Robert Frank: Trickle-Down Theories Don’t Hold Up

Speaking of supply-side economics and trickle-down, Robert Frank explains that trickle-down theory, which says that higher taxes on the wealthy will reduce incentives causing lower growth and hence lower employment and income generally, "is supported neither by theory nor evidence." Thus, contrary to what its proponents argue, trickle-down theory does not provide a valid objection to a more progressive tax code:

In the Real World of Work and Wages, Trickle-Down Theories Don’t Hold Up, by Robert Frank, Economic Scene, NY Times: When asked why he robbed banks, Willie Sutton famously replied, “Because that’s where the money is.” The same logic explains the call by John Edwards, the Democratic presidential candidate, for higher taxes on top earners to underwrite ... universal health coverage.

Providing universal coverage will be expensive. With the median wage, adjusted for inflation, lower now than in 1980, most middle-class families cannot afford additional taxes. In contrast, the top tenth of 1 percent of earners today make about four times as much as in 1980, while those higher up have enjoyed even larger gains. ... In short, top earners are where the money is. Universal health coverage cannot happen unless they pay higher taxes.

Trickle-down theorists are quick to object that higher taxes would cause top earners to work less and take fewer risks, thereby stifling economic growth. ... On close examination, however, this claim is supported neither by economic theory nor by empirical evidence.

The surface plausibility of trickle-down theory owes much to the fact that it appears to follow from the ... belief that people respond to incentives. Because higher taxes on top earners reduce the reward for effort, it seems reasonable that they would induce people to work less... As every economics textbook makes clear, however, a decline in after-tax wages also exerts a second, opposing effect. By making people feel poorer, it provides them with an incentive to recoup their income loss by working harder than before. Economic theory says nothing about which of these offsetting effects may dominate.

If economic theory is unkind to trickle-down proponents, the lessons of experience are downright brutal. If lower real wages induce people to work shorter hours, then the opposite should be true when real wages increase. According to trickle-down theory, then, the cumulative effect of the last century’s sharp rise in real wages should have been a significant increase in hours worked. In fact, however, the workweek is much shorter now than in 1900.

Trickle-down theory also predicts shorter workweeks in countries with lower real after-tax pay rates. Yet here, too, the numbers tell a different story. ...

Trickle-down theory also predicts a positive correlation between inequality and economic growth, the idea being that income disparities strengthen motivation to get ahead. Yet ... researchers ... find a negative correlation. In the decades immediately after World War II, for example, income inequality was low by historical standards, yet growth rates in most industrial countries were extremely high. In contrast, growth rates have been only about half as large in the years since 1973, a period in which inequality has been steadily rising.

The same pattern has been observed in cross-national data. ... Again and again, the observed pattern is the opposite of the one predicted by trickle-down theory.

The trickle-down theorist’s view of the world ... bears little resemblance to reality. In the 1950s, American executives earned far lower salaries and faced substantially higher marginal tax rates... Yet most of them competed energetically for higher rungs on the corporate ladder. The claim that slightly higher tax rates would cause today’s executives to abandon that quest is simply not credible.

In the United States, trickle-down theory’s insistence that a more progressive tax structure would compromise economic growth has long blocked attempts to provide valued public services. Thus, although every other industrial country provides universal health coverage, trickle-down theorists insist that the wealthiest country on earth cannot afford to do so. Elizabeth Edwards faces her battle with cancer with the full support of the world’s most advanced medical system, yet millions of other Americans face similar battles without even minimal access to that system.

Low- and middle-income families are not the only ones who have been harmed by our inability to provide valued public services. For example, rich and poor alike would benefit from an expansion of the Energy Department’s program to secure stockpiles of nuclear materials that remain poorly guarded in the former Soviet Union. Instead, the Bush administration has cut this program, even as terrorists actively seek to acquire nuclear weaponry.

The rich are where the money is. Many top earners would willingly pay higher taxes for public services that promise high value. Yet trickle-down theory, which is supported neither by theory nor evidence, continues to stand in the way. This theory is ripe for abandonment.

Here's a simple way to show that a an increase in taxes does not necessarily reduce effort. Suppose you have a summer job and you have to earn $2,000 for the summer. You don't need to earn any more than that, and don't plan to, but it is a necessity that you reach this goal. Also suppose that you have a job paying $10 per hour so that you can earn the money in 200 hours, or five 40 hour weeks. Let taxes be zero initially.

Now let the government tax you at 50%, surely enough to reduce effort. But in this case it won't. Instead, you will now work twice as long, 10 weeks or 400 hours at $5 per hour, in order to reach your goal of $2,000. So in this example, a tax of 50% doubles work effort rather than reducing it.

