[kenrexford]

A thought just occurred to me. Maybe I'm missing something.

I always thought that one of the great economics debates, sometimes a political debate, is whether economics works best when addressed from the demand side or from the supply side.

The "supply side" idea seemed to be to reduce taxes for the money-makers (the wealthy) so that they kept more money to invest, made more money, and then paid more in absolute taxes, although at a lower percentage. The wealth would then "trickle down" to people who made goods for and provided services for the wealthy.

The "demand side" idea is to put more money in the hands of the poor, perhaps by taxing the wealthy. The poor, less poor now, would want stuff. So, the wealthy, less wealthy, and wanting their money back, would build stuff to sell to the less poor, and get their money back. trickle-up, if you will.

This new economy seems really weird. We tax people, whether by actual obvious taxes, special taxes like cigarettes and gas, or de facto taxes like reducing the value of the dollar by printing money. We then take that money and give it to the rich, so that the rich can loan it to the poor, so that the poor can make stuff for the rich and get paid enough to pay back the rich for the money they borrowed from the rich, which turns out to have been the money of the poor taken from them in the first place to pay the rich, by way of taxes. So far, this seems like trickle up and then down and then up again economics. All the while, the stock market slowly creeps up at about the same rate of speed that unemployment and gas prices creep up.

I don't quite get this.

[mike777]

I guess it depends on what you mean by rich....I think someone who owns a phone, computer or car is pretty rich( We did not have any of this stuff growing up) so ya.....we do give alot of money to rich people. So I can understand the demand keynesian side

OTOH more than 50% of the population , young and old, do not pay income taxes, so I can understand the supply side.

[Winstonm]

It's not that hard to understand. First, look up oligarchy...

[hrothgar]

This may be the first time I ever heard anyone discuss "demand side" economics....

Supply side economics is normally contrasted with Keynesian economics or even mainstream eocnomics

[mike777]

Winstonm, on Oct 22 2009, 06:26 PM, said:

It's not that hard to understand.  First, look up oligarchy...

I know what it means....I do not know which people are oligarchs and what you want to do with them? In any event I still think anyone who owns a phone, computer or car is rich. It seems we can tax that stuff much more more..Also as I mentioned in other posts we can fix the gift tax...raise it to 70% and get rid of the exemptions, tax life insurance, etc...

[mike777]

kenrexford, on Oct 22 2009, 06:18 PM, said:

A thought just occurred to me. Maybe I'm missing something.

I always thought that one of the great economics debates, sometimes a political debate, is whether economics works best when addressed from the demand side or from the supply side.

The "supply side" idea seemed to be to reduce taxes for the money-makers (the wealthy) so that they kept more money to invest, made more money, and then paid more in absolute taxes, although at a lower percentage. The wealth would then "trickle down" to people who made goods for and provided services for the wealthy.

The "demand side" idea is to put more money in the hands of the poor, perhaps by taxing the wealthy. The poor, less poor now, would want stuff. So, the wealthy, less wealthy, and wanting their money back, would build stuff to sell to the less poor, and get their money back. trickle-up, if you will.

This new economy seems really weird. We tax people, whether by actual obvious taxes, special taxes like cigarettes and gas, or de facto taxes like reducing the value of the dollar by printing money. We then take that money and give it to the rich, so that the rich can loan it to the poor, so that the poor can make stuff for the rich and get paid enough to pay back the rich for the money they borrowed from the rich, which turns out to have been the money of the poor taken from them in the first place to pay the rich, by way of taxes. So far, this seems like trickle up and then down and then up again economics. All the while, the stock market slowly creeps up at about the same rate of speed that unemployment and gas prices creep up.

I don't quite get this.

Ken to me it seems the real debate is over such issues such as is health care a right that all should have or a home or food, etc.....

IF we all agree the government should pay for our home, food, college and health care if we cannot then the solution is easy....raise taxes......with those taxes the government creates jobs or sends us a check.

[Winstonm]

Ken,

I can appreciate your problem but I personally believe it stems from the bastardization (politcalization, bumper-stickerization, Limbaugheration, Foxeration....) of legitimate theories to fit an agenda's mindset.

For example the Laffer curve shows a return to the government from taxes as a maximal point where taxes neither take too much nor too little - thus, a curve. But the Reagan clan borrowed the idea that simply lowering taxes would increase government revenue - which is not what Art Laffer explained.

But it is easier to sell tax cuts than to explain that the Laffer curve also shows that raising taxes can be the best course.

If you really want a better grasp of how we got here, I recommend "Greenspan's Fraud" by Ravi Batra.

