Contributors

Sunday, July 24, 2011

It Ain't Trickling...

I was sitting around with a friend recently and the topic of trickle-down economics came up. He said he's conservative, but agreed generally that the policy hadn't made any real effect on employment. Many corporations are experiencing huge profits, but aren't hiring. But, he said, it might be working a little.

He told me about a machinist friend who had been laid off. The guy has had an interest in flying model planes. That landed him a job with a local millionaire who has a hobby of racing full-sized planes. This millionaire has a crew of 10 guys who build and maintain the equipment. It's a dream job for the machinist, and some day they might turn this rich guy's multi-million dollar hobby into a business (supplying other rich guys with plane parts, I suppose).

I don't know how the rich guy makes his money or any of the details of how he does his racing. The details don't really matter because anyone who's rich can set his life up the way I'm describing. But let's say he's set up the racing gig as a business because he can win prize money and has "business expenses." Since he has so much time to race planes, it's obvious he isn't working any more. So let's say he's a typical trust-fund baby, who inherited his wealth from daddy, or he's a retired CEO who still got loads of stock options when he was fired for driving the company into the ground.

Since he's able to race planes, he obviously has millions of dollars a year in disposable income, all of it coming from long-term investments in the stock market and qualified dividends. Let's say he also has some investments in tax-free municipal bonds (diversity is good).

He hires a personal broker to do all the work of investing his money (which he can write off), and all this income is taxed at the 15% long-term capital gains tax rate, and is not subject to payroll taxes.

Now let's say this rich guy also has a second home in Florida. Both multi-million dollar houses are mortgaged. He spends most of his time flying around the country in his plane to races ("on business"), and claims citizenship in Florida because it has no income taxes. He incorporated his "business" in a third state that has the lowest possible corporate tax rate. Or if he's really daring, he'll incorporate in another country and further reduce American taxes.

His total tax liability will be that 15% tax rate on his "investment" income, plus whatever "income" he earns as prize money in the races, minus the "business expenditures" in the salaries of the guys he hires to work on his planes. Likely he'll be running at break-even or a loss every year (this is just a hobby, after all), so he'll basically pay no taxes on any winnings. He may even be able to reduce his tax liabilities further if he really tries to max out his racing expenses, but he'll have to be careful to avoid doing so in too many years out of five, otherwise he'll get audited. He'll also pay property taxes on his homes, but that'll be reduced by the interest deduction he gets on both mortgages.

Now to the machinist who he hired. Let's say he's a regular guy making $50K, living in an apartment (he lost his house in the bubble), and will pay federal taxes at a rate somewhere around 18-20%. He pays payroll taxes at 4.2% this year (down temporarily from 6.2%). He lives in Minnesota so he pays state taxes at 7%. He gets no mortgage interest deduction because he's living in an apartment.

We'll ignore the sales tax the two guys pay, even though the machinist will be paying a much higher percentage of his income as sales tax.

The rich guy putts around in a plane all day for the hell of it, while the machinist works his butt off so the rich guy can putt around. Guess who pays the bigger percentage of his income in taxes? The 15% the rich guy pays is half the rate of the 30% the machinist pays. Warren Buffett made this same sort of comparison between himself and his secretary several years ago. And it's still just as outrageous today.

The justification for low long-term capital gains tax rates is to encourage entrepreneurs to invest in new job-creating enterprises. But we're not seeing that. The rich are buying planes and yachts and racking up big bills at Tiffany's. They're not investing in new business opportunities here in the States, as unemployment has been stuck at basically the same rate for years now. Renewing the Bush tax cuts last year removed the "doubt" that conservatives claimed had been holding back business investment, but they haven't start hiring en masse. Now the story is that the debt is causing "doubt," but the truth is that as long as there are countries that have a lower standard of living than the United States, our businesses are going to continue to expand their workforces overseas instead of at home -- as long as our tax policies encourage them to do so.

Conservatives love to talk about how lazy and worthless people on welfare are. But, honestly, how can you defend taxing the wealthiest people -- who can literally sit around all day and do absolutely nothing -- at half the rate that people who have to sweat and bleed for every penny?

