Minion Mailbag, March 11, 2005 - Economics and Stuff

Greetings, loyal minions. Your Maximum Leader does love his minions. You are all so bright and beautiful. And from time to time one of you writes him with something really really smart. (As opposed to all those soliciatations for viagra, tight college nymphomaniacs, and off-shore investment opportunities that he receives.)

This week a post prompted a thoughtful question. The post was concerning the Smallholder's assertion (which appears to be confirmed in a roundabout way by the Bush Administration) that the US's tax rates put us on the left side of the Laffer Curve. (Read here to catch up.)

To the whole concept of the Laffer Curve and tax cuts, loyal reader "S" writes thus:

Discussion of your posting between me and some of my fellow independent Philistines led to a debate about whether or not tax breaks at the top of the socio-economic matrix were more or less beneficial than breaks more towards my end of the spectrum, which is squarely middle class.

While it is immediately obvious to me that, as an American, I should always back whichever measure decreases my simple taxes, I am in favour of further reduction of taxes for other reasons as well. Specifically, I am in favour of reducing taxes on the middle class. My reasoning is simple. The benefits of tax cuts among corporations and the very wealthy are wisely applied. That is to say, they are invested, often overseas, or they are held as cash reserves, or, maybe, if there is a good economic or political reason, they are invested locally in ways that may or may not help stimulate growth of the local economy.

The fact of the matter is that corporations that are profitable and people of wealth already have the basic necessities and reasonable amounts of fun monies. The middle and lower classes do not, as a whole. Nor do they, as a whole, have a great deal of economic sense. This means that a three hundred dollar tax break among the ranks of the lesser economic entities end up in a return of nearly three hundred dollars into per person into the economy, while a corporate break most often does not.

As you and your gang of henchmen are undoubtedly more informed in such matters, do you have any relevant comment or observation which speaks to where and how to best apply tax cuts in order to benefit the overall economy?

Whew! What a question.

Well "S," your Maximum Leader will have to provide just cursory comments to your thoughtful question. If he had more time, he would attempt to get some hard numbers for you. He used to have a fun little book from which he could get some figures for you - but he can't lay his hands upon it at this moment.

Your Maximum Leader will have to rely on the teachings of Karl Marx to disagree immediately with one of your premises. Namely the premise that additional money (from a tax cut) to the wealthy is "invested, often overseas, or they are held as cash reserves, or, maybe, if there is a good economic or political reason, they are invested locally in ways that may or may not help stimulate growth of the local economy."

Comrade Marx teaches us that a Capitalist (aka: a wealthy person) is always looking to accumulate more capital. Thereby making himself (or herself to use sex-inclusive language) more wealthy. Money that is invested, whether overseas or domestically, is done so to create capital. A cash reserve is money invested in a bank. And as we all know, banks loan out money to capitalists to create more capital. So all the money you are describing, in one way or another, is being put back into the economy and (one hopes) creating more wealth.

Your Maximum Leader will have to rely on a personal anecdote for now (perhaps he'll be able to get some statistics for you later) concerning the wealthy and investing. Your Maximum Leader knows quite a few people who would - by any reasonable person's estimation - qualify as being wealthy. All of these people, regardless of how they came into their wealth (by inheritance or entrepreneurship) are all actively pursuing making more money. They do not invest overseas as much as one might think (because overseas markets do not afford basic protections as does the American market - protections like financial transparency and regular accounting standards). And they tend not to hold large cash reserves (because all a cash reserve gets you is a simple interest return - investing in blue chip stocks will - likely - get you a much greater return long-term).

These are individuals, not corporations. Admittedly, many corporations will do what they can to squeeze out every bit of profit they can. This is especially true of public corporations. But one shouldn't lose sight of the fact that profit and increasing shareholder wealth is what a corporation is all about. That is its basic reason for being. If you own stock, or shares of a mutual fund, or invest in a 401(k); you are one of those shareholders. Wouldn't you feel cheated if the corporation didn't try to earn you some return on your investment? Isn't that what you are counting on?

Anyho... Back to the tax cuts...

The basic argument made by Arthur Laffer, Jude Wanniski and other supply-siders is that money in the hands of individuals and not the government will stimulate the economy. So long as tax rates remain modest, government revenues will increase as the economy grows. When tax rates are too high, individuals will hold on to their money and not spend/invest it in a way that will result in stimulation of the economy.

Now, many economists argue these premises. But since Ronald Reagan no politician has effectively argued these premises. So, US tax rates are among the lowest (if not the lowest) in the developed world. And our economy is the strongest and largest.

According to the prevalent theory, a tax cut favouring "the rich" will have a more salutary affect on the economy because, as your Maximum Leader anecdotally related, "the rich" will put more money back into the economy. The $300 tax cuts received by the "middle" and "lower" class people also will go into the economy and cause it to grow. The question comes down to how much money do you want to put into the economy.

As for your Maximum Leader, he is a general proponent of tax cuts. Where will a tax cut do the most good? That is a tough row to hoe. Given the complexity of the federal spending/debt side of the equation goes, it is hard to tell just what one would want to do. As the federal debt grows, it shrinks the amount of available capital; thereby reducing the possible growth of the taxable economy. So, cutting the debt is a good step towards boosting the economy. Cutting spending (thereby slowing the growth of the debt) is also a good call. Your Maximum Leader believes that these are more prudent steps to take right now than further tax cuts. This is a change of position for your Maximum Leader from just a few months ago. After reading a few big economic reports from the GAO and Congressional Budget Office he thinks that freezing the tax rates where they are, and then working to cut spending and pay down (off?) the debt is a better course of action.

This is, upon a moments reflection, a rather facile discussion of quite complex issues. (But as facile as it is, it was more detailed than either candidate in the late presidential election.) Perhaps another blogger could provide some good material or links to expand on this theme.

Carry on.