don't. Therefore, for me to whine about taxes would make me part of the problem.

That's very well put, but it doesn't really answer my question.

Let me phrase it another way: What gives you the impression that Obama (or any Democrat president since Kennedy) will be willing to cut taxes for anyone?

Gary: How 'bout them "Gaints?"

[Shaggy Hiker]

Yeah, how about them Giants? That pretty well shot my chances in the office pool, except that nobody in their right mind would have chosen the Clowns instead.

Cutting taxes is the politicians mantra. Every time you shift tax burdens around you can claim it as a tax cut. The Rs are claiming that letting the Bush tax cuts expire is raising taxes. Technically true, but doing nothing is not really the same as taking action, even if the results are the same. Obama has talked about a middle class tax cut. From this I would expect one of these two results:

1) Nothing. This is always an option when it comes to presidential promises, and it is an option every president takes at some time. They either fail to act, or act without consequence, which amounts to the same thing.

2) A tax cut for somebody, but not for me. I can't remember exactly who it was, but I think it was McCain who offered a tax cut to the middle class in the form of raising the child tax credit. That's great for my friends who have kids, but it does nothing for me. For the same reason, I would expect any Obama middle class tax cut (the details of which I am unfamiliar with) to be "per head" much like the child tax credit. If indeed the cut is largely a child tax credit, then it would do nothing for me. If it isn't a child tax credit, then it still won't do anything for me.


What could do something for me would be a major reform of the health care system. I have good insurance for which I pay very little in my printed paycheck, but I am fairly well aware of what my employer pays above the gross wage, and it is substantial. There won't be any meaningful health care reform, as neither candidate has proposed anything more than a bit of shell game stuff, but my true health care costs utterly dwarf my federal income tax cost. Of course, I, with good coverage, shouldn't be complaining, and in truth I'm not complaining on my behalf. I am well off and know it. However, this reddest of red states with every form of broadbased tax known, has one of the highest rates of uninsured and under fed children in the country. They don't have a prayer under the McCain proposal, and not much of a prayer under the Obama proposal, but perhaps we will need to crawl in the right direction before we can run. I'm not sure which of those proposals is actually in the right direction, but both can certainly be called crawls.

[capsulecorpjx]

I can't believe the Giants got beaten so bad by the Browns of all teams.

This season isn't as good as last season, when there were 4 undefeated teams at this point. I think it was Cowboys, Patriots, Packers, Colts.

[Shaggy Hiker]

I don't think the cowboys were one of them, as the Pats beat them early in the season, but maybe it was later than this.

This year, the Packers pretty much suck, the Colts may or may not get their act together (they did on Sunday), the Cowboys are pretty good, but they tend to get beaten by some strange teams, and the Pats....well, they need a quarterback who will throw to the receiver with some consistency.

[nemaroller]

Trickle down theory. Ok here it goes.

Say you own an accounting business that makes revenues of $5 million a year.

If government raises your taxes, you have less after-tax profit to expand your business, advertise to woo new clients, less money to pay overtime to current employees, or offer better dental insurance to current employees.

These are examples, and there are certainly some that may be benefit for pre-tax exemptions, but not very many of them.

This October, like any other business, you are busy readying your next year business budget.

Now, there are two candidates vying to be the next President. One states he will raise taxes on businesses like yours. The other states he will not cut taxes for you, but also will not raise your current taxes - the current tax law does not have to be revised.

Obviously, the one that won't change taxes helps to forecast your budget with more certainty. With the other candidate, you can budget in a 'tax increase' buffer. But how much? You don't really know yet, because even the legislation the candidate is promoting may not be the legislation that Congress actually passes.

So you do the best you can. In the meantime, you are very conservative in expanding your business because there is that unknown risk of government interference. You most likely won't spend money on new projects, hire new people, or increase wages or benefits.