[jdonn]

Ken, don't forget there are reasons for taxes other than economic. They are also used to influence behavior. That's why there are policies and proposals such as cigarette taxes, write offs for charitable contributions, tax breaks for companies that don't ship jobs overseas, etc.

[Al_U_Card]

The voodoo who do....

http://www.youtube.com/user/RenegadeEconom.../35/qHqrBb-nRbs

Value for money. Tax value and you get a "free market" approach to equitable taxation. Also tends to ease speculation as "real" value is more apparent and it is harder to inflate those darn economy-destroying bubbles that we are so fond of re-financing after all the profits have been sucked out.

[phil_20686]

Winstonm, on Oct 22 2009, 07:02 PM, said:

For example the Laffer curve shows a return to the government from taxes as a maximal point where taxes neither take too much nor too little - thus, a curve.  But the Reagan clan borrowed the idea that simply lowering taxes would increase government revenue - which is not what Art Laffer explained. 

But it is easier to sell tax cuts than to explain that the Laffer curve also shows that raising taxes can be the best course.

Hehe, i think this is part of the basterdisation you are referring do, the laffer curve is about how much revenue the goverment can collect in the short term, i.e. if they tax too much then people avoid paying taxes or simply don't work as much. It is not about the long term link between taxes and growth.

It's fairly obvious in the abstract that higher taxes restrict trade and hence growth. After all trade happens because the seller sets a price he thinks is fair and the buyer pays it. If we regard the seller's fair price (as in teh amount he wants for his work) to be fixed, then its fairly obvious that as taxes increase the price to the buyer increases, and some trades will no longer be profitable.

However the picture is very murky because it depends on what your taxes pay for, a certain amount of taxing goes into creating a stable environment for trade, stuff like the police and courts and army etc. Even the health service keeps your workforce in better working condition, and this offsets the loss of trade caused by the taxes.

Basically its clear that in economic terms the aim should be to maximise the growth of your economy as the growth is power law and in the long term a larger powerlaw always overtaks a smaller powerlaw, and hence leads to greater revenue in teh future. Its not clear what level of taxation will do that. Besides there are other concerns than growth generally.

Also, the capitalist model depends on the existence of capital, that people with capital will give their capital to entrepeneurs stc who will use it to generate wealth. In the current set up that largely means banks, hedgefunds, and venture capitalists. Thus, we can't do without the rich ppl and the corporations. Thats why money has been spent bailing them out.

[y66]

I've heard of the "invisible hand". Maybe there's also something called the "invisible finger".

[Al_U_Card]

phil_20686, on Oct 23 2009, 08:27 AM, said:

In the current set up that largely means banks, hedgefunds, and venture capitalists. Thus, we can't do without the rich ppl and the corporations. Thats why money has been spent bailing them out.

They need us (as a source of gullibility to buy in to the speculative bubbles that they engineer and exploit, at our expense) more than we need them.

If we inverted the money system and based it on value rather than debt, then taxation could be more equitable and those that generate the wealth would get their fair share and those that provide the impetus would also benefit.

As it stands now, the speculators got a win win. Gambling with our money, they won in the run up and through their bonuses and now the losses are being "refunded". Thus, we paid them to make us think we were getting rich and then we paid them for having bankrupted us. Pretty sweet deal....for them

[kenberg]

Economics, at the theoretical level, has always seemed impenetrable to me. But KenR's post is at a general level and I feel I can comment.

From my viewpoint, what this country somehow got right is setting an environment where people from very modest circumstances could substantially improve their situation. Mike mentions not having a car or a phone growing up. My situation was better than that, but I recently visited Ellis Island (Perhaps I mentioned this elsewhere). On the ship's list of passengers, it indicated whether the immigrant had at least fifty dollars with him and if not, then how much. My father listed ten dollars. By the time I appeared on the scene, we had a house, a car, and a phone. There are reasons that Europeans left their home country in droves and came here. Whatever our faults, we have also had our successes, and not just success for Andrew Carnegie. This is important because probably my most fundamental economic dictum, and I expect that it is widely shared, is that we are not supposed to screw this up. [I realize that I cannot publish this dictum in the Journal of Economics.] And to some extent we haven't yet screwed it up. Sergei Brin, for example, came to this country as a child. His father could have taken the family to Belgium or France, but he didn't, they came here. At a less dramatic level, there is the Spanish speaking guy who comes around with his Anglo wife to negotiate a price, cuts down trees, hauls them away. I expect he also has a house, a car, and a phone. He and my father would have gotten along very well. There seems to be something of value in this way of doing things.


I realize there are the incompetent, the unlucky, the impulsive, the predatory, and then there are the financial high rollers who have the potential to bring it all down. Well, few things are simple.