This is, of course, a special case and it is possible in the more general framework for the opposite to happen, i.e. for a reduction in the take-home wage to reduce effort, though as noted above the evidence is against the trickle-down story. But this does show clearly that the claim that higher taxes will reduce effort is not necessarily correct. If there is a strong incentive to recover income losses after an increase in the tax rate, effort will increase in contradiction to the trickle-down claims.

Comments

[calmo]

Kash at The Street Light has a very persuasive couple of threads to answer this

Trickle-down theorists are quick to object that higher taxes would cause top earners to work less and take fewer risks, thereby stifling economic growth. .

by drawing attention to the stunning lack of growth in this 2001-2005 period. The lower taxes on the top earners stifled economic growth is the inescapable conclusion.

[David]

Mark,

I don't think your summer job example is a very good one. If taxes were 90% would you work 2,000 hours?

Like the Laffer curve, trickle down economics seems pretty obvious at the extreme (I don't think anyone would argue that lowering the top bracket from 100% to 70% wouldn't increase tax revenue and grow the economy). But at some point (my guess is in the neighborhood of 50%), the returns are pretty minimal. The problem is that people like Bush use these arguments dishonestly to justify irresponsible policies.

I've often wanted to ask Bush if he thinks a tax hike is EVER justified?

[sa]

this example assumes that the person has to earn 2000( not true for the top earners, whose incomes are anyways high enough) and that a person won't be be upto any tricks to avoid the higher taxes(not true). there's no guarantee that higher taxes will increase revenue beyond a certain point although the govt might be aiming for much higher.

[save_the-rustbelt]

Let me weigh in as a tax guy.

One impact I have noted about higher taxes (going back 30 years) is that higher rates tended to stifle entrepreneurial efforts and tend to protect larger established corporations.

Entrepreneurs generally struggle for cash flow, and at the point they start generating profits the amount redirected to taxes is painful.

Those of you who remember the economy of the 60s and 70s will remember the dominance of large corporations and a lesser emphasis on startups.

Can't prove it, but I'm certain it is true.

[ken melvin]

Trickle Down is Orwell for Trickle Up which is the only kind of economics ever. Crumbs, mere crumbs.

Work less? Lord lord, Billy must have worked umpteen million hours a week lo the last past few. Hard work this digging down into the pockets of the lower class and taking the money up where it belongs.

Taxing wealth and big income in order provide health care the masses would be criminal and sinful. Taxing the working class to subsidize GE be OK.

Little disparity, add little more, positive feedback, voila third world. Works every time. Galbraith above was right. It was intentional.

[Farrar Richardson]

Save the RB

As a long time independent entrepreneur, I appreciate your point of view, but your anecdotal evidence, as well as my own experience, suggests only that corporate and other business taxes should also include progressive features

[Bruce Webb]

Posit the Laffer Curve. Okay we have conceded the central point of Supply Side.

Where is the top marginal rate that maximizes tax income? Is there a Supply Sider ever who will actually come out and pinpoint that number? I haven't seen it. Instead they seemingly insist that wherever it is it must be less than the current rate.

Bruce Bartlett is proud of being one of the architects of the Reagan tax cuts, he quite literally wrote the book Reaganomics: Supply-side economics in action . So the question is did they pick 50% as the top rate because that was the optimal revenue producer? Or because it was all that they could get politically? Actions since argue the latter. Presumedly there is some level of top rate between 0% and 50% which under Supply Side theory would coincide with the maximum of the Laffer Curve. But do they ever present one? If so point me to it.

If you look past the economic verbiage and examine the actual policy proposals it becomes abundantly evident that Supply Side equates simply and totally to reducing taxation of returns from capital to zero or as close to zero as they can make it. You get your arguments against Corporate Income Tax, you get your theoretical arguments for cuts on Capital Gains tax (they kind of won that one), arguments for a Flat Tax, arguments for further cuts in top marginal rates, arguments against the Estate Tax. Each has a plausible surface argument, each has the ultimate effect of cutting taxes on capital.

Certainly Bruce Bartlett is a serious man. Serious about cutting taxes paid by the wealthy. Hey it is a job. Even a Mafia Don deserves a lawyer. But please let us not be fooled into thinking that logical holes in the theoretical case will suddenly cause any of these guys to throw up their hands in surrender. It is perfectly clear that they get it, it just isn't in their clients' interest to concede any of the fundamental points in their overall case for cutting taxes.

[robertdfeinman]

I must take issue with the part of the discussion which gets no attention - the term "theory".

From the dictionary:
"A set of statements or principles devised to explain a group of facts or phenomena, especially one that has been repeatedly tested or is widely accepted and can be used to make predictions about natural phenomena."

Notice the two key concepts here - testing and predictions.

In their continuing attempt to turn economics into a hard science economists appropriate the trappings of science and misuse its terminology.