The logical conclusion of Bush-era tax policies will ultimately be a new idle rich class, similar to the nobility of old, where the children of the wealthy never work a day in their lives, and CEOs live like kings even after making colossal blunders that cost thousands of people their livelihoods.

The low capital gains tax rate is the most immoral thing about our tax system. It devalues honest work and promotes lazy money-grubbing.

The Bush tax cuts are now scheduled to expire in 2013. At that point the "qualified" dividend tax rate will return to the regular income tax rate, and the capital gains rate will go to up 20%. I can only hope that the fight over the deficit brings some sense into the Republicans in the House, and we get rid of the special treatment the wealthy are receiving sooner rather than later.

42 comments:

Anonymous said...

This rich guy currently pays the Alternative Minimum Tax based on what you've described. The last proposal offered by the gang of six wants to get rid of the Alternative Minimum Tax.

The rich really do have a lot of power to influence. The little guy, so busy working, has no time to lobby/access.

Anonymous said...

Now let's say...

You use that phrase an awful lot here, which means the entire post is speculation. Fair enough, and perfectly valid.

But using the exact same speculative, "what if" type of argument, Obama thinks he can nuke Tripoli without needing the approval of Congress, because it doesn't rise to the level of "hostilities".

And yet the idea that the President of the US believes he has the authority to unilaterally start World War III, without needing the permission or approval of anyone in the world, doesn't bother you a bit. I wonder why that is. Somehow I suspect you considered the Patriot Act and/or the Iraq war to be examples of "Republican dictatorship", even though Congress had its say and gave its approval in both cases.

Your outrage would seem a lot more sincere if it wasn't so selective.

Anonymous said...

The rich:

literally sit around all day and do absolutely nothing

The poor:

have to sweat and bleed for every penny

Sounds like it is better to be rich to me.

Your class warfare techniques are improving, but you still haven't quite sold me on your 'From each according to his means' lectures.

Juris Imprudent said...

I don't know how...The details don't really matter...But let's say...Since he has so much...it's obvious...So let's say

I have to hand it to you N, I don't think I could possibly pack that much speculation into a single paragraph.

GuardDuck said...

I think the whole thing lost its credibility when N said he had a conservative friend.

Futility said...

"That landed him a job with a local millionaire "

I hope the local millionaire reads this blog and fires your friend.

Then a poor person can hire your friend to do all of the precision machining on his 1980 Dodge Omni.

Funny how the evil rich fatcat is the one providing your conservative gay black friend with a dream job, but you hate him for it.

Mark Ward said...

The one thing people tend to forget is that trickle down economics is just that...a trickle. I find it highly amusing that you guys defend all this stuff AND are worried about socialism. Plutocracies are how socialism suddenly becomes chic again. And I'm talking about real socialism not the imagined socialism bouncing around in your minds right now.

If you folks would chuck the paranoid fantasies for a moment and realize that it would be far more beneficial to give a little bit and support the current form of the Democratic Party which is pretty conservative compared to the past. Otherwise, your nightmares will come true and you will only have yourselves to blame.

Anonymous said...

...it would be far more beneficial to give a little bit and support the current form of the Democratic Party...

Meaning what, exactly?

Support the belief that it's okay when government's bills are nearly twice its income, that in fact we're not far enough in the hole, and that anyone who considers that a problem is fearmongering and "un-American"?

Support the "offer no plan of your own, and reject everything" strategy that has resulted in 817 days since the Senate last addressed the budget?

Support forced unionization?

Support the idea that President Obama should get to do whatever he wants, and it doesn't matter whether he has the authority to do so under the law because it's "a unique situation"? Here's a news flash: Every situation is "unique".

Support the cronyism that decrees that whoever the villain du jour is, go after them and destroy them, not caring whether it's legal or not, unless they're a big Democrat Party donor, in which case they get a waiver from laws everyone else has to obey?

Support "the unitary executive" who, if Congress doesn't pass the laws he wants, can just rule by Executive Order? Who can even take the country to war without so much as a by-your-leave from anyone?

