It suddenly occurred to me this morning that there are important similarities between the prosperity gospel nonsense preached by so many televangelists and the trickle down economics favored by conservatives. In the first, fabulously rich hucksters tell their followers that they will become rich too, if they only send in more money; in the second, fabulously rich politicians and corporate executives tell their followers that they will become rich too, if only they’d make them even richer by cutting their income taxes.
Both of these fantasies manage to survive even though the evidence is clearly against them and should be obvious even to the dullest of those who buy into it. Prosperity preachers are forever telling their followers that if they would just send them money, God will send it back to them ten-fold, or a hundred-fold. So people give money, in huge amounts, and that prediction is proven false; they don’t suddenly become rich. If the preachers really believed their scam, they’d be giving money away rather than demanding that others give it to them. And yet they keep believing that nonsense and keep sending in money.
Likewise, Republicans are forever telling their followers that if they would just cut taxes on wealthy Americans and on corporations, those “job creators” would unleash an economic boom that would provide jobs by the millions. But here again, experience clearly says otherwise. Those taxes are lower now than they have been in decades, while corporate profits are breaking all previous records and so is executive pay. So where are those jobs they promised? The economy was creating far more jobs from 1993 to 2001, when the top marginal tax rate was 39.6% rather than the current 35%.
Maybe — just maybe — economic growth and job creation is a function of the interplay of a huge range of factors and marginal tax rates, at least below a certain threshold, have little to do with it. In fact, since 1950, the correlation is directly in opposition to the Republicans’ prosperity gospel tax policy. When the top marginal rate is above 50%, GDP growth is a full percentage point higher than when those rates are below 50% (2.7% vs 3.7%).
Bear in mind, of course, that marginal tax rates are not the same thing as actual tax rates. From 1950 to 1963, the top marginal rate was 91%; that doesn’t mean that the wealthy were actually paying 91% of their income to the government, for crying out loud. If anyone did pay such a rate, the Republicans would be right that this would undermine their ability to invest and create growth. But that simply isn’t the case below a certain threshold. And the debate now isn’t between 35% and 91%, it’s between 35% and 39.6%. But to listen to the Republicans tell it, we must have been living in a socialist hellhole during the 1990s, must have been living in a terrible dystopia, a virtual great depression, when they paid that second, slightly higher, rate.
Oh wait, we weren’t. The country averaged 4% GDP growth during those years, compared to only 2.8% in the years prior, and had 116 consecutive months of economic growth. 22.5 million jobs were created while Clinton was in office, the most during any presidential administration ever. That’s not because the top marginal rates were higher, of course; higher taxes on the wealthy don’t create growth. But it’s also clear that higher taxes don’t impede growth either, at least up to a certain point that we are nowhere near. And that’s because those tax rates are simply not a factor when it comes to growing GDP and creating jobs.
So no, you aren’t going to get rich by sending more money to Christian hucksters — or to corporate boards of directors.
28 comments
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thisisaturingtest
August 16, 2012 at 1:15 pm (UTC -4) Link to this comment
Both groups share a convenient out, too, for when the flock-members don’t get rich (or go to heaven- same thing to these folks)- “you weren’t good enough!”
tbrandt
August 16, 2012 at 1:21 pm (UTC -4) Link to this comment
Keep in mind that the very wealthy usually make most of their money in dividends, carried interest, and capital gains. The debate over that rate seems to be between 0%, 15%, and 20%.
sailor1031
August 16, 2012 at 1:29 pm (UTC -4) Link to this comment
“…..Voodoo economics”
George H W Bush.
raven
August 16, 2012 at 1:32 pm (UTC -4) Link to this comment
It’s magical thinking all the way down.
Ever wonder how Bush could cut taxes, increase spending wildly, start two wars, and balance the budget.
It’s so easy. He didn’t.