Trickle Down, the Laffer Curve and any number of other "theories" are not theories, perhaps they are premises:

"a premise is a statement that is assumed to be true and from which a conclusion can be drawn"

So social planners decide on what result they wish to achieve (in this case cutting taxes for the rich) and then construct a set of plausible sounding reasons why doing what they wish will benefit those most likely to be harmed. By selectively quoting data and ignoring facts which contradict their desired outcome the "theory" is proven.

Sorry, none of the economic assumptions pass the test for being a theory. Perhaps the economists should get out more and find out how real sciences operate. A good place to start would be with Karl Popper.

[DRK]

Why do economists think they are experts in human psychology? How do they know what "motivates" people to work harder or be more entrepreneurial or be more or less greedy? It sounds like they make some awfully big assumptions about humnan behavior and how us poor "common" people are going to react to the carrots they dangle. Why don't they try to educate us working class folks about the nature of our economy? Hell, most people in this country don't even know we have a fiat currency. Maybe they should spend less time trying to please the politicians and spend more trying to help the rest of us understand why we're working so hard to dig ourselves a deeper hole.

[ken melvin]

If the rich get richer, maybe more crumbs'll fall off their tables.

[Bruce Webb]

I try to avoid terms like 'fiat currency' because they just play into the hands of the goldbugs but DRK has a point.

It is amazing that some people point to the Special Treasuries in the Social Security Trust Fund and point out that there is nothing backing them, yet willingly accept $20 and $100 bills as payment for services. They are just pieces of paper that have value because the government promises it will act in such a way that people the world over will continue to accept them as things of value.

Full Faith and Credit of the United States. At one level of reality thinner than gossamer, at another as real as steel.

On the whole I don't believe in Platonic Ideals. There is not in my view any Zeitgeist animating events, and Progress is not propelling anything, yet I would literally bet the bank on Full Faith and Credit. Maybe because in the end I really don't have a choice.

[Mark Thoma]

David:

Yes, if I HAD to earn $2,000 and the wage was that low, then yes, I would work the entire summer to come as close as possible. Sure, there's apoint where it wouldn't be worth it at all a penny an hour for example - but that's a matter of the reservation wage, not trickle down in the sense it's used.

The point is that there are examples where effort can go up when taxes go up. Your higher tax rate example doesn't change the fact that counterexamples to trickle-down exist.

[Dan]

One of the claims of the article is that, since the theory of labor force participation has no way to distinguish between what are essentially income and substitution effects between work and leisure, follwoing a tax hike, it cannot say what the impact on effort will be, and therefore it is not clear that high marginal tax rates are bad. This is true. However, Stiglitz showed in 1986 that the optimal tax regime always involves a marginal tax rate of zero at the highest bracket. So, effort aside, a low marginal tax for the rich is optimal. Average taxes, however, should/could be high.

[reason]

STR...
Don't you have tax averaging for self-employed in the US? If they are not making money and start making it, that shouldn't cause them problems for several years.

[Scott Ferguson]

Why do Supply Siders assume that the hyper-wealthy respond to incentives the same way the working classes do? Is there a point at which additional income no longer exerts the same incentive. Let's face it, you work harder when it means the difference between eating and not eating than when the stake is merely building a 10-story headquarters instead of a 20-story one.

And how about this: does a baseball player turn down a $100 million offer in favor of a $120 million one because of the monetary incentive or has the money become a proxy for status? If the later, than the rich and powerful will find ways to feed their ego's regardless of the tax rate they pay.

One more example - from real life this time: I worked for a software company run by it's founder. He often remarked on the "fact" that there were no 150 employee software companies, only 100 and 200+ firms. After five years working there, it had become obvious to me that he was not managing this company to achieve maximal financial success but rather he was hellbent on creating a 200 employee corporation to the possible ruin of his enterprise.

So, reducing all "economic" activity to tax-rates is frightfully simplistic but, then again, when have conservatives ever exhibited more than a superficial understanding of free markets and economics.

I know, "Invisible Hand" and all. What if Adam Smith was wrong?! (Heresy?) Or merely incomplete? In any case, remaining willfully ignorant about what the Hand does or how it works will most likely lead you to misunderstanding of the world and disastrous policy-making.

[cm]

David: Back then "when taxes were 90%" (in the highest bracket or so I believe), people did work 2000 hours, or spent 200 hours on account of obtaining their income, no?

One thing that happens with jobs that get into high income taxation is that wages get grossed up to restore a "sufficient" net, if the demand for the worker in question is sufficient. In parallel, it will be "work 2000 hours or don't get/keep the job". It appears there are always takers.

[cm]

David: And then I quote James Killus' "bidding position". To a good extent where you are in the "pyramid" of incomes matters more than your absolute income.

