Trickle Down and Taxes

It was Will Rogers who coined the phrase “trickle down economics” when he commented that "money was all appropriated for the top in hopes that it would trickle down to the needy."  It didn’t work in the Great Depression, and it hasn’t worked since Ronald Reagan promoted this policy during his presidency.

The trickle down economic theory (supply side economics) makes the assumption that when the wealthiest individuals have more money, they will invest in their businesses promoting growth.  This, in turn, relies on two other assumptions:  First, that investment alone drives economic activity and second, that wealthy individuals invest because they have the money to invest.  As a corollary, the wealthy individuals would be expected to invest in their own businesses rather than types of investments that would be unlikely to promote the greater good of society.

The problem is that human nature does not follow the assumptions given above.  It seems that wealthy individuals invest in things that benefit themselves but may have little or no benefit for their business or any other specifically American business.

It turns out that there are many ways to spend money without investing in business, and for the wealthy, uncertain of the future, some means of protecting their wealth or otherwise enjoying the benefits of wealth are very personal.  Buying gold, for example, does virtually nothing for the economy.  Neither does purchasing another company.  Mergers and acquisitions are relatively safe bets, but the actual money exchanging hands tends to remain in the hands of the wealthy who already own most businesses, and if there is a benefit to the purchaser, it is the potential for creating a veritable monopoly.

Also, with respect to investing, the driving force of greatest import is demand instead of supply.  It does not behoove an investor to produce something that no one will buy.

Consequently, wealth accumulates with the wealthy who seek desperately to hold on to what they have rather than risk their wealth for the benefit of any business or nebulous benefit for society. 

Almost paradoxically, higher tax rates do promote investment.  Buying gold with after tax dollars when the tax rate is low may be a reasonable investment, but when tax rates are high, the government has the opportunity to use “loopholes” to allow the wealthy to hold on to a greater portion of their wealth by giving exemptions for investing in those things that truly do benefit society and the economy.

Allow me to give a hypothetical example.  The government would like to promote hiring.  Giving a wealthy businessman the choice between turning his money over to the government versus hiring more workers and growing his business will usually result in growing the business by hiring.  The same applies to capital purchases, growing the business within the United States (as opposed to foreign expansion), or almost any other goal that the government may wish to promote. 

Businesses do indeed seek to maximize profits, but they will do so through the path of least resistance.  It seems that foreign investment and expansion is significantly more profitable than domestic investment and expansion because of several advantages offered by foreign countries, not the least of which is a labor force that is disorganized and unaccustomed to high salaries.  It is the businessman’s dream of virtual slave labor or indentured servitude. 

Tax policy, carefully targeted at the income of the wealthy with specific loopholes that benefit the profitability of his company by directing domestic investment will promote expansion of his own business domestically.  It is the personal income of the wealthy that guides investment strategies as much as “what’s good for business.” 

In the Randian world, the positivists would assert that the wealthy, given the choice of using tax loopholes to preserve their wealth versus doing what would be most profitable for the business (at the expense of the United States) would choose a third option:  Leave the country.  There are two reasons this anticipated exodus of the wealthy would not take place in significant numbers.  First, moving to another country while still a citizen of the United States does not automatically exempt one from paying taxes to the United States.  A tax attorney wrote, “As U.S. citizens, we are taxed on our worldwide income.”  To the extent that there are advantages, that too can be changed.  Second, most people who are considered American would not wish to move from the country of their birth.  It is unrealistic to suppose that anyone with sufficient wealth would automatically leave his family, friends and society.  Relinquishing U.S. citizenship is a poor choice for several reasons, not the least of which is that U.S. taxes continue to be in effect for a number of years after this rather drastic action (currently 10 years, I believe). 

Incidentally, for those who are wealthy and conducting business in the U.S., tax policy could also encourage both the business and the owner to move to the U.S. regardless of the actual tax rate.  Anyone, or any business, conducting their business in the U.S. would likely be persuaded to move their business to the U.S. rather than be excluded entirely or taxed at a higher rate than domestic businesses (either by statute or by virtue of “loopholes” that allow deductions to domestic businesses preferentially).

On the other hand, the Randians may have one thing right.  After a certain point, more wealth is not personally beneficial.  After the first or second billion dollars, this individual does not really need any more income.  He or she could take their billions of marbles and leave without risking anything significantly.  Who needs a million dollars a day when you already have thousands of millions of dollars in wealth after taxes?  This is true now, however.  Bill Gates finally realized that he does not need to get more money from Microsoft to be rich, but he has not decided to live in another country.  He could afford to give away all of the money he is still accruing from Microsoft stock.  And he is.  100% or even more. 

Besides, most people who choose to have their products manufactured in China would likely agree that China is a nice place to visit, but they would rather live in the United States.  Businesses have no such compunction however, but most business decisions are made by those who live in the United States – or would like to.

The threats of the Randian libertarians are hollow.  Call their bluff.  The Galts of the world, exercising rational self-interest, will remain in the United States, invest in a manner that will preserve their wealth, and pay their fare share of taxes.