I read over and over again in this forum the dark predictions that jobs will be destroyed if Obama is elected and enacts his changes to the U.S. tax code. The oft-quoted line is that tax increases on the wealthy reduce their incentive to invest and that lack of investment will result in fewer jobs being created. But there is another possible outcome, and it is at the heart of something called Demand Side policy. Tax cuts for the middle class (people who spend nearly all of their income) end up going directly into the U.S. economy and thus boost demand for goods and services, which creates jobs and economic growth through a different mechanism.

 

Here is an interesting article making the case for Demand Side based on U.S. economic data from periods during which both policies were in effect. Read and discuss.

 

Supply Side vs. Demand Side

 

Some excerpts:

 

According to Supply Side theory, tax cuts should go to the wealthy for only they can afford to use the extra income to invest in the economy

to increase its capacity to supply goods. But there is nothing to make

sure they actually invest, especially in the U.S. economy.

 

The new money might simply sit in the bank, or be spent on expensive

foreign imports. It might be wasted in misdirected speculation, or

invested in fast growing markets like southeast Asia. Without the ability

to ensure that tax cuts are, in fact, invested in new productive assets,

Supply Side Economics cannot ensure any real linkage between tax cuts and

the hoped-for economic boom.

 

 

Contrast this wishful thinking with Demand Side economics. Demand Side Economics, says that if taxes are to be cut, they should go to those who earn the least amount of money. The reason is that low-income workers

spend virtually all of their incomes. Money given to them goes right back

into circulation, fueling a boom in consumer spending. This is essentially the policy that rescued the U.S. economy from the Great Depression. This, say the Demand Side economists, is the real foundation for an expanding economy. How has this theory held up in practice?

 

Bill Clinton reversed Reagan's Supply Side policies, raising taxes on the

wealthy and lowering them on the working and middle class. This Demand

Side formula was fiercely resisted by Republican leaders in Congress who

predicted a stock market crash and another Great Depression. Indeed,

every single Republican member of Congress voted against it. It took a

tie-breaking vote by Al Gore in the Senate to get the bill passed. What

happened?

 

The economy produced the longest sustained expansion in U.S. history. It

created more than 22 million new jobs, the highest level of job creation

ever recorded. Unemployment fell to its lowest level in over 30 years.

Inflation fell to 2.5% per year compared to the 4.7% average over the

prior 12 years. And overall economic growth averaged 4.0% per year

compared to 2.8% average growth over the 12 years of the Reagan/Bush

administrations.

 

It wasn't even close. The economy performed dramatically better in almost

every way once Supply Side policies were replaced with Demand Side

policies.

Has history not proven that when taxes are cut on the wealthy, tax revenue goes up and the economy gets stronger?

Has history not proven that when taxes are cut on the wealthy, tax revenue goes up and the economy gets stronger?

 

 

Not really. The notion that revenue goes up when taxes are cut is not supported by the majority of economists. The data from the most recent wave of major tax cuts Bush 2003 showed a huge drop in tax revenue the two years after the cuts were enacted.

 

Read the linked piece. It notes and illustrates with real data that economic growth under supply side policies have not been as historically strong as under demand side policies.

First of all, thanks for starting a quality thread, H.

 

Secondly, I have no problems with tax cuts for the middle class. It is when it is coupled with tax hikes on the wealthy that I have a problem.

 

Thirdly, here is my attempt at an explanation. Tax cuts for anyone results in increased spending, of course, because it leaves more money in the hands of people or businesses. When it is tax cuts on the demand-side, it results in more consumer spending. This of course is good for the economy, but does it result in long-term economic growth? When it is on supply-side, it results in investment spending.

 

That article, while it raises some good points, is a bit misleading. It almost blames the debt on supply-side economics during the Reagan era, when the real problem was humongous spending. Also, I don't think using Clinton's Presidency alone is a proof that supply-side economics isn't as good.

Not really. The notion that revenue goes up when taxes are cut is not supported by the majority of economists. The data from the most recent wave of major tax cuts Bush 2003 showed a huge drop in tax revenue the two years after the cuts were enacted.

 

Read the linked piece. It notes and illustrates with real data that economic growth under supply side policies have not been as historically strong as under demand side policies.

Tax cuts do not correlate with increased taxes, but with economic growth. It is no wonder that tax revenues have been down with the state of our economy. But is Bush's tax cuts to blame? And does Clinton (and Demand-side economics) deserve credit for two terms with no recession?

First of all, thanks for starting a quality thread, H.