[ken melvin]

If work led to wealth the world would be turned upside down. Or, are we talking about the hereafter?

[James Killus]

Rustbelt,

The 60's and 70's were two _very_ different periods in terms of startups. The go-go stock market of the 1960s produced a _lot_ of startups and IPOs; I can remember articles in Fortune about H. Ross Perot (remember him and his little startup?) and in other magazines about other entrepreneurs. The slow market slide in the 1970s brought that to a halt.

The 60s action was enhanced by new financial instruments like the convertable bond. The recent activity is all about stock options, "paying people in lottery tickets" (sometimes tickets that have already won, it's true). When Netscape showed that you could have a huge IPO without actually showing a profit, that openned the floodgates.

The real action occurs around what does and doesn't constitute "capital gains" and it is there were things get tricky. Too high a CG tax can immobilize capital, but too low a tax creates a strong incentive to speculation, which is to say, using capital assets as gambling chips. I'd very much like to see an argument to the effect that this is a good idea; it looks dangerous to me.

It's also important to not forget the difference between wealth and high incomes, the latter being how non-wealthy people become wealthy. For those who are already wealthy, wealth is already locked up and accumulates naturally; they just peel off what they want to consume whenever they wish. As long as they're not "spending capital" all's right in their world.

[Holly W.]

Reason,

IIRC, the US stopped allowing income averaging as part of the 1986 Tax Reform Act. Writers and other self-employed people whose income fluctuated alot from year to year had previously been allowed to average their incomes over three years, but it was one of the loop holes which were closed at the time.

[David]

Mark:

"The point is that there are examples where effort can go up when taxes go up. Your higher tax rate example doesn't change the fact that counterexamples to trickle-down exist."

I agree completely. My point was that your lower tax rate examples don't prove that trickle-down DOESN'T exist. They only show that it isn't functioning under the tax rates we are looking at. I think tax rates on the wealthy should be raised, just not indefinably. I feel confident in saying that at SOME point it will have significant negative effects. If nothing else, business will compensate in other ways that are taxed less.

[Lafayette]

RF: "As every economics textbook makes clear, however, a decline in after-tax wages also exerts a second, opposing effect. By making people feel poorer, it provides them with an incentive to recoup their income loss by working harder than before. Economic theory says nothing about which of these offsetting effects may dominate."

If the above is what economists who write text books think, then maybe they should go find a real job?

The above sounds plausible (on the surface …) but in reality income taxes do not induce the behaviour predicted. They reduce expenditures and divert them from consumer to state/government. This is especially the case at high marginal rates of taxation, where the “cash-cow” is likely either working already at maximum time employment or lolling on a beach in the Caribbean living of “rents”, whichever.

So, the actual effect induces no such response as cited above from the individual in question, neither amongst the higher tax brackets nor within the middle-classes. And, the rates in question are not applied to the poorer classes, of course.

What the trickle-up effect produced was exaggerated wealth accumulation avoiding redistribution and therefore the income inequality that plagues the US currently. The consequence was that the untaxed income remained in its class and was applied to earning even more income either in the form of rents or investments.

Income inequality is a vicious societal ill. It creates social distortions the consequences of which can be severe and even chaotic. Katrina is an example where the impact on the poor of a natural disaster has dislocated permanently some people. Had they been less poor, they would have returned with the financial resources to rebuild their lives.

Another social distortion is the inequality of chances. The uneducated poor do not have the wherewithal in talents/skills to take the economic escalator up to the middle-class condemning them to lives in poverty, with the attending consequences upon society as a whole of crime and delinquency.

Finally, the redistribution of excessive wealth is a means for implementing public services that fill the chasm between the haves and the have-nots. Basic health care is only one facet of a panoply of health care services that a nation may need. When afflicted with a pandemic of obesity, the treatment must start young and in the schools. With penitentiaries overflowing, studies have shown that simply incarceration exacerbates the criminality of individuals, who require psychological attention. In a nation where neonatal rates approach those of developing countries, specific attention must be made to assisting very young and indigent mothers in carrying their pregnancies to term.

This array of public services would be allowed by an affordable health care system that serves not only the poor but the middle-class, where abnormally high costs prevent those without the insurance to forego treatment. Even those who do have insurance, pay exorbitantly for its price in a nation where health is not a public service but a business.

And finally, the statistic the most damning, that of average total costs double that other developed countries for a health care service that leaves nearly 15% of the population beyond its reach.

[Lafayette]

David: " I think tax rates on the wealthy should be raised, just not indefinably."

Quite true, they should be raised. So, let’s discuss the “indefinably”.

The trickle-down effect of lowering marginal tax rates on the rich DID NOT HAPPEN – neither in the US nor in the UK, where they were implemented. In fact, just the opposite has been the result with income inequality that is socially unfair.