That "current form of the Democratic Party"?

Anonymous said...

And what are my nightmares?

Because if you are talking about that one where my grandpa wears a bra and sings opera, you are really freaking me out...

Juris Imprudent said...

And I'm talking about real socialism not the imagined socialism bouncing around in your minds right now.

For someone who seems to have a lot of difficulty distinguishing between real people on his blog and the voices in his head, I suppose I should give a great deal of credence to what you say about imaginings. But considering that you have so much trouble with what I actually say, as opposed to what the voices in your head say - I don't think I will lose much sleep over it.

Haplo9 said...

>I find it highly amusing that you guys defend all this stuff

Notice a classic Markism here. He isn't clear on what "stuff" we defend, and doesn't even bother asking how whatever it is might be defended. Nope, with him, we defend bad stuff, it's bad, and thus, we are bad. And stuff. Clear as mud, like usual Mark.

>far more beneficial to give a little bit and support the current form of the Democratic Party

Be sure to let us know when the economic platform of the Democrats is something more than "uh, lets spend a lot of money, both borrowed and taxed. Nothing bad can happen, right?" Then I will be happy to consider supporting Democrats. Till then, I will likely still vote awful over horrific.

Pedro said...

"your nightmares will come true"

Did you just watch Napolean Dynamite? You could be running for the anti-class president.

http://www.youtube.com/watch?v=_TA42woVsqc&feature=related

6Kings said...

The low capital gains tax rate is the most immoral thing about our tax system.

This is true but not the way you meant it.

It devalues honest work and promotes lazy money-grubbing.

This is patently false and shows you have no understanding of capital gains.

From here: CG Taxes retard economic growth

Just a few highlights:
* The tax actually punishes people for moving assets into more productive activities.
* It protects those (like the late tax-loving Teddy Kennedy) who can live off their family’s accumulated capital against those who are trying to accumulate capital
* it is not a tax on the rich but on getting rich; it encourages those who have accumulated wealth to simply conserve it while reducing the flow of venture capital, the lifeblood of entrepreneurship.
* the most important factor that the capital gains tax penalizes is the decision-making ability of entrepreneurs.
* high capital gains taxes are a lousy revenue raiser

All in all, you rant against something you have a fundamental misunderstanding about.

Anonymous said...

Above post...

Hey wow! Prof. Laffer of the Laffer curve I presume?


Should be required reading for you Mark, you too Nikto.

Larry said...

N: The low capital gains tax rate is the most immoral thing about our tax system. It devalues honest work and promotes lazy money-grubbing.

Aww, kids, look! Another believer in the Marxist labor theory of value. Now on to the next exhibit in the Vast Museum of Idiotic Ideas.

Mark Ward said...

Larry, what is your solution then to our plutocracy? Nikto is no Marxist and neither am I. I can almost guarantee you, however, that there will be some sort of socialist uprising if we don't do something about the massive sucking sound of wealth going to the top percentile of this country.

Jaxson said...

Mark.

Can the solution possibly be to borrow money from what I think you believe to be the top 1%, to continue this farce?

I think (and I could be wrong), that you believe the 'fatcats' need to chip in, get some skin in the game, pay their share; but then you want to continue to use more money to pay many of the benefits that people receive at the expense of society.

The government can't do that.

It.can't.work.that.way.
It.never.has.

The world got by just fine with good-hearted people helping out those who were down on their luck. Or just needed a hand. Or might appreciate a home-cooked pie brought over just to be sociable.

Have any of you done that recently?
Have you ever met your neighbors?

Might be important someday.

Who owns the US debt? It ain't the same people that bought War Bonds, and planted victory gardens in 1942.

It is the financial houses, the corporations, the other governments of the world, and THIER financial houses and corporations.

If you truly believed your own position against the plutocracy; the oligarchy!, you would have to support the restriction of throwing the people's money to them.

We, as a nation, cannot afford where we are now. It is unfortunate for Obama to hold POTUS today. Blaming him is useless, as is your consistantly non-well-defense of him as the bestest Prez ever.

