On tax cuts for the rich and Panama.

We fight for and against not men and things as they are, but for and against the caricatures we make of them.

J.A. Schumpeter

The ‘Ol Trickle Down™ myth,

You see trotted out by all the Tax and Spend types all the time when their political opponents work towards tax cuts for businesses. And when you take the time to consider the basis of the claim and some of the counter arguments against it, you have to wonder if someone’s missed out on the idea of doing their homework on the subject before opening their mouth and letting us all know the obvious.

The idea behind the trickle down economics has been traced back to William Jennings Bryan in 1896 in his Cross of Gold speech. The term “trickle down” emerged in a column by comedian actor Will Rogers in 1932. These days it’s used to critique the Supply Side school of economics by those who believe any tax cuts for the wealthy or business owners, robs those at the middle and lower portions of the economic scale due to the expected decrease in government tax receipts.

My issue with this claim is when you look into the subject in detail, you find it’s often little more than a political ruse used to goad the conversation in a certain direction. It’s fundamentally lacking, in any serious analysis of the economic situation both current and historically, to claim that any recognised economic identity has advocated this as a means to economic prosperity.

As an exercise that’d help understand this claim is you could simply consult any serious economic school of thought and see if that idea has ever been substantiated as a course of action they’d advise a government to take.

Consider also when you observe the number of political actors across the globe that use this phrase, the dishonesty is amplified. There’s always a need for taxes or borrowing to fund the ideas that our politicians. After all, they have a vision for us and we need to pay play our part, right? And if we elect the right one, we’ll get something back for it, right?

I often wonder if they think that no-one notices that their schemes of wealth redistribution alway seems to have that wealth, first passing through the hands of those in government, they’re supporting at the time. I also wonder if there’s a majority that sees this factor and just accepts it as being how life is.

Now it has to be said that there is merit in the claim in a roundabout way. That cutting taxes doesn’t automatically ensure that wages will increase. But as we know, life ain’t that simple and any assumptions on complex issues like the economy require those assumptions to be founded on a correct basis.

A dynamic that will shed some light on the possibilities of the complexity in economics that I have found, comes some economic history that Thomas Sowell did in his writing on the subject Trickle Down Theory and Tax Cuts for the Rich.  He writes that “under the high income tax rates at the end of the Woodrow Wilson administration in 1921, vast sums of money had been put into tax shelters such as tax-exempt municipal bonds, instead of being invested in the private economy, where this money would create more output, incomes and jobs”.

There’s always more at play then what the critics who focus on singular issues may want to allow to be suggested. It reminds me of those who claim the wage gap between males and females is due to sexism aimed at women. It’s a multivariate dynamic, with when considering the issue of taxes being missed by governments often being due to their own influence.

A while back we had the Panama Papers episode surface internationally in 2015 and the net it cast was world-wide and included links to a number of persons of influence around the globe. Now, the ICIJ website link I’ve cited here acknowledges that there are legitimate uses for offshore companies. I see this as just another example, as Sowell describes, of the effect of tax laws and the methods that the investor class will make use of to avoid excess costs.

The point I’m trying to make here is that, when those political actors behave like they want to give the average punter a fair go i.e. more taxes equal more publicly funded services and therefore promote schemes that are economically founded on these premises. This approach can create the kinds of results that provide the folder for the subjective assessment of the wealthy, that part of society that invests in industry and economic activity beyond a day job when they choose not to play along as nicely as the high tax proponents would prefer them too. They didn’t get to where they are by being stupid. And at the end of the day, it’s often the case that those political actors make tax rules creating the loopholes the wealthy use to legally avoid tax.

Now, there has to be a point at where we recognise the obvious and be willing to compromise and make sense of how things work. And when this challenges our world view, well the that world view needs to take a back seat and give way to methods that make the best of a complex situation.

I’m not backing one side or the other here. I don’t consider myself to be that economically literate (hence the blog). We can have certain services that are better provided by coming together (in the form of ‘good’ government) but the proponents of this method need to recognise the limits of this concept.

The partisan baiting of the electorate needs to be laid bare for what it is and that’s can be a difficult thing to do when we are a polity of taxpayers who expect a return on our taxes. And I realise that your average voter isn’t going to be some well read economist. I’ve tried studying the subject myself and have failed to fully comprehend the subject (and its many schools of thought) but as I’ve said complex dynamics require an honest assessment.

When we give in to an idea like taxation on all and sundry, just because we think that it will reward us with better services thus being a good thing socially, we fail to even grasp the effect of the use of taxes to facilitate those services. Opportunity cost, I’m hinting at you this time.

I’m not pleading the case for some libertarian ideal here, you only need to see how governments can waste huge sums of taxpayer money to provide evidence of that. There needs to be an understanding of the concepts of perverse incentives and unintended consequences that accompany any complicated plan we want to enact. The idea that you have a hammer and every problem’s a nail doesn’t stand the test of time.

I guess what I’m arguing for is that ever elusive balance factor when it comes to governments spending our taxes. The problem of just how much is too much or too little is a complex scenario that isn’t solved by baiting people with a single sentence response to a solution that is a damn sight more complex than that type of response.