Let’s also consider the consequence of confiscatory marginal taxation on the rich. Yes, no more Buffets or Gates. But, will there be no more shrewd investors or hi-tech companies? Not at all, come to Europe and I will show the instances where human talent was not motivated by riches but by challenge.

Europe has not only its rich, but its super-rich. And, it does not glory in the fact that Forbes reports an increasing number of them every year in its listing – because Forbes does not. (An example in point: the presidential campaign in France, where the redundancy payments of executives has become an electoral issue, has even had one candidate propose that “golden parachutes” merit confiscatory taxation – since they are unearned income.)

The premise that human ingenuity and talent is motivated by exaggerated riches is a false assertion. Yes, enhanced personal wealth is an important incentive, but beyond a certain point its “marginal incentive” is null. Any developed nation can suffice with an income tax system that allows people to become rich so as to secure their families from the uncertainly of life and ensconce them in relative comfort.

Beyond that point, the accumulation of wealth is simply an accounting practice and an object of media adulation. It has little or no real economic value. Had the accumulated capital revenue been taxed and redistributed, its consequence on the economy would be even more beneficial than had it been reinvested by the rich.

It is also key to remember that “redistributed” does not mean “given away to others”. It means employed by the state/government to afford the country the public services that are considered necessary by its citizenry. (And, one of those public services could very well mean bringing down the nation’s debt that all tax payers must support with their taxes. The consequence could thus very well be a generalized reduction in the tax base.)

[reason]

Income averaging is a loophole? Particularly for foreigners, or expecting mothers I suppose.

[Lafayette]

Income averaging is a loophole?

What do you mean?

[reason]

Lafeyette...
see response by Holly W. to a previous comment of mine.
Income Averaging (when probably done) is not tax avoidance, but tax deferrment - for precisely the reason, given by STR earlier (cash flow issues for small, expanding businesses). My point is that being against tax in general, because of specific implementation issues for a small subset of payers seems silly. Don't throw the baby out with the bath water. Find a specific solution.

[real person from the real world]

Been out of comission due to computer problems, but here is one great blog page, and Layfette is particularly good, but how come he has the time to write all this? I would love to chage jobs....I work 10 hours a day for under $24k, and I barely have the time to do anything but sleep and eat. Couple things tho:

1) Many HR people today are big on the "follow your bliss" philosophy of joe campbell, or those who have single-mindedly focused only on a particular job. Money talk is consider a no-no. If you are only interested in money you will not stay in your supposed dream job and the company. (Frankly from what I have seen, HR is one F_ _ _ _ d up occupation), but supposedly, upper management aka Decision Makers and Thought Leaders (the well paid types), are in it because they LOVE it. So much for economics of working more to make more.

2) I have scrimped to put together an IRA nest egg, and pay down my mortgage. So now what? do I suddenly enter the ranks of the wealthy, right after I retire, and get taxed on my "investments?" When do I ever get some advantages? After I die?

[reason]

RPFTRW...
Huh?

Is this OT or just random rant?

It reminds me of a vote for parent representatives in our local kindergarten. One parent (with the only handicapped child) stood to get elected promising to represent the interests of handicapped children. She not surprisingly didn't get elected, because the vote was not a sympathy vote but a vote for someone to represent the interests of all the other children.

Your comments are good, but please remember we are a varied crowd and this is not your blog. By all means put in your personal experience but please relate it to the topic at hand.

[Lafayette]

reason: because of specific implementation issues for a small subset of payers seems silly.

The tax code in just about any modern country is hellish. It is full of loop-holes, and the American tax code is no exception.

Instead of focusing tax advantages by group specificity, it would be far easier to admit that the state/government should be administering a public service to citizens generally. This is, after all, the purpose of taxes - not just development contracts for the military-industrial complex.

After all, what is the DOD if not a "public service" consisting of the military defense of the nation?

How many deaths have been caused by direct attacks to American civilians on our soil? About 3000 as I recall. How many neonatal deaths occur per year? How many deaths due delinquency-related crime? How many due to drunken driving. How many due to drug-related abuse? These are, to my mind, more of a deadly menace to the nation than al Qaeda will ever be.

More so, they are all menaces that we can confront with the right set of publicly provided services.

We are stuck in the eighteenth century when it comes to our notion of "public services". A bit of shame for the "Greatest Nation on Earth", I should think.

[Callahan]

What do you expect in the future, if we continue at our current rate where the rich get richer and the rest of us get poorer?

If you said tents for housing, and roots for food, then that is close, very close.

[Lafayette]

C: “What do you expect in the future, if we continue at our current rate where the rich get richer and the rest of us get poorer?”

What is there to expect, except more of the same?