Improbable Joe
August 16, 2012 at 1:43 pm (UTC -4) Link to this comment
Well, I don’t know that higher tax rates don’t encourage job growth, but I would wager that lowering tax rates on corporations and the wealthy discourages job growth. If taxes are higher and regulations are tighter and you want to make more money, you have to grow your business. If every couple of years you can get a bigger tax cut, fire some employees and steal their pensions, and ship your operation overseas, then why would you bother to grow your business? Especially if you’re an executive who is going to get a huge bonus at a lower tax rate for quarterly profits by ANY means, and get a golden parachute when you bankrupt the company? Higher taxes and more regulations have a stabilizing effect on the economy, that can and usually does lead to slower but sustainable growth.
Area Man
August 16, 2012 at 1:52 pm (UTC -4) Link to this comment
The difference is that Prosperity Theology victimizes only the true believers who buy into it. Trickle On Economics victimizes all of us.
Dalillama, Schmott Guy
August 16, 2012 at 1:55 pm (UTC -4) Link to this comment
This is actually not entirely true. Higher taxes on the wealthy which are then spent on infrastructure and social safety nets do create economic growth, by getting that money back into circulation, and by reducing the costs of business and entrepreneurship via improved infrastructure (including social safety nets; people are more willing to take risks when they know they’ll continue to have health care, food and a roof over their heads even if they fail).
Michael Heath
August 16, 2012 at 1:56 pm (UTC -4) Link to this comment
Improbable Joe,
You vastly underestimate the ingenuity and effort businesses expend attempting to growth their profits; using a multitude of approaches, e.g., organic growth, productivity improvements, M&A’s, and yes tax avoidance and lobbying efforts which create barriers to entry for competitors. I’m confident you’d lose that wager.
lofgren
August 16, 2012 at 1:58 pm (UTC -4) Link to this comment
Actually, this reasoning illustrates the same flaw that I always feel when republicans talk about businesses being discouraged to grow by taxes.
It’s true that businesses can find themselves in certain unusual financial situations where growth is a bad thing, but has there ever been a business anywhere ever that had an opportunity to grow – sufficient customer base, sufficient customer opportunity, sufficient credit to finance the operation, sufficient access to base materials – and yet the executives said to themselves, “Shit, we could do that, but then we’d have to pay a little bit more taxes. Let’s not bother.”
Unless I am mistaken, there is no point on the tax arc where you will find yourself crossing a bracket and suddenly having way less money than you did before. At worst, you will be running in place unless you continue to grow your income or shrink back to the smaller bracket. But it’s not like you have $10,000, and then you make $10,001 and the government immediately swoops in to take 75% of it and suddenly you’re practically broke.
Abdul Alhazred
August 16, 2012 at 2:11 pm (UTC -4) Link to this comment
Democrats believe in trickle down too, just it has to trickle through their hands first.
So instead of big corporations being allowed to grab whatever they can, big connected corporations don’t even have to do their own grabbing.
Jasper of Maine (I feel safe and welcome at FTB)
August 16, 2012 at 2:16 pm (UTC -4) Link to this comment
#10
With the slight difference that the money actually gets there – whereas with the Republican “tricky down economics” – it’s a pure myth.
Or are you saying there’s no one currently getting any kind of government benefits/disability/tax credits/etc?
eric
August 16, 2012 at 2:30 pm (UTC -4) Link to this comment
lofgren:
Don’t know about corporate taxes but you’re bang on in terms of US income tax brackets. Earning enough to move up a bracket changes how much tax you pay on the extra money, not the entire amount.
Mark Sherry
August 16, 2012 at 2:51 pm (UTC -4) Link to this comment
Not through marginal tax rates, necessarily, but there are places where the clawing-back of various benefits, combined with taxes, leads to less money in pocket after earning an additional dollar. See http://en.wikipedia.org/wiki/Welfare_trap
Several years ago, I did work for somebody who wrote articles for financial magazines. He had me crunch numbers looking just at (Ontario) income tax rates, plus a couple of child benefits, and IIRC, there was a spot where you’d be better off if you’d earned a couple hundred dollars less. Such situations are obviously something you want to avoid when planning a tax/benefit system, but if you’ve got room in an RRSP, can be a good place to invest from.
Ben P
August 16, 2012 at 3:29 pm (UTC -4) Link to this comment
This is solely to play devils advocate, but you’re mis-stating the argument.
The problem is you’re making it too complicated.