You were warned on this blog of this exact situation year(s?) ago.

The American economy is based on (70%) one American jerking off another American. As a service economy, what do we spend our money on? Think about the money you spent yesterday, every dollar, how much of it went to the guy at the counter, the office, or the waitress?

(Hint - it was 70% of your dollar)

Another 25.22% is now in China [general goods], or Pakistan [clothing], India [IT outsourcing] or Germany [sweet cars]... etc.

hmmmmm... How long can I circulate a dollar, at a 25% clip each time, to end up with zero?

(Given: The US is allowed to borrow 15 Trillion dollars total)

Answer: From approximately 1970, when the Vietnam War put us over a Trillion dollars debt, until 2011. (or so)

Last in Line said...

Mark, you had all the solutions when GWB was president.

I love these long screeds by Nikto about the way things are. Remember that the guy you both voted for is in power and if he hasn't changed things like the tax code to your liking yet, it may prove that he really doesn't want to change it.

Mark Ward said...

Can the solution possibly be to borrow money from what I think you believe to be the top 1%, to continue this farce?

The wealth transfer is a large part of the problem. Like President Clinton and many others, I believe that the middle class is the engine that drives our economy. We are seeing our economy stagnate because fewer people are spending money (consumer confidence). You can't have an effective economy with so much money at the top.

But you are correct in stating that taxing the upper percentile alone won't help. With revenue being only one third of the problem, the other two thirds is spending. That means social security, medicare, and defense. Means testing, as juris has mentioned, has to happen. Raising the retirement age, restructuring, and serious cuts in defense all have to happen. Probably even more than that. That doesn't mean the programs should go away but they need to be tailored in such a way that is more sensible for 2011 and beyond.

The world got by just fine with good-hearted people helping out those who were down on their luck. Or just needed a hand.

I don't agree. We had 50 percent of the elderly in poverty before social security. Now we have less than 10 percent. There may be pockets of people helping each other out but not on a systemic level and that's where the government has achieved a great deal of success.

Our nation become the super power that we are because of (not in spite of) welfare capitalism. One need only examine the post WWII period until the late 70s to see this. The problems began when deregulation grew. To certain extent, we needed that to happen to remain competitive in the world but not to the degree and expense of social cohesion. Have you read that piece by Manzi that we talk about all the time on here?

you would have to support the restriction of throwing the people's money to them.

Indeed. It was a bitter pill to bail out those assholes but due to the interconnections in the financial world (brought about by deregulation) we had no choice. We'd be much worse off now and that's the naivete of folks like the Club for Growth. Their belief that government is always the malaise blinds them from seeing that often the choices our leaders face are "Vomit or Diarrhea."

Mark Ward said...

. Blaming him is useless, as is your consistantly non-well-defense of him as the bestest Prez ever.

He is not he best president ever. He doesn't even make the top 5 in my opinion. He doesn't even makethe top 10. I'd say our best presidents were Lincoln, FDR, Truman, Teddy, and Clinton. After that I'd say Washington, Jefferson, Kennedy, Madison, Adams (both) and then maybe President Obama but it sill may be too early to tell.

Our worst presidents were (in order from worst): Lyndon Johnson (because of Vietnam and being complicit in the murder of JFK) George W. Bush (for...well...everything), Nixon (criminal, psychotic), Hoover (economic incompetent), and Woodrow Wilson (who set back civil rights by several decades).

Then you have guys like Reagan who were good and bad at the same time. Very frustrating!

Anonymous said...

Complicit in Jfk's murder? Whoa! You're going to have to explain that.

Jaxson said...

I won't argue with a single premise you believe in.

The government currently seems to be just the way you would design it.

It is unfortunate that your government is 15 trillion dollars in debt, with massive societal unemployment.

Your design perpetualizes a poverty stricken under-class of inner-city residents.

Your design requires the importation of laborers to perform the 'dirty work' of picking your food from the fields.

Your design absolutely requires borrowing money in perpetuity to shower the masses with bread and circuses to keep them from revolting.