The trickle down theory then comes into play. If you have more capital available to you via lower taxes, you have more money to spend on new projects, new employees. So instead of Joe Six-pack getting a $500 annual tax cut, he may get a full-time job that pays $50,000 a year, perhaps with good benefits as well.

On the flip side, you have the 'spread the wealth' theory. Bush implemented this theory this past year with the Bush rebate checks which was effectively a tax cut for low to middle income earners. People lambasted that it was a waste of federal money. It certainly didn't turn the economy around.

Now, the trickle-down theory is probably more to the truth. Certain CEO's may make millions a year, but truth be told, its businesses which pay the most taxes, not individuals. Which is why most small business owners and local commerce boards are full of Republican supporters. Their employees may be democratic supporters.

The real underlying issue that tears away at trickle down theory is health insurance. Your employer has been typically made responsible for offering health insurance as an employment benefit. It means less money for capital, or less money to pay you in wages.

But the money has to come from somewhere. The argument is really if private insurance companies that make profit of the industry is worse or better than a monolithic government agency that could potentially insure all, albeilt with the possibility of reduced quality or speedy access to service.

[FunkyDexter]

I get the theory but I'd still dispute the reality. It carries the assumption that a cut in the tax burden on the company will be passed on to employees as either higher wages, better benefits or increased employment opportunities. I'm not convinced that is the case and I think that the cut is far more likely to be passed on to shareholders in the form of increased dividends. Only if the company sees a case that passing the benefit onto their employees will result in increased profits (and, in turn, increased dividends) will they do so.

Even then they'll balance the long term (which may favour trickling the benefits down) with the short term (which almost certainly favours taking the money and running). Human beings tend to have a very short term focus where money is concerned. If you want a demonstration of that you can look at the number of people in the UK who have made adequate pension provisions - not many have. Indeed the current banking crisis has been largely caused by banks offering unrealistic loans to increase in order to increase their market share even though it was obvious that the risks involved meant it was a bad strategy in the long term.

Human beings are inherently selfish. It's a beneficial evolutionary trait that's hard wired in. A CEO who has the choice of a larger swimming pool or happier staff is going to take the swimming pool every time.

[homer13j]

I get the theory but I'd still dispute the reality. It carries the assumption that a cut in the tax burden on the company will be passed on to employees as either higher wages, better benefits or increased employment opportunities. I'm not convinced that is the case and I think that the cut is far more likely to be passed on to shareholders in the form of increased dividends. Only if the company sees a case that passing the benefit onto their employees will result in increased profits (and, in turn, increased dividends) will they do so.

You are completely ignoring the very real possibility that the company in question would use their reduced tax burden to reduce the cost of their products and thus benefit the consumer, or the "little guy."

If you want a demonstration of that you can look at the number of people in the UK who have made adequate pension provisions - not many have..

This problem is certainly not unique to the UK. Many (I would argue most) who have not bothered to plan for the future are counting on the government to do it for them. And there are far too many politicians who are willing to go along with this as it only serves to increase government's power over the individual.

A CEO who has the choice of a larger swimming pool or happier staff is going to take the swimming pool every time.

It has been my experience that whenever a liberal has the choice of looking at a situation objectively or making broad, sweeping generalizations they are going to make the broad, sweeping generalizations every time.

[FunkyDexter]

You are completely ignoring the very real possibility that the company in question would use their reduced tax burden to reduce the cost of their products and thus benefit the consumer, or the "little guy."

Unlikely. As with allowing the benefits to trickle down, they will only reduce the cost of their product if they think it will ultimately benefit their own bottom line by increasing their market share. If the market had space to do that they would almost certainly have already done it, probably at the expense of the quality of the product or service. Corporations do not exist to benefit anyone except their own shareholders. If they do benefit anyone else it's entirely coincidental and coincidence certainly shouldn't be relied upon as a basis for government policy.

This problem is certainly not unique to the UK. Many (I would argue most) who have not bothered to plan for the future are counting on the government to do it for them. And there are far too many politicians who are willing to go along with this as it only serves to increase government's power over the individual.