Are we so blind as to think that the economic situation will mend itself if we only leave it alone? We look upon hi-tech to improve productivity, when what it does to accomplish this feat is to displace low- and semi-skilled workers with automation.

I don’t fundamentally believe in intervention measures, either in markets or generally within the economy. These tend to be cosmetic, short-lived and announced with much media hype. They are also palliatives for problems with much deeper roots.

Un- and semi-skilled manufacturing jobs are disappearing from the US at an alarming rate. The unemployed are deeply impacted, because they have high fixed costs (read mortgages, particularly if they are below 35) and without changing geographies (which is unlikely in this social class) they will have to settle for lower paid service jobs, with dual-income earners per family. If this latter wasn’t already the case.

The only alternative for these people is work retraining. They cannot all become systems analysts or investment bankers, but they can be retrained as tradesmen (plumbers, electricians, woodworkers, etc.) And, their welfare benefits should be conditional upon the retraining program being successfully accomplished.

More so, their children will require attentive care to assure that they finish a high school diploma and enter either formal trades training or a diploma bearing 2 or 4-year post secondary school education. This care should be a public service provided by skilled professionals in educational guidance coupled with personal attention for children who fall behind.

This sort of attention is not particularly difficult to put together and offer on a secondary school-by-school basis. If it doesn't happen, then the unemployment will pass from generation to generation. In fact, this has been the case historically. Unskilled workers are typically the children of unskilled workers. 'Tis sad but true.

[cm]

Lafayette: "The only alternative for these people is work retraining. They cannot all become systems analysts or investment bankers, but they can be retrained as tradesmen (plumbers, electricians, woodworkers, etc.)"

Sorry, I can't let off. I appreciate the acknowledgement that not everybody can move into "higher-level" (AKA superior pay?) positions. But, not everybody can (successfully) move into construction/maintenance positions of the variety you quoted either, and for a similar reason, limited demand (unless you meant not everybody can become analyst b/c of lacking ability). How much work for plumbers or carpenters (at a certain price point!) is there? Here in California a lot of construction work is supposedly done by uncredentialed un- or semi-documented workers, with resulting quality issues. That's not a matter of not having enough "legal" contractors, but entirely one of price point.

"And, their welfare benefits should be conditional upon the retraining program being successfully accomplished."

I think I'm saving my breath on this one, other than pointing out that some people don't have it in them to do competent handiwork, just like some don't have what it takes for mental gymnastics.

[ken melvin]

Take labor out of the equation.

[Wayne Jett]

Revenues that accrue as income to a producer of goods or services can be used in two ways: production or consumption. If used for consumption, the funds flow to another producer who then has the same choice: production or consumption. Thus, even when capital is consumed, it quickly moves to another opportunity to be used productively. That efficiency in the market is most important to those whose livelihood depends upon capital investment and production: namely, working people.

Tax rates do not affect incentives only. They affect the amount of capital retained by producers for further investment in hiring and equipment. For example, a small firm that achieves a profit of $3,000 net of operating expenses may have double or triple that amount of profit if the tax rate is reduced by a much smaller percentage. That small producer may be highly motivated to grow and expand in either case, but with more capital to invest he/she will be actually able to do more to hire and equip employees.

Setting up strawmen and disparaging classical theory by characterizing it as trickle down does nothing to advance the examination of real ideas and real solutions. Here is a principle of classical economics that ought to be considered. Every increase in the marginal tax rate costs jobs. When the government takes funds from the private producer as taxes, that producer will be able to hire and equip fewer employees. The producer's customers will be able to afford fewer purchases of his/her goods/services. Incentives play some role in this, but initially it is simply a matter that the government takes the money and the producer does not have it to invest.

[Lafayette]

WJ: "Every increase in the marginal tax rate costs jobs. "

Bollocks. You have no proof whatsoever of this since such does not exist.

When the government takes funds from the private producer as taxes, that producer will be able to hire and equip fewer employees.

Bollocks again. When the government spends the money on either Pentagon armaments or simply public services, it creates jobs or supports them.

The point of discussion is this: If marginal tax rates are increased, is the economy better or worse off? In terms of jobs, it's a wash.

However, what happens also, in this case, is that untaxed incomes that are accumulated by a minor percentage of the population are employed to augment further their own incomes.

Taxation and redistribution, by means of creating public services that address the needs of the population as a whole, would not only create jobs that serve more of the population than serving a select minority who already have more than enough income to attend to their needs.

Your reasoning is the sort of simplistic inanity that promotes income inequality in America and condemns some Americans to life-long poverty.

[Lafayette]

cm: That's not a matter of not having enough "legal" contractors, but entirely one of price point.

Of course that is the matter. Put contractors in jail who hire non-qualified workmen. How? Make the contractors legally responsible for their work by means of an insurance policy that guarantees their work for a period of ten years and requires therefore that the work be done by qualified personnel.

