Question about raising taxes on the wealthy

I see.....the question is......do the wealthy actually use the money they earn after taxes to invest?

 

If you mean has the federal budget always increased, the answer is no. Not in inflation adjusted dollars. It's gone up and down and had long periods of little or no increase.

Generally however periods of budgetary growth have tracked pretty closely with periods of economic growth and prosperity.

 

As a percentage of GDP, spending has been pretty level over the past 70 years, whether taxes were raised or lowered.

http://www.marktaw.com/culture_and_media/TheNationalDebt.html

 

It's not that simple.

The fact that the wealthy do not spend as much of their income on consumption as working people do argues against your conclusion. The higher velocity of money in the hands of lower income people means more economic activity and hence more tax revenues, and hence more resources for increasing productivity. In addition, by consuming more as a percentage of income, lower brackets increase demand and hence increase the incentive for investing in the production of real goods and services. Investing is wonderful, but if the return is low or uncertain as to the production of real goods and services, it is suppressed. Consumption provides the incentive for dollars to be put into the production of real goods and services and hence higher living standards, rather than say, hedgefunds.

So you have essentially only looked at one half of the equation.

On the whole we are always better off taxing the rich at higher rates and putting that money into the hands of working people (through various means, either directly or indirectly), than to leave it to the wealthy to "invest". The rich notoriously misallocate capital into areas that produce no real goods and services and hence do not increase standard of living. That's the fundamental problem with our economy today.

 

Sure, but we can ignore them because they unfair.

 

No; we can ignore them because many of out trading partners ignore them.

We cant do that though. The captains of world industry will not allow it. China has a vote and can buy power in the US according to the USSC. Our Asians masters will not allow it.

 

Budget was balanced under Clinton

 

Too bad the overall debt still increased =\

 

As a percentage of GDP I believe it went down.

 

http://www.fraud-magazine.com/article.aspx?id=4294970420

 

We could caveat this to death as has been done on this forum hundreds of times, but frankly I don't care that much and realize that regardless of whether it was balanced or there was a deficit, the economy was in much better shape and that's really all that matters.... well that and the Chief executive doesn't play as big of a role in the economy as everyone likes to give them credit for.

 

The people and their spending habits play the biggest part, IMHO.

 

Indeed consumer confidence is hugely important, and I'll admit the POTUS plays a role in this. The reason I make that comment is because too often folks want to attribute economic wins and loses to the position, when their direct effect on it is really small compared to other governing bodies and the citizens themselves.

 

And people like Bill Gates create jobs, not people like Clinton or Reagan, all they do is take credit for the good, and reject the blame for the bad.

 

Yup. I agree completely. The problem is the lemmings don't understand things like that.

 

There is a basic economic problem with wealth accumulation and a lot of erroneous ideas about how that effects the economy.

For one thing, as wealth is accumulated more and more is directed into speculative markets like the stock , bond and commodity markets from which it leaves in a trickle compared to the inflows and the internal activity of these markets. The accumulation of money into markets leads to another problem. As more money flows into the markets than leaves less and less becomes available for other economic needs, like investment in plant and equipment, employee wages, and consumer spending.

The markets can grow while the economy slowly strangles. As the national income accumulates at the top more money enters the markets while less becomes avialable for the rest of the economy. Eventually the market collapses as the speculators become fearfull of the mounting distress in the undelying economy caused by all the money being locked up in the markets.

There are two ways to combat this inevitable circumstance, one is to place a tax on capital gains and the other is to continually create new money. The usual prescription is some combination of the two.

 

The money leaves the market as quickly as it enters it. Every dollar one person pays for a share of stock another investor receives for that stock and has available to spend on other things. It isn't as if the money spent on a stock just sits in a mattress somewhere, it goes right back into the economy.

The reason it doesn't appear to enter the economy quickly is because purchases and sales of stocks aren't part of the GDP measurement. Even so, that money is still moving.

 

Clearly the president doesn't have that big of an influence in a huge economy like ours (though we blame or credit them just the same).