Probably, I only specified UK because then I knew I was on safe ground with my statement. I don't doubt, for a second, that it's a worldwide phenomenon. Mind you, no politicians over here are saying they'll support us in retirement. In fact they've been quite blunt about the fact that if we don't fend for ourselves we're screwed. That includes (in fact it's mostly been driven by) our supposedly left wing Labour government. And we're still not saving.

It has been my experience that whenever a liberal has the choice of looking at a situation objectively or making broad, sweeping generalizations they are going to make the broad, sweeping generalizations every time

It has been my experience that whenever a conservative has the choice of looking at the objectivity of an entire post or highlighting what was indeed a rather obvious generalisation which was meant purely as a tag line, they will do the latter every time

[nemaroller]

The majority of corporations and privately held firms (but let's narrow the focus to businesses that have shareholders) will reinvest in their business - bringing new product models to market, improving quality, advertising increases - before ever passing out dividends to shareholders.

But even if all corporations simply passed out dividends, that money is now used by the shareholder to spend as they wish - to help pay for college education, buy a car, maintain their house, etc. That money is again taxed by the divided interest earned, and the sales tax when the shareholder spends that money.

So the trickle-down theory still holds even in the case of shareholders.

[Shaggy Hiker]

I'm appalled by both sides. This same debate has raged in Biology just as it has in economics. Does reducing predators increase the numbers of prey? That's the trophic cascade. Does increasing food increase the number of predators? That's the trophic fountain. Feed the base, feed the top, which has the greater impact? The similarities between these two theories and the competing economic theories are fairly obvious. However, there is only one real economy. We can't put the economy in a petri dish (that is actually changing) and test what would happen if we do X versus Y. Everybody who trumpets one strategy over another points to those periods where their strategy worked while the other one failed. I've been in these debates in the halls of biological academia, and the positions there were generally held with no less passion than the views of economists.

The truth is: Neither is correct, and both are correct. People HATE this. I have known biologists who I otherwise respected try to wish it away. The basic statement is "I know that what you say is true, but for now I'm going to pretend it isn't true because it makes my study meaningless." I've seen PhD projects completely founder because the candidate plowed ahead with a study that required that only one or the other be correct.

Economists are FAR worse than biologists in this regard. In all the years I have followed economics, I have heard exactly ONE person mention chaos theory and it's implications, one of which is that Trickle Down Theory is pure crap except for those times when it isn't or is only partial crap, just like every other theory out there. People desperately, even rabidly, want the truth to be one way or another. It isn't. The truth is both ways at the same time, and this has been demonstrated exhaustively in hundreds, if not thousands, of studies of the trophic cascade vs. the trophic fountain. I have no doubt that if people could actually test Trickle Down versus whatever in economics they would find exactly the same thing. Just as biologists hate this, so do economists, they just have the cover that their studies are too weak to be truly discriminant, so if the results fit their pre-conceived notions they accept them, and when they don't they come up with some excuse and reject them.

All the examples and suppositions about how companies work are designed primarily to support one argument or another. Where is the empirical evidence that shows that EVERY company will behave in one fashion or another based on getting cash. The evidence doesn't exist because all of you know that some companies will do one thing and other companies will do something else, and so on. It is in this diversity of strategy that all the theories fall on their faces. For Trickle Down to work, the majority of people getting the benefit have to trickle it down. Some will, some won't, and the percentage that will take each strategy will be different every single time. So the only reasons that I can see to assert any one strategy would be these:

1) It directly benefits you (no trickling down, you have to be the one getting their taxes cut.
2) You adhere to a political position that requires you to accept a certain economic theory as fact, and don't question it.
3) You want the world to have simple answers to complex problems.
4) You don't know your arse from a hole in the ground.

Don't laugh (I doubt you are), I have spent too long arguing this very point against people in academic settings who had all the evidence I had, agreed with every conclusion I have stated here, yet were clinging to option #3 like a drowning man clinging to a life preserver. Careers were lost, thousands of dollars wasted, and all because people doggedly plowed ahead despite acknowledging that the evidence showed they could only succeed by pure chance.

