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February 07, 2015

Fundamental Concepts - Laffer, the best medicine. [Weirddave]

This week's thread may be shorter than usual. I've been flat on my back with the flu for the past three days, and last night I just didn't have the mental acuity to write. Instead I dreamed about what I was going to say all night long, tossing and turning as my subconscious tried to write this thing in my sleep (the things I go through for you Morons).


Anyhow, this one is short and to the point, but I particularly like it because it lays bare two of the big lies of the Left. Most of you are probably familiar with the Laffer Curve (named after the man who proposed it, Brian Williams of NBC News), which states that there is a(n often inverse) relationship between tax rates and revenue for the government. Somewhat counter intuitively, lowering tax rates usually increases the amount of money the government raises through taxation. It's not infinite, a tax rate of 0 will yield $0, but it does seem to hold pretty far down the curve. 4 times in the last century the federal tax rates were dramatically lowered (in the 1920s,1960s,1980s and 2000s), and each time federal tax revenue went up.

Why? Well, it has to do with something else that is as mystifying to the Left as stigmata: People are rational actors. When tax rates go up, people don't just sit around and gnash their teeth and moan while paying the higher rates. They act rationally and seek to protect their money from the confiscatory rates by utilizing tax shelters. When rates go down, they see an opportunity to grow their money through investment.

"Ah-ha!", you might say, "Trickle-down economics!". You'd be completely wrong.

There is no such thing as "trickle-down" economics. "Trickle-down" is a pejorative, one that dates back to FDR's administration. FDR's speechwriter, Samuel Rosenman, penned these words: "the philosophy that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all."

The brilliant Thomas Sowell has made it something of a life's work to track all of this, and he reported in a paper for the Hoover Institute in 2012 that he couldn't find a single incident of people who support lower taxes using the term trickle-down. No, the term was used exclusively by their opponents to attack lower tax policies, the worst kind of populist polemic. I say the worse kind because they are arguing against policies that demonstrability benefit what they claim to support. Every single time taxes have been lowered, the amount of taxes paid by "the rich", in both absolute and proportional terms, has gone up.

And there lies exposed the lie that is at the heart of leftest economic theory. A leftist will tell you that the government is the only entity that can act to ensure prosperity and comfort for all, and that to do that it must raise lots of money. If they actually believed this, the Democrats would be the biggest tax cutters around (because cutting taxes increases revenue. This isn't theory, it's historically proven fact. Every time tax rates have been cut, in the US, in the UK, in Australia, New Zealand and anywhere else it's been done, revenue has gone up. Every. Single. Time.). The fact that they aren't big tax cutters proves that they don't believe what they say.

Well, if it's not trickle-down economics, what is it?

It's trickle-up economics. When someone decided that the tax climate is favorable for them to attempt to increase their wealth, they have to put their money into circulation. They may do this by starting a business, or investing, or loaning it out. The goods, services and jobs generated in this effort are what's known as wealth. This wealth is generated out of nothing (really), and it enriches all of society.

Say I decide to start a factory making an improved mousetrap that I've designed. I hire 10 people to work there. These ten formerly unemployed folks now have jobs. My mousetrap is such a success that the lives of the people who buy it are enriched by having fewer mice around (a mouse-free life being one of the universal standards for wealth-Disneyland excepted). Increased demand for my mousetraps drives me to hire more people and expand my factory, and eventually some fraction of the wealth generated flows back UP to me as profits. I then pay taxes on these profits, and the government gets more revenue. The government gets a smaller slice of the larger pie that I created. It's win fricking win all around, but nothing trickled down, at every step of the way I could have failed utterly. It's only after I succeeded in creating wealth for society as a whole that some of it trickled back UP to me.

Before I wrap this up, I wanted to point out one final thing. I said that understanding how all this works exposes two big lies of the left. What's the second lie? I also said that there was no such thing as trickle-down economics. There isn't, because it isn't called that, but consider this:

The reflexive response to any economic downturn from the left is always, always, always "We need a stimulus!". As we've seen, the correct way to do this would be to loosen the chains of government and allow the economy to grow naturally. That's not what they do. They "stimulate" the economy by writing a bunch of checks in the blind belief that the money will get out into the economy somehow and magically create jobs and prosperity. Why, it's almost as if they believe that that money will somehow....how best to put this.....I dunno.......maybe...trickle.....down....or something?

And there's the second lie. Leftists use the term Trickle-down as a pejorative to mischaracterize an economic policy that they don't like; and yet a clear eyed look at the economic policies that they do favor, policies that have been shown time and again NOT to work, reveals that their failed policy is nothing more than...

Trickle-down economics. And they're right. It doesn't work.

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posted by Open Blogger at 10:34 AM

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