Very rarely is the argument saying “I’m not going to do X because if I did X, I would pay more in taxes.”
The argument they make is “I’m paying $X in taxes, if I didn’t have to pay $X,, I’d be able to do Y with that money.”
Sometimes Y is buy a boat, sometimes it’s expand a business.
lofgren
August 16, 2012 at 3:43 pm (UTC -4) Link to this comment
It’s the same argument, just stated differently.
Either way, the assumption is that the only obstacle to growing the business is a bit more in taxes. I highly doubt that has ever been the case. And even if it has been the case, then lowering the taxes on businesses of size X would just mean that it would suddenly become the case for businesses of size X-1.
Area Man
August 16, 2012 at 3:51 pm (UTC -4) Link to this comment
I recall that after the financial crisis and the bailouts, which resulted in Wall Street annihilating several trillion in housing wealth and then taking several hundred billion more in tax dollars, there was talk of capping executive pay and bonuses at least for those companies that got bailed out. The usual suspects threw a fit. If we didn’t pay these super geniuses what the “market” demanded, then they’d just take their ball and go elsewhere. As if they had been doing anything socially useful to begin with and could easily make 8 figure incomes in whatever profession they chose.
Then, in a hilarious twist, the NYT or one of the other major papers that ran dozens of “pity the rich” pieces (and still do), told us that capping executive pay would be a disaster for younger execs and traders looking to move up. Why? Because the way things work is that an Ivy League MBA with all his connections gets a phat job on Wall Street, makes a gillion bucks, and by age 40 or so hands his job off to the next person in line and retires in luxury. If they didn’t get paid as much, they’d have to work more years, and then they couldn’t spread the wealth by handing things over to the new guys!
It was truly amazing. After months of screeching about how capping pay or raising taxes would destroy their incentive to work, suddenly the narrative had taken a 180 and we were told that reducing their income would make them work too much and deprive others of the opportunity. It was at that point I decided we should probably just kill them all and be done with it.
Area Man
August 16, 2012 at 4:17 pm (UTC -4) Link to this comment
The idea is not that businesses or individuals will deliberately leave free money on the table just so that they can avoid paying taxes, it’s that the marginal benefit of extra work or extra capital investment is lower when the tax rate is higher, so that people might decided to work less or consume rather than invest because the risk/reward ratio changes.
Of course, the way in which people actually respond to taxes is an empirical question, and to the best of my knowledge, there is not a shred of evidence that lower marginal rates and multiple rounds of capital gains tax cuts have done anything to improve incentives. If Republicans believed their own rhetoric, we should be in the midst of an economic boom unlike any in history, because since 1997 we’ve had multiple tax cuts of every kind, mostly tilted to the
richjob creators. We see how that turned out.But of course the real problem must be that rich people are not sufficiently rewarded for hard work, even if like Romney they don’t actually do any work. And it will always be this way, no matter what the economic conditions, because we need an excuse to cut taxes on the rich.
Jordan Genso
August 16, 2012 at 4:53 pm (UTC -4) Link to this comment
Ben P wrote:
And that could be a valid argument, if businesses were not sitting on excess capital that they’ve already chosen not to use. I don’t have any sources at the moment, so I could be wrong, but my understanding is that most corporations have enough money that they could use to expand their business and increase capacity if they wanted, but they don’t want to because they don’t believe it will increase their profits.
The tax rate doesn’t matter if a potential business expansion is looked upon as generating a loss. And you could cut their tax rate on current production to zero, but that still wouldn’t change a capacity increase from a bad investment to a good investment.
Now if the expansion is looked upon as potentially generating X amount of profit (and not a loss), then the tax rate on those profits could matter as it influences the opportunity costs, but it’s unlikely.
Reginald Selkirk
August 16, 2012 at 5:40 pm (UTC -4) Link to this comment
We’ve seen that movie before, in the 1980s. Businesses won’t hire more people if it won’t help them sell more product (or, more precisely, gain more profit). When this occurs, they will instead improve their market share by buying up competitors, so that supply side voodoo actually decreases competition, and therefore is bad for the consumer.