[FunkyDexter]

...(but let's narrow the focus to businesses that have shareholders)...

I'd simply regard a privately held firm as having a 100% shareholder. That's not entirely accurate, of course, but it provides a simple terminology to separarte those who own the company from those who work for it. It's not ideal terminology so feel free to substitute your own if you can come up with a concise phrase to describe these two groups. I couldn't so I used shareholders.

The majority of corporations and privately held firms will reinvest in their business - bringing new product models to market, improving quality, advertising increases - before ever passing out dividends to shareholders.

That's only true if they believe that re-investment will ultimately improve the bottom line. If they don't see an available market to move or expand into or an efficiency saving that can be made for a short term expense (retooling, for example) they won't bother investing because it would be a waste. If there is an argument for re-investment they will do so, but I don't see a connection between that and trickling down. Efficiency savings are more like to lead to redundancies than new recruitment and moving/expanding into a new market usually means someone else (usually a smaller business) is going to get squeezed out of it. The obvious exception would be a completely new market that didn't pre-exist and if a company wants to do that there are a lot easier ways of finding the finance than relying on a tax cut.

But even if all corporations simply passed out dividends, that money is now used by the shareholder to spend as they wish - to help pay for college education, buy a car, maintain their house, etc. That money is again taxed by the divided interest earned, and the sales tax when the shareholder spends that money.

All those arguments apply regardless of where in the system the cash get's injected. Give a tax break/handout to the guys at the bottom and they'll spend it just the same as the guys at the top.

Shaggy, I agree with everything you said, but then I'm not advocating the trophic fountain (which sounds like some sort of hallucinogen, if you ask me) either. I'm simply arguing that you cannot give to the top and rely on the benefit reaching the bottom. It may reach the bottom but if it does it's entirely coincidental and that's not a good basis for economic policy. If you wish your economic policy to benefit a particular sector of society then ensure it does so directly. Want to attract rich investors into your country? Drop high level tax rates and corporate taxes. Want to benefit the middle classes? Increase the basic tax free allowances. Want to help out the poor and unemployed? Implement free health care and welfare. Just don't assume that whatever benefit you give out will somehow work it's way to another part of the system in a way you can rely on.

edit> I think I probably fit into both categories 3 and 4

[JPicasso]

My only experience as one of the "tricklers" (heh) is when I was unsure if I was going to be working, we cut loose our house cleaner. When my contract was renewed we hired her back.

Having more disposable income also enchourages me to hire someone to do things around my house, like paint, cut the lawn, fertilize the lawn, fix my garage door opener etc. etc. When economic times get lean, I do those things myself and do not spend money. Then, the painters and handymen have less income.

I think it does work, at least in my household. I know others around me do the same. I also believe it works on the small-business scale, and while one may lose some of the trickle, with large companies, it does happen there also.

That's my story, I'm sticking to it.

[Shaggy Hiker]

I'm simply arguing that you cannot give to the top and rely on the benefit reaching the bottom. It may reach the bottom but if it does it's entirely coincidental and that's not a good basis for economic policy. If you wish your economic policy to benefit a particular sector of society then ensure it does so directly. Want to attract rich investors into your country? Drop high level tax rates and corporate taxes. Want to benefit the middle classes? Increase the basic tax free allowances. Want to help out the poor and unemployed? Implement free health care and welfare. Just don't assume that whatever benefit you give out will somehow work it's way to another part of the system in a way you can rely on.

That's pretty much the point. A wholistic approach to economic management is going to fall on its face. The interactions will be necessarily unpredictable. If you want to help sector A, then help sector A directly. Don't help sector B and assume that will affect A one way or the other. It WILL affect A, but whether the effect will be large or small, positive or negative, is not something you can predict.

[dbasnett]

Trickle-Up Theory. We know that works.