If the work is done by non-qualified personnel, they are in breach of their contract with the insurance company and, from a penal standpoint, that could imply a jail sentence … much of their work is related to components that can be life threatening if they do not function properly, particularly in construction work.

I think I'm saving my breath on this one, other than pointing out that some people don't have it in them to do competent handiwork,

Because “some” cannot benefit properly from professional training, it should not be offered to all? Your logic there escapes me.

Both France and Germany have apprentice programs, funded and supervised by the state, that are highly recognized in both construction and other industries. In fact, the programs are so good that the graduating classes are “sold out” (meaning those graduating have a job waiting them) two years in advance.

[Lafayette]

WJ: Revenues that accrue as income to a producer of goods or services can be used in two ways: production or consumption.

What is this nonsense?

“Revenues that accrue as income”? You mean gross revenues from sales of products/services, net of costs (meaning, principally, labor but also supplied component costs), or Net Revenues. (Watch the lingo: corporations earn revenues, individuals earn income.)

They are not then “used”, they already have been “used”. They are net of supplier component costs.

What remains (as total profit) goes through corporate taxation to yield Net (of Taxes) Revenue. This Net Revenue is then applied to internal investment (to expand production, or R&D) and operating expenses (meaning corporate compensation but not non-expensed stock-options). What remains goes into declared dividends accrued by stock holders, and becomes net personal wealth. (If dividends are not declared, then the company accounts for the money as undistributed revenue.)

This wealth, in the form of declared dividends, that goes to stockholders (owners of the company), goes back into the economy either as savings, consumption or investments (meaning equity acquisitions).

That is the economic cycle undertaken, not the subset you present.

So, if marginal income tax rates are increased, then taxed total compensation (salary plus stock-options plus dividends) of individuals becomes federal revenues and can be spent – and they therefore re-enter the economic cycle (either through federal expenditures on administration, infrastructure or services (like a war)). These expenditures are all accounted for in GDP consumption figures.

Marginal income taxes do not affect corporate investment decisions, since they relate only to individual income and they do not reduce total consumption since, if unspent by the individual, they are spent by the state/government.

As regards framing the debate, then, only the effectiveness of state expenditures is debatable. But, to say that higher marginal income tax rates "cuts consumption" is, to my mind, false - because the taxes are spent and therefore contribute to consumption, just in another way. (NB: In America, however, if higher income taxe revenues are employed to reduce the national debt by redeeming T-bills, they will not evidently contribute to consumption.)

[ndd]

I think Wayne Jett's comment above largely responds to a comment I left on the "Plonking type 2" thread concerning incentives, and first of all I do thank him for responding to a comment posted by a layperson. In essence, I pointed out that psychological experiments arrive at completely different results about incentives than those posited by mathematical economic theories. Since "supply side" economics is sold as incentivising entrepreneurship, psychological theories appear to contradict its main point, and support the experience set forth in the article giving rise to this thread.

In response (I think), it is argued that the main justification for supply side economics is not incentives, but rather producer ability to expand production at same or lower cost. It makes sense to me that a business tax cut - a tax cut for producers/suppliers only - will cause more and/or different types of production to be profitably undertaken, and by shifting the supply curve will be disinflationary -- which is something desirable in a high inflation environment such as existed in the 1970s and early 1980s. This appears to be Wayne Jett's argument.

The argument is vitiated, however, when it is made to support demand-side tax cuts on individuals. And the original argument by Bruce Bartlett on this blog, and restated in another comment by Mr. Jett, was regarding the reduction of INDIVIDUAL's marginal tax rates, not corporate or business tax rates. Additionally, the main justification put forward in the media is exactly the "incentives" argument. For example, before starting this comment I did a google search on supply side tax cuts, and the very first article that came up starts of as follows:

"Supply-side economics provided the political and theoretical foundation for a remarkable number of tax cuts in the United States and other countries during the eighties. Supply-side economics stresses the impact of tax rates on the incentives for people to produce and to use resources efficiently. A person's marginal tax rate—the tax rate she pays on an additional dollar of income—determines the breakdown between taxes, on the one hand, and income available for personal use, on the other. Since they directly affect the incentive of people to work, to save and invest, and to avoid and evade taxes, marginal tax rates are central to supply-side analysis"

Here's the summary from another article:

"Marginal tax rates affect incentives to engage in productive economic behavior that will yield additional income"

So, despite the emphasis on what a producer might do as the result of a lower tax rate, the actual reasoning behind supply side tax cuts has always emphased the alleged incentives to consumers. I believe my original criticism, that tax cuts to individuals whose needs and wants have already been satiated, leads to indolence more than innovation, still applies.

