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Cutting Taxes for the Wealthy

How Economies Grow.

by James Leroy Wilson
January 30, 2003

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Cutting Taxes for the Wealthy_James Leroy Wilson-How Economies Grow. The debate over tax cuts "for the wealthy" reflects, I believe, two conflicting views over the engine of economic growth. Some think that economic growth is the result of more people having more money to spend. To this line of reasoning, tax cuts for the middle class and earned income credits - giving the poor more money - will create greater demand for more consumer goods, thereby prompting greater production and more job creation. And if that is not sufficient, government public works projects and other increased government spending could help the country until the business cycle swings upward again. This is frequently called "demand-side" or Keynesian economics, after the British economist John Maynard Keynes, who wrote on these topics in the early part of the last century.

The contrary position is that economic growth comes from capital and labor. Capital is excess income - money one receives that is not going to be spent for personal and family needs and wants - and therefore is saved, invested, or used to expand or improve one's business. When more money is saved, interest rates - the price level of borrowing money - falls precisely because there is more of the "supply" - money - to meet the demand. When interest rates fall, more people are motivated to borrow money in order to buy homes, improve their businesses with expensive new equipment, and do other things they would otherwise not have done because interest rates are too large. This, in turn, creates greater demand in many different industries such as home construction, and thus more jobs are created. And when money is invested in stock, corporations have more money to expand and improve their businesses, and therefore to provide more jobs. When capital is re-invested in one's own small business, that might mean hiring more workers. A mom-and-pop operation may hire more clerks or a custodian, so that the owners can concetrate their energies on what they do best instead of performing mundane tasks. Or it may upgrade its operations with better technology and provide quicker, better services. The result of all of this is low employment, and more, better, and cheaper prices for more and more kinds of products to more and more people. This is called "supply-side" economics, and there are a host of economists that inspired it, but former Congressman Jack Kemp (R-NY) and President Ronald Reagan were the names most associated with it in the 1980's, when tax rates, especially for the wealthy, were drastically slashed.

You've probably already guessed, based on my much longer discussion of it, that I agree with supply-side and disagree with Keynesian economics. Keynesian economics would create make-work projects such as paving little-used rural gravel roads, building second or third airports when the market demands only one, building impractical military weapons, and recruiting or drafting unnecessary military personnel. The government would essentially be taking money out of the productive private sector and try to allocate resources where it, not the aggregate free choices of free people, decides is best.

Since 1971, when President Richard "We are all Keynesians now" Nixon took the United States off the gold standard, which equates the value of a dollar with a certain weight of the precious metal, the situation has become even more dangerous. Dollars can now be printed up at will via the decisions of the Federal Reserve Board. The government can thus articially create "demand' in three ways: giving money to people who haven't earned anything, employing people in worthless government jobs, and artificially lowering interest rates by flooding our banks and economy with money it decided to print up.

Keynesian economics is social science's version of the perpetual motion machine. "Wealth" (money) is created by government decree, not by any actual production of anything that people actually want or need. It rewards people that haven't worked, it creates work that isn't needed, and it generates money that has no innate value in itself, only the value assigned to it by the appointed bureaucrats of the Federal Reserve. All of this to give the common people some cash in hand, so that they can spend our nation out of a recession.

But if the economy was based on what people "demanded," or wanted, you'd think that Star Trek-style molecular transporter devices would have been invented by now. Things do not magically appear thanks to consumer demand. If that were the case, not only would we have transporter devices, we'd have immortality pills.

But public demand for something is only a reflection of what a producer provides. People may fantasize about what they wish for, but what they actually get are the things they most want and can afford among what is currently availalabe. Something is created, and the creator tries to sell it, tries to profit - improve his own life - because of the work he has created. But for him to profit, somebody has to want that creation. The art of selling is convincing people that they need or want something that they previously hadn't seriously considered as important to their quality of life.

This is not a false or fraudulent activity - it only seems so. Some industries undoubtedly appeal to our hidden and most perverse fantasies and desires, or try to exploit our cravings for certain foods, drinks, and drugs. But does the existence of the temptation excuse the tempted? Is one vice worse than another?

Why is one who is "tempted" by greed and therefore seeks profit in the porn, tobacco, alcohol, or gambling industries not excused, but the people who knowlingly persist in every other time-wasting, self-destructive, and emotionally empty pleasures are excused, precisely because they were "taken advantage of" by the greedy? Unless the greedy resort to theft, fraud, or violence, the reason for his riches is consumer choice. If you want to take away the right of consumer choice from other adults, because they are too stupid or weak to handle freedom and responsibility, you are also taking it from yourself. You are promoting a regime where people who deem themselves smarter and stronger than you, take away your choices, for what they say is your own good.