Michael Heath
August 16, 2012 at 6:40 pm (UTC -4) Link to this comment
Jordan Genso writes:
I don’t know if this is still true but it has been true going back to at least the fourth calendar quarter of 2009. The root cause for the hesitancy to invest was a lack of demand sufficient enough to spur more capital investment.
President Obama met with business leaders at the end of that quarter when corporate cash holdings were setting a record at $2+ trillion. The president aptly noted the irony of these CEOs complaining the government wasn’t doing enough to defend and stimulate aggregate demand while these CEO’s lobbyists were spending big bucks with Republican members of Congress to obstruct such stimulative efforts.
Dalillama, Schmott Guy
August 16, 2012 at 7:09 pm (UTC -4) Link to this comment
The thing is that when Y is expand a business, the argument is entirely fallacious. Businesses are taxed on profit/net income; money that you spend expanding the business isn’t taxed. So if your business is generating 1,000,000 a year after expenses, and the marginal rate on income above $500,000 is 90%(just for ease of calculation I’m assuming that there’s only 2 brackets, 0% and 90%), then you can choose to pocket $550,000, or you can choose to pocket $500,000, spend the rest expanding your business, and have a business worth $500,000 more than it was before.
grizzle
August 16, 2012 at 7:42 pm (UTC -4) Link to this comment
Ed, you should elaborate a little more on the difference between Actual and Marginal tax rates! Truth be told, I know several, educated people who hold fairly decent jobs who actually think that a ’91% tax rate’ means that’s the chunk coming out of their salary! It’s ridiculous. Whenever someone claims this I always ask them if they’ve ever done their own taxes before. Not surprising, I’d say at least 91% of ‘em just go down to HR Block.
Sadly, I think this ignorant viewpoint is shared amongst many, many more out there….
Cheers,
Modusoperandi
August 16, 2012 at 8:33 pm (UTC -4) Link to this comment
raven “Ever wonder how Bush could cut taxes, increase spending wildly, start two wars, and balance the budget.”
Oh, please! Everybody knows that Bush II isn’t a True Conservative®. And he never was, no matter how much his followers insisted he was at the time, back when any criticism of the President was treason and shut up, that’s why!
Abdul Alhazred “Democrats believe in trickle down too, just it has to trickle through their hands first. So instead of big corporations being allowed to grab whatever they can, big connected corporations don’t even have to do their own grabbing.”
At worst, that’s a bipartisan problem.
Michael Heath “The president aptly noted the irony of these CEOs complaining the government wasn’t doing enough to defend and stimulate aggregate demand while these CEO’s lobbyists were spending big bucks with Republican members of Congress to obstruct such stimulative efforts.”
Exactly. Obama’s so divisive!
chrisdevries
August 16, 2012 at 11:44 pm (UTC -4) Link to this comment
I think what America needs is an actual socialist party that is capable of mobilising the segment of the population that currently doesn’t vote – those who are left of both major parties, who see such a small difference between the Blues and Reds (both of whom are in favour of laissez-faire capitalism) and who know their priorities will never be tackled by either party. If this seems too unrealistic and “pie in the sky”, perhaps a realistic and certainly positive step would be a socialist version of the Tea Party that votes with the Democrats but actually has a spine and principles they’ll fight for. Right now, the only independent voters the Democrats try to woo are the right-wing ones; what if they had to fight for socialists’ votes, the votes that have never been cast because there was no party that fought for the values of those people?
Here in Canada, we have the New Democratic Party and its influence at the provincial AND federal level is growing. When in power at the provincial level (say, for example, in Manitoba), the presence of two major separate parties to its (primarily economic) right, force it towards the center so that it appeals to would-be Liberal (centrist) voters. This could just as easily have happened in the opposite way, with the Liberal centrists moving left to steal votes from the NDP (indeed, if the Liberals are to ever rise to power again, they’ll have to do something like this). So you get a government that remains committed to leftist social policies while picking the best economically centrist ideas and running with them. It’s not for nothing that they’ve been in power for over twelve years now in a province that reliably produces half Conservative, half NDP/Liberal members of the federal parliament. Last year, the provincial NDP won their FOURTH consecutive term in office with a record seat majority, despite beating the Conservatives in the popular vote by only 3%.