[cm]

Lafayette: You are not reponding to my arguments. Here for your convenience I repeat the 2 points to which you (nominally) responded:

(1) Local contractors and local home owners are using "undocumented" labor apparently not because there is lack of "legal" supply, but primarily because it's cheaper. Not just for durable work, but also landscaping, cleaning, etc. At least that's what I'm hearing, directly or cloaked, from private parties -- "documented" services are too expensive, and they can't, or won't, afford it, at least not when the undocumented alternative is there. Of course the rhetoric on the part of industry is "we cannot find qualified people", not "we cannot find people who want to do below-the-table prices above the table" (i.e. who will absorb the "full load" of all taxes, mandated expenses, and business costs). How is adding additional supply supposed to help in that regard?

(2) I was clearly responding to your statement: "And, their welfare benefits should be conditional upon the retraining program being successfully accomplished." -- when somebody cannot pass their final exam or is discharged from the program for lack of achievement, you will cut their welfare? Or is "shows up for classes" a good enough standard for "succesfully accomplished"?

[real person from the real world]

All these brains, but what comments. Workers and competency depends.

1) If you are hiring someone to do your lawn, the lawn company owner will hire anyone as cheap as possible, and maybe undocumented if he can get away with it. As for the quality of work, with a lawn it is no big deal if the clippings are not cleaned up. Also, the people work in teams. Some will be more competent than others, but the ultimate net result should be more or less satisfactory. What matters is what the owner can charge, not what he pays the workers. He can always find another high school drop out or wetback or college kid.

2) If you go to a doctor, you may want the best, but how do you know or even get access? How do you really know what you are paying for? Maybe you look up his malpractice suits. A magazine might give a rating on a hospital. Ultimately, some doctors, hospitals, et al, will still be better than others. Creating a barrier to keep people out of medical schools doesn't necessarily keep out bad doctors, it just keeps up the rates they are paid.

3) In IT.... these CIOs last about 4 years on average. When their contracts are not renewed or they get fed up, then what? A lot of them go into "consulting." The conundrum as to what is a best practice is constantly evolving. How do you really judge these guys? Would another $50K help them to work better? Of course they want more, it's a rock star mentality, actually a cult of personality, but for the extra salary money does a company get better work?

Fact is, some work for the money, and some work. Lucky are they who are well paid for something they really love to do. Joe Campbell did none of us a favor with his follow your bliss ideas. If you look for a job, some HR people, want what they want. If you are a hands on guy but have been looking beyond for some manangement skills, they may say they only want a senior guy who is hands on, not management. If you are a commodity, well do not say you need the job because your mortgage is due. I went to some guy lecturing about opensource jobs, and he was in reality pushing a book he wrote, saying nothing about open source. His big joke for the group was showing a guy with a snow plow, and saying that was how it was for people like him dealing with all the job seekers, and if you needed money he would fear you would be only looking for a job to pay your bills, not because it was your 'bliss.'

All I can say is that jobs and people do not align in this country, due to nutiness in HR. I do staffing and I see it every day. The nutty HR dame that thinks a consultant, who has no control over the jobs he takes is a 'job hopper.'

My foreign employers is an entreprenuer. He likes to tell me he is paid nothing, put that is his excuse to soothe me about the crap work I do for peanuts, to build his empire.

PAY HAS LITTLE OR NOTHING TO DO WITH WHY YOU WORK.

[real person from the real world]

You work to pay bills or you work because you like the job.

[cm]

real person: Not sure whether you are commenting on my exchange with Lafayette. My claim that "creating" (more likely credentialing) skill sets in occupations with limited demand for qualified people at reasonable pay was not going to help anybody much, and neither is it the road towards earning a living wage that can supersede, not just replace, the dole. Regardless of anybody's motivations to work.

Re your post,

"He can always find another high school drop out or wetback or college kid."

Honestly, hereabouts the "landscapers" don't look like from any of those categories, which is part of my point.

"All I can say is that jobs and people do not align in this country, due to nutiness in HR."

It goes beyond that. There is a larger cultural pattern of pretentiousness and pomposity, everything has to be the "best" and "greatest", and certainly better than yesterday and way above average. That expresses itself in several ways, only one of which is overestimating corporate needs for worker credentials. The claim that somebody needs only highly-experienced people is not (entirely) frivolous, in good part it comes from an exaggerated image of how sophisticated the respective business process is.

[anon]

Dare one say that perhaps Cho's rampage in Blacksburg and his tirade against the rich has something a wee bit refreshing about it? Perhaps it is time for many more of America's downtrodden to get mad. Not in a fashion to shoot people, necessarily, but to make their rage frightening enough to the plutocracy to get them to work on more equality. Cho might be a candidate to be an iconic American Che Guevara. Cho Guevara, perhaps?