Your design unloads the responsibility for taking care of your own family onto the back of 'society'.

Your design seems to be exactly what you have.

Why isn't it working?

Jaxson said...

"blinds them from seeing that often the choices our leaders face are "Vomit or Diarrhea.""

If those are the only two choices, then perhaps the wrong choices were made in the past.

And if you believe that any decision your leaders make are necessarily bad, then that explains why the same people are held blameless at the ballot box.

Your government has come to the point that any choice is bad.

Then the majority elects the same people to make the same bad choices they have been making so far.

Mark Ward said...

Why isn't it working?

Well, first of all, I don't necessarily agree with your list but hey, that's your opinion.

It's not working right now because we had eight years of incompetent management. You can't cut taxes, have two unfunded wars and a subscription drug program that wasn't paid for. This is what created our problem so let's please not do that again. Those actions and incation caused a myriad of problems that aren't easily solved. I think the president is doing the best he can but, given what he was dealt when he arrived in office, it's not going to be all roses and won't be for some time.

There are other reasons why it isn't working. The wealthy in this country have more money than they have ever had. Corporations are netting record profits. They aren't going to easily change from what they are doing even if it helps the economy. What they don't see yet is that eventually their livelihood might be threatened if less and less people spend money.

Jaxson said...

Let's go in a totally different direction.

"given what he was dealt"

OK. He ran for POTUS - against - perpetuating the status quo of GWB. Was he completely ignorant of the situation he was getting into? What has he changed economically? I'm not claiming he could have done anything, just asking.

Back on topic:

Let's both do the math on the tax cut, the wars, and the PDB. We'll meet here within 48 hours to discuss our numbers.

"That's what created our problem"

I'm not so sure. See you day after tomorrow, at the latest. I'm prepared to eat crow.

Jaxson said...

p.s.

"What they don't see yet"

Some do. According to the statistics, businesses aren't hiring BECAUSE their livelihoods are threatened. Unless you are a stupid business owner, I guess.

As a non-small business owner, I doubt I would hire somebody to do work that I was willing to do myself. Unless I thought it was profitable.


See you tomorrow.

J. said...

Poor choice of hyphenation.

I do not own a business.

I see how it sounds. My bad.

Anonymous said...

With revenue being only one third of the problem, the other two thirds is spending. That means social security, medicare, and defense. Means testing, as juris has mentioned, has to happen. Raising the retirement age, restructuring, and serious cuts in defense all have to happen. Probably even more than that. That doesn't mean the programs should go away but they need to be tailored in such a way that is more sensible for 2011 and beyond.


And yet you're supporting the party that is obviously prepared to do anything rather than reform entitlements more than just cosmetically, and has gone nearly 2 1/2 years without addressing budget issues at all, in order to avoid facing such tough questions. The party that demanded "Pay As You Go", and yet has not even once abided by it.

Why is that?

rld said...

Now is not the time for tough questions anonymous - it is time to ask questions of others.

Mark Ward said...

do the math on the tax cut, the wars, and the PDB. We'll meet here within 48 hours to discuss our numbers.

That's cool. If you like, I'll publish your numbers as a regular post so we can start a new thread. If that's an issue, we can continue here.

Don't sweat punctuation or typos. I'm horrible with that stuff.

Mark Ward said...

And yet you're supporting the party that is obviously prepared to do anything rather than reform entitlements more than just cosmetically, and has gone nearly 2 1/2 years without addressing budget issues at all, in order to avoid facing such tough questions. The party that demanded "Pay As You Go", and yet has not even once abided by it. Why is that?

Uh...because your assessment of them is a lie? Or, if you need to be pampered a little, grossly inaccurate. Sadly, this is a managing fantasies issue...

Larry said...

Okay, so where have the Democrats passed a fucking budget in last two years? When have the Democrats actually followed "Pay as You Go"? Where are the serious proposals for entitlement reform?

Jaxson said...

Time kinda got away from me. But I did get laid! Not trying to avoid my pledge....

Anonymous said...

Uh...because your assessment of them is a lie? Or, if you need to be pampered a little, grossly inaccurate. Sadly, this is a managing fantasies issue...