But economic policies do, at least in the long run. And they are often influenced by presidential power. Little things like the ease of getting student loans for higher education, or the regulation of CDSs, or the rules of bankruptcy add up to big things after a while.

 

No doubt about that, but typically those policy decision don't impact us until the POTUS that enacted it is long gone, and then oddly the current POTUS bears the burden.

As you said though, and we agree, they have a small direct impact on an economy our size and with as many influences as it has.

 

True -- in the short-run, although it is obviously, eventually, cycled into the economy. Also, I think only about 1% of funds are stored in hedge funds, so it's not as if a tax cut wouldn't have any effect because 1% won't be seen for a while.

If the rich are making investments, that means more production and more jobs. This does expand the economy.

Either that or put it in the bank, which means the money will be invested by someone else. A small amount (in terms of percentage) is spent on consumption, of course.

 

Yea sure, it expands economies of BRICS countries, and that in turn force U.S. government to print money to hand unemployment checks.
Also U.S. government has to print money for Military Industrial complex to defend U.S. from China that is growing stronger and stronger wisely investing U.S. dollars.

 

An increase in spending cannot increase the number of resources in the economy in the long term. The only way that long term living standards can increase is through more efficient production techniques and techniques which provide for new goods. The only way that these can actually be accumulated is by abstention for current consumption. For instance let's say that this happens, that everyone starts to spend a huge portion of their income (we'll say for now that there are no negative repercussions of this) and this lead to very high profit margins. This then would result in a large amount of money accumulating in the pockets of corporations and/or the rich. The only way that this can ever allow for an increase in the PPF is if some of this money is then taken aside and invested, but this is then decried for not being spent... So what is to be done? What is being recommended would not increase the amount of resources in society, it could not, for no more is being invested, everything is going towards current consumption and maintaining it, therefore a period of increased consumption in the now would result, but no increase in resources would actually exist, therefore the increase in living standards in the long term would not be increased by a policy of massive spending and instead living standards over time, assuming a continuation of this living standard, would inevitably be retarded by such a policy of spending over investment.

But the only way that this money can ever actually be channeled into investment is through the abstention in consumption, see above. I should also note that we are actually simplifying the example in favor of consumption by assuming that the current level of production can be maintained with the increase in the interest rate which accompanies a radical shift of income from the rich to the poor.

'Low' is a relative term, but part of the reason why savings spawns investment is the very fact that profit margins in the now are decreased, making the opportunity cost of long term projects less.

In the short term, not in the long term.

Why to projects which don't result in an increase in satisfaction and production yield profit which warrants taking out a loan? Why is it that there is profit where nothing is produced (keeping in mind that both capital and increases in production can mean more than simply physical goods)?

 

No, money does not flow equally in both directions, usually more flows in than flows out. One would think that market downturns are caused by greater outflows of money than inflows but this is not always the case, or even usually the case. A falling market destroys capital. In fact inflows can exceed outflows but the market will continue falling in an orgy of capital destruction.

This actually happened in 2008. Hundreds of $Billions just disappeared from the markets as they went into free fall. Investors had huge losses but there was no offsetting gains by someone else. Even the big gains realized by short sellers offset only a small percentage of the losses.

If this seems a little confusing don't worry, even investment bankers, fund managers and sophisticated traders have a lot of trouble fathoming that huge amounts of money can just disappear from the markets without going somewhere else.

One banker could not answer her children's question about where all the money went in 2008. It took her a while to figure out that it did not go anywhere, it was destroyed.

The markets are not always a zero sum game.

 

The value of the securities goes up and down, but the money spent to buy them leaves exactly as fast as it goes in.

I buy a stock at $100. The guy I bought it from now has an extra $100 to spend, which goes back into the economy. Then the stock tanks to $5 and I sell. Someone gives me $5 for my stock, which goes right back to the economy. The value of my stock went down, but no money left the economy.

 

You buy a stock for $100. Your stock tanks and you sell it for $5. The other guy might still have his $100 but that does not explain where your $95 went. It did not go to him, that was his money that he had already bought the stock with before you even entered the picture and he still has his money that he started with but you are out $95.

So where did your money go?