At the federal level, the NDP have recently had their biggest election success in history; despite there currently being a Conservative majority government, this success will have ramifications down the way…the Liberals (centrist party) know now that they have to fight for votes on both sides of the ideological spectrum. They can no longer take for granted that people will “strategically” vote for them to keep the right-wingers from winning. I guess ideally, minority governments are the best way for the Canadian constitutional monarchy to propagate democracy; instead of having 35% of voters (less than 20% of eligible voters) creating a majority government that doesn’t have to compromise, having more than 1/2 of the seats in the house, parties need to collaborate with each other, moderating their positions to pass laws. This could work in the House of Representatives in the USA too…instead of a pendulum swinging left-and-right perpetually, politics would become a self-moderating endeavor where everyone wins, and everyone loses, at least some of the time.
I think American democracy is a joke right now; the votes of a few million people in less than ten states will decide the November presidential election. The lack of a “supermajority” in the Senate has been blocking any work from being done. Private citizens are throwing away billions to convince ignorant people to vote against their interests. A third party won’t fix the situation, not in the least, but in terms of politics, I believe the best political systems are the ones that work to represent the values and interests of the largest segment of the entire population. A third party could help increase the volume of the voices of the unheard tens of millions who are too young, too jaded, and/or too non-normative to have a place at the table and a real shot at being represented for who they are.
dailydouq
August 17, 2012 at 12:09 am (UTC -4) Link to this comment
The idea that more taxes, or maybe moving to a higher bracket discourages more work is silly. It’s not how much taxes you pay, it’s how much you have left over. If taxes were confiscatory or even >100%, then sure, making more income is a bad idea.
Simple test. Winning the lottery will push you into a higher tax bracket. Now, how many of you wouldn’t like to win the lottery?
If somebody came to me and said, here’s more money but you only get to keep 70% of it, of course, I as a rational Randist would say NO! No way. Whatever fraction of an additional dollar I can earn is an incentive.
Plus if taxes are high the only way I can get my McMansion and Ferrari is to earn more. Sure if I choose to earn less I pay less taxes and now I’ll be in a bad apartment and riding a bus.
This is absolutely the most absurd argument I’ve ever heard.
Again, even rich guys, there is a hundred dollar bill laying on the ground. If you pick it up someone will see you and so you’d better pay the 36% tax on it. Of course you can pass it by, saving that 36% tax and losing the $74 that some poor slob in the 14% bracket will then pick it up.
Unless picking up the $100 bill raised my taxes by $101 the marginal return of picking up the bill is still positive, so any rational Mittens MBA type will pick it up.
jakc
August 17, 2012 at 3:58 am (UTC -4) Link to this comment
Oh for Adam Smith’s sake Ed. Consumer demand drives business growth, not effective tax rates. As Republicans keep pointing out, increasing Mitt’s rate (even if you did take 16 or 18 million) won’t fix the deficit, but it also doesn’t screw the pooch on job creation. When you run a business, you add jobs when you have to, when that’s the only way to meet the demand from your customers. You don’t add jobs because some rich guy has money to invest. A 90 % effective rate might be unAmerican or unfair (how will Mitt’s family survive on 2 million a year?) but it’s not going to affect job creation.
eric
August 17, 2012 at 8:33 am (UTC -4) Link to this comment
On the original subject – Ed, their similarities are not as amusing as their contrasts. Consider for the moment that the prosperity gospel teaches that if poor people ask Jesus for money, he’ll give it to them so they can become prosperous. Trickle-down economics teaches practically the opposite: you cannot make individuals prosperous by giving them money, you have to give it to businesses and let people earn it.
So, someone who espouses both at the same time is not being economically consistent at all. They’re just being selfish. The combination leads to this attitude: “I deserve a handout from Jesus, but giving handouts to others is wrong.”
Now on to the current OT discussion. Grizzle:
That’s no excuse. I’ve used tax preparers and attorneys before, and they always report my real tax rate back to me.
slc1
August 17, 2012 at 8:09 pm (UTC -4) Link to this comment
Gee, doesn’t Mr. Brayton realize that a rising tide lifts all boats? End snark.