Lots of people don't need lots of things, and would probably be better off without them. But who's to judge? Lots of people who complained a few years ago that people don't need cell phones or DVD players now themselves own such gadgets, because their price came down to a level where the anti-capitalist could afford them. The anti-capitalist could argue that I'd do better spending more of my time and money buying and reading 19th-century Russian novels, listening to Glenn Gould's early CD's, and collecting Fellini films, instead of spending even larger sums on a better computer, a better-looking jacket, or a digital tv. Life is more than shallow comforts; beauty, truth, and other intangible goods mean more than money and technology, the anti-capitalist would say.

Yes, but the reality is that industry and technology provide the canvass, so to speak, for great art, philosophy, and almost every other intagible good that further our happiness. How many great novels were written in the 13th century, or 6th century? Even though the art form, the extremely lengthy and detailed fictional story conceived by one person's imagination and produced in prose, hadn't itself been invented, how could it have existed and thrived without the printing press? How many people today would even know how to read, or think it is necessary to learn how to read, without such an invention? And why would the video and CD players that we've taken for granted for over a decade be good, but the latest models of computers or television be bad? Why shouldn't I decide what is best to improve my own life?

Technology has improved quality of life in a way that has outstripped dollar inflation. Thirty years ago, the dollar could buy much more than it does today, and when adjusted for inflation, people are barely making more than they did back then. But the quality of the stuff we are buying today is far superior.

Back then, Elvis Presley at his Graceland mansion would have the audacity to have two tv's, side by side, so that he could watch two NFL games at one time. That was considered eccentric and tacky. Today, a person of moderate income could watch his favorite team play every week via satelite television. Or go to a sports bar and watch every game at the same time for the price of lunch and a few drinks.

Cell phones let car breakdowns (which are rarer today) require one phone call to AAA from the warmth of one's car, instead of a perilous long walk or hitch-hike to the nearest phone. The classic movie you always wanted to watch, you can, for a couple of bucks without staying up late because the local tv station wouldn't show it until midnight. And no matter how smart, friendly, and helpful the reference librarian was twenty years ago, the Internet is a lot quicker.

The real test of economic growth should be the changes in what people can afford, rather than how much money they earn. This comes from the increase and improvements of products over time, so that previously unheard-of devices become commonplace even among low-income people. And it is capital, excess income, that is the engine for this kind of prosperity. And the people with excess income are the wealthy.

While tax cuts for the middle class and poor would undoubtedly help them afford more of these things or help solve other problems, it is also true that these classes save less and spend more of what they earn. A person whose taxes are cut by just a few hundred dollars, or even a couple of thousand of dollars, are saving only from eighty cents to five dollars a day. Most or all of that money is going to get spent. I am for cutting taxes all down the line, but the economic effect of cutting taxes only for the middle class and working poor would be negligible, precisely because the money is going to be spent in the short term, not reinvested into the economy for the long term.

But when taxes are cut by five thousand, twenty thousand, to hundreds of millions of dollars, the proportional increase in spending declines, and savings increase. The billionaire who has everything he wants will spend very little, if any, of his tax break, and he's not going to convert that money to cash to hide under his mattress. His money, formerly confiscated by the government, will end up being re-invested in the economy in savings, stocks, bonds, improving his own businesses, and helping start new ones.

It is the wealthy who have the resources that can revive the economy. And the size of the tax cut will determine how strong the recovery will be, not necessarily in the next quarter's statistics, but years down the road when more and more people are enjoying a better quality of life.

Comments (2)

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Barnabas from TPO writes:
January 31, 2003
James Leroy Wilson writes, It is the wealthy who have the resources that can revive the economy.

It is also the wealthy who have the resources to insure, through campaign funds, that the government they want gets elected - to have the resources to lobby the government to buy what they have to sell - and to convince local congressional districts that their industry is vital to the economic health of the community, if not the country.

Very limited government has to exist before the ideas in this article become operative, because governments as they are now constituted are far and away the hugest customers of private industry.

Those wasteful items mentioned (e.g. the unnecessary airport, the redundant sophisticated weapon) will continue to be built and sold, not to stimulate the economy from below, but because the supply-siders have them to sell and they will go broke if the government--the only entity that can afford their product--doesn't buy them.

The military-industrial complex warned against by President Eisenhower has now existed for so long, under the guise of free enterprise, that we treat it as The Way Things Are.

Middle-Class Joe writes:
February 4, 2003
Mr. Wilson's persuasive argument is one of the most clear and rational defenses of supply-side economics that I've read or heard. I hope it gets millions of hits.

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