[mike777]

Ken keep in mind economists are still debating if the French Revolution was a good thing or bad thing for the economy. They are still debating on whether Roosevelt's depression era polices, helped or hurt the recovery.


Lets look at one of the big issues going on now where there seems to be disagreement among economists. Can the central government create jobs or does it merely redistribute them?

If we go out on a limb and say the Central government cannot create jobs that affects one's viewpoint on taxes.

OTOH if it is true that the Central government can create jobs and does a better job at it compared to free capital markets that results in another viewpoint.

[awm]

The idea is to get capital (financial wealth) into the hands of those who will use it to add value (creating more wealth). This means money for entrepreneurs and companies which are likely to be successful. At the same time, some care should be taken to make sure that the wealth thus generated is spread out in a sufficiently egalitarian manner, and that the underlying services that allow the economy to function (education, law enforcement, etc) are paid for.

Wealthy people often invest their money in companies (through stocks, venture capital, etc) so reducing the tax burden on them can have a positive effect. The issues are that sometimes they judge wrong (give their money to companies that aren't successful), that sometimes they just sit on their capital (rather than invest it), and that giving money to wealthy people doesn't make the distribution of wealth very egalitarian.

A more direct approach is to give money to successful companies. Our government does some of this, but taken to an extreme it's a particularly noxious form of socialism (corporate welfare) which has all the disadvantages of big government (corruption, inefficiency) without the benefits (social safety net).

Right now, the major problem is that big private investment firms (and wealthy individuals) made a large number of bad investments. Then they stopped lending out money (either because they had no money, or because they were afraid of further exposure to risk after the big losses). This meant that a number of wealth-creating entrepreneurs and companies couldn't get capital. This was a huge problem! The government stepped in. In principle, the government could've given money to the wealth creators (and it did a little of this, with substantial loans for green energy for example). But again, giving money to the wealth creators is viewed as socialism, and it's not clear that the government would know which people to give money to either. Instead, the government bailed out the big private investment firms who (supposedly) have the expertise to lend to the right people. Of course, this was a huge benefit to the investment firms, who were reaping huge profits from the loans when they "guessed right" and then got bailed out by the government when they "guessed wrong." Nonetheless, bailing them out was probably less disruptive than letting them all collapse and either having the government handle all major loans indefinitely or waiting for new private investment firms to be built from the ground up.

Still, the government needs to put some regulation in place to prevent wild risk taking by the investment firms (make sure this doesn't happen again). Not clear this will be politically feasible.

[mike777]

To prevent wild risk taking you need to define it, tough to do.
Also how do you define an investment firm, most firms and individuals....invest...

Simple example car companies and phone companies invest hundreds of billions of bucks.....and yet many of them went bankrupt out of business. Was that wild risk taking?


90% of all resturants go out of business after a couple of years...is that wild risk taking of investment capital?

If you want to limit the size of a company ok..how do you define size....should we limit the size of microsoft or google?

[Winstonm]

Quote

Hehe, i think this is part of the basterdisation you are referring do, the laffer curve is about how much revenue the goverment can collect in the short term, i.e. if they tax too much then people avoid paying taxes or simply don't work as much. It is not about the long term link between taxes and growth.

The Laffer curve is simply about an optimal tax rate - as I said. I do not know what you are smoking to come up with your description, but it sounds like it is straight out of the mouth of Rush in one of his Reagan fantasies.

Quote

The Laffer curve is an economic concept used to illustrate the theory that increases in the rate of taxation do not necessarily increase tax revenue. The basic assumption is that both a 0% income tax rate and a 100% tax rate will generate no revenue. An optimal tax rate is therefore assumed to lie somewhere in between

"An optimal tax rate is...somewhere in between."

Translation for supply-siders who can't grasp that there can be two sides of a story: if taxes are too low, raising taxes helps reach the optimal rate.

[Winstonm]

y66, on Oct 23 2009, 08:30 AM, said:

I've heard of the "invisible hand". Maybe there's also something called the "invisible finger".

I am pretty certain the loud numbskull is quoted in Wealth of Nations.

[luke warm]

Winstonm, on Oct 23 2009, 08:06 PM, said:

Translation for supply-siders who can't grasp that there can be two sides of a story: if taxes are too low, raising taxes helps reach the optimal rate.

are there supply-siders who don't know that? here's another translation, for the anti-supply-siders: if taxes are too high, lowering them helps reach the optimal rate

the fact is, all things being equal there *should* be an optimal rate... find what it is and use it to generate maximum revenue - not for other reasons... why tax smokers more than non-smokers? why not tax fast food eaters more than healthy food eaters?

[helene_t]

The optimal rate isn't the one that generates maximum revenue.