 

Secondly, I have no problems with tax cuts for the middle class. It is when it is coupled with tax hikes on the wealthy that I have a problem.

 

Thirdly, here is my attempt at an explanation. Tax cuts for anyone results in increased spending, of course, because it leaves more money in the hands of people or businesses. When it is tax cuts on the demand-side, it results in more consumer spending. This of course is good for the economy, but does it result in long-term economic growth? When it is on supply-side, it results in investment spending.

 

That article, while it raises some good points, is a bit misleading. It almost blames the debt on supply-side economics during the Reagan era, when the real problem was humongous spending. Also, I don't think using Clinton's Presidency alone is a proof that supply-side economics isn't as good.

 

Someone has said the magic words. I keep hearing about how hard the folks at the tippy-top of the income scale have worked for their hard-earned riches. Not to paint with too broad a brush, but many have done exactly what you say - make money by investing. A difference between the lower/middle classes and the upper class - making money by working versus making money by investing.

I don't believe either to be inherently correct. I think it is circumstantial.

 

Is the point of the government to ensure that the collective populous benefits through the economy? I believe it to be. Have Keynesian economics worked? Yes. Have supply-side economics worked? Yes. Why? Different times call for different policies.

Someone answer this for me: When did it become an absolute truth that higher taxes on the wealthy automatically means less investment? It's not like rich folks are going to wake up that morning and say, "I'm satisfied with the money I have and don't need to make any more."

Has history not proven that when taxes are cut on the wealthy, tax revenue goes up and the economy gets stronger?

History has proven that tax cuts on wealth producers do strengthen the economy. Ireland is one of the best modern examples of the effects of slashing taxes on businesses. Reagan's tax cuts cured what ailed the Carter economy over a very short period. Liberals prefer to discuss the theoretical because reality has smacked them in their collective face so often in the past. :lol:

Someone has said the magic words. I keep hearing about how hard the folks at the tippy-top of the income scale have worked for their hard-earned riches. Not to paint with too broad a brush, but many have done exactly what you say - make money by investing. A difference between the lower/middle classes and the upper class - making money by working versus making money by investing.

Investments create jobs. Money blown in lottery tickets and beer - not so much. Tax cuts to people who pay no federal income taxes is much less likely to be invested in places that will efficiently create jobs than tax cuts given to federal taxpayers.

Someone answer this for me: When did it become an absolute truth that higher taxes on the wealthy automatically means less investment? It's not like rich folks are going to wake up that morning and say, "I'm satisfied with the money I have and don't need to make any more."

Is it not evident that high taxes reduce the money available for investment? Wealthy people do not have mattresses full of money that may be used to either invest or to pay taxes - they became wealthy through investment. I think that it is self-evident that higher taxes means less investment.

Has history not proven that when taxes are cut on the wealthy, tax revenue goes up and the economy gets stronger?

 

Absolutely. Please read the following story published by the Joint Economic Committee in 1996. Be sure to read it in its entirety. For Econ geeks like me, it is very interesting.

 

http://www.house.gov/jec/fiscal/tx-grwth/reagtxct/reagtxct.htm

Supply siders believe in tax cuts for everyone. Of when you earn more you have a bigger total of dollars you get to keep. Everyone spends and or invests, stimulating the economy. And of course, those with the most money spend or invest more total dollars. All this spending and investing helps to stimulate the economy.

 

Money for taxes should only be collected for the Constititional purposes of government, not wealth redistribution. It is so tiring of hearing from people who are jealous of big money earners or those who are not willing to prepare theirselves for the workforce, so they may increase their earning potential.

Is it not evident that high taxes reduce the money available for investment? Wealthy people do not have mattresses full of money that may be used to either invest or to pay taxes - they became wealthy through investment. I think that it is self-evident that higher taxes means less investment.

 

Seems to me they would continue investing aggressively to make up for the chunk of money "lost" to taxes.

 

Just as there is no guarantee that a less-heavy tax burden automatically increases investing, there is also no guarantee that a bigger tax burden decreases it.

Seems to me they would continue investing aggressively to make up for the chunk of money "lost" to taxes.

 

Just as there is no guarantee that a less-heavy tax burden automatically increases investing, there is also no guarantee that a bigger tax burden decreases it.

Where does the money come from to make up for the money lost to higher taxes? I don't know about you, but I have no pool of loose cash available to pay an increased tax burden. If my taxes are increased, then I would be forced to cut spending somewhere or to cut my contribution to my 401K plan, which is already nowhere near as much as it should be. Tax increases must result in cuts in investments unless you adopt liberals' definition of government spending as "investments."