So are you going to actually support that statement? Or is this going to be like your response to Obama's campaign finance fraud, "I looked into it and there's nothing there", which everyone is supposed to believe just because you said so, with no evidence, no links, no rebuttal, nothing?

"Managing fantasies" indeed. But then as a teacher, that's what you do, isn't it?

A. Noni Mouse said...

So are you going to actually support that statement?

As I pointed out in the "Are These Numbers Accurate?" thread, bald assertions (as opposed to rational arguments) are Mark's mostest favoritist debate tactic. And apparently, it's also a mortal sin in his religion to back down from his assertions or actually produce evidence when questioned.

Mark Ward said...

Time kinda got away from me. But I did get laid! Not trying to avoid my pledge....

This blog should be last on your list in your life. It simply isn't that important and should never EVER be a substitute for fucking as well as....well....everything else. You could not post your numbers for 8 months and I wouldn't care. I don't bully or childishly taunt people.

A. Noni Mouse said...

You could not post your numbers for 8 months and I wouldn't care. I don't bully or childishly taunt people.

The problem, dear Marxy, is that you just make assertions without the numbers*, or even in spite of them. Jaxson apparently has too much class to stoop to your level.

BTW, way to turn something absolutely beautiful into something base and degrading. Great job, potty-mouth.

(* Or what someone actually said. :::cough::Reagan::cough:::)

Jaxson said...

Thanks for the understanding. Obviously I'm going to miss my self-imposed deadline. But I haven't forgotten.

Jaxson said...

My figures:

Bush Tax cut (2001) lowered government revenue by 1.3T $ from 2001 to 2011. I use this number, because I think you will agree with it. I can make a decent argument that the actual 'cost' to the IRS may have been 15% lower.

130 billion a year.

Bush tax cut (2003) lowered government revenue over the same timeframe by 350 billion.

35 billion a year.

The Iraq/Afghan war has cost 1.3T since 2001.

130 billion a year.

The prescription drug benefit costs about 55 billion a year.

I come up with 350 billion a year.

Now don't misunderstand me, 350,000,000,000 is enough that I had to count the zeroes to make sure I got it right. But it is still dozens of billions less than just the interest on the national debt.

An interest expense that you never have seemed to care about, on a debt we seem to think we never have to pay back. The ironic part is, we won't.

Anyway, hopefully I have made my disagreement plain.

"That's what created our problem"

No, they didn't. They are part of the problem. If we agree the problem is that the government has run out of money.

Here's a nice quote from the WP, where I did some of my research.[...] the current sky-high deficit exists because tax revenues are at their lowest level since 1950 and spending is at its highest level since World War II, as measured as a percent of the GDP. Moreover, as demonstrated above, revenues have consistently failed to meet the projections that prompted the original tax-cut frenzy in Congress.

But the original question was about solving the plutocracy system you claim to not want.

Mark Ward said...

Jax, I won't bother checking your numbers. No reason to doubt you and they seem in line with what I have read and posted previously.

Based on all the comments you have posted here, your central focus has been on interest. Now, had we not been 3T more in the hole, would you still be as concerned about the interest? Even after Clinton balanced the budget?

Regarding plutocracy, I would urge you to check out this link.

http://www.informationclearinghouse.info/article15923.htm

And that was written back in 2006! It's worse now.

http://money.cnn.com/2010/09/22/news/companies/forbes_400/index.htm

If this trend continues, history has shown us what comes next. I don't want that.

Jaxson said...

I use the interest angle only because anyone who has a credit card or an option ARM coming due knows, if you are finding it painful to pay the interest, you have more debt than you can stand.

If it is painful to the revenue side of the government to 'lose' that 350 b, then it must have been just as painful to pay the 350 b interest.

That's the only reason I use interest as a basis. Talking percentages and Debt/GDP ratios, and state debt ratio vs US T-Bill yield spreads only stops people from reading.

Mark Ward said...

Yeah, that's a good point. I see where you are coming from with all of this and it certainly puts things in perspective.