Taxes

How Risk-Taking by the Wealthy Helps the Middle Class

Aim higher with tax reform to help average Americans.

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Credit: Nejron | Dreamstime.com

Hudson Institute senior fellow Jeffrey Anderson is the latest conservative theorist to offer up a tax plan meant to boost economic spirits. While his focus on growth is encouraging, his belief that middle-class tax relief is the source of broad economic bliss leaves a little to be desired.

Writing in the Wall Street Journal this week, Anderson decried the tax plans offered up by Republican presidential hopefuls given his view that their "biggest beneficiaries would be the top 1%, and they would substantially increase the $19 trillion national debt." Anderson's assumptions don't pair well with economic history.

Considering debt, it should be said up front that realistically all government spending is debt. Governments can only spend to the extent that they extract resources from the real economy first, at which point debt amounts to an accounting abstraction. A focus on debt misses the real barrier to economic growth, which is government spending itself. As the late Robert Bartley put it in his classic book on the Reagan economic revival, The Seven Fat Years, "The deficit is not a meaningless figure, only a grossly overrated one." Government spending is the true tax signaling resource consumption by politicians lacking market discipline. The unseen with the spending is all the experimentation (and yes, voluminous failure) that is never pursued by market-driven entrepreneurs (cancer cures, transportation innovations, technology advances that would render the internet dated) thanks to government existing as a size consumer of always limited resources.

Thinking about debt more broadly, Anderson's point is that large tax cuts will per his own modeling lead to massive revenue shortfalls for the U.S. Treasury. So while many would properly quibble with his assumptions about reduced revenue (tax cuts for the rich in the 1920s, '60s and '80s led to more tax collection, sadly), if deficits are Anderson's concern then he should cheer tax reductions that would actually reduce Treasury's intake. The reason for this is basic: high-revenue countries, like high-profit companies, can run up lots of debt, while low-revenue countries and struggling companies can run up very little.

We've seen the above with great constancy in modern times. Apple and Google have floated two of the biggest ever non-bank debt offerings in just the past several years alone. As for the countries with the most debt, a cursory glance reveals them as the most prosperous ones. Basically governments can run up a lot of debt to the extent that investors are comfortable with the ability of their tax collectors to secure payment from the productive citizenry. In that case, it's a paradoxical reality that the path to reduced national debt for the U.S. would be tax cuts so substantial that Treasury's revenue intake would actually decline. If so, investors wouldn't so eagerly line up to buy Treasury debt given reduced optimism about Treasury's ability to pay it back.

Lastly on debt, another "solution" to it would be tax increases so substantial that taxable economic activity would plummet. A severely depressed U.S. economy would similarly make U.S. debt unattractive, but since Anderson desires growth it's hard to imagine he would countenance such a plan.

Moving to the growth side of the equation, economic history is very clear about the path to staggering, economy-boosting advances. They spring from abundant failure. Two thousand carmakers were incorporated in the early part of the 20th century, only for 99 percent of them to fail. The advent of the personal computer in the '70s and '80s similarly left countless implosions in its wake. Moving to the internet technology boom that is happily still with us, most of those ideas have gone bankrupt too, or will go belly-up soon enough. As billionaire venture capitalist Peter Thiel explained it in his excellent 2014 bookZero to One, "most venture-backed companies don't IPO or get acquired; most fail, usually soon after they start."

Thiel's observation speaks volumes about why Anderson's "Main Street Tax Plan" focused "on the well-being of typical Americans" would do very little to boost the economic chances of same. That is so simply because the typical American doesn't have much money to lose. By extension, the typical American must almost as a rule park his or her savings in companies that are already established and that have more predictable earnings streams. There's nothing wrong with the latter, but if growth is what Anderson desires, the simple truth is that job-creating innovation springs from more dynamic investing that by virtue of being dynamic is highly risky. This is where the rich come in.

The rich, for being rich, have money to lose. That's why much lower tax rates on wealth that is earned or inherited are so crucial to the economic well-being of everyone else. Precisely because the rich are flush with funds, they can take risks on the dynamic companies of tomorrow that are tautologically necessary for the prosperity that Anderson would like. Adam Smith was very clear that investment migrates away from economies that are stationary, and if the tax-cut focus is on the middle class, a more stationary economy will be ours. Such an economy will do little for the typical American whom Anderson would like to aid.

History is once again very clear here. Since the rich have money to lose, they alone can pursue the intrepid investments that make the typical American much better off. Indeed, it was J.P. Morgan who took a flyer on Thomas Edison's light bulb despite the protests of his father, it was Howard Hughes who brought a pile of inherited money to California in order to fund the aviation boom, families with names like Rockefeller, Vanderbilt and Phipps were the initial money behind the venture capital explosion out in Silicon Valley, PayPal co-founder Thiel was the money behind Facebook, and then Amazon founder Jeff Bezos was a pioneer investor in both Google and Uber.

Middle class jobs? As Cal-Berkeley economist Enrico Moretti has described it, successful tech companies author what he calls a major "jobs multiplier" as small businesses cluster around tech behemoths. Thinking about Cupertino, CA (where Apple is located) alone, its success had led to voluminous job creation as baristas, yoga instructors, personal trainers, chefs, lawyers and financial advisers have set up shop around Apple's stunning bonanza.

And then it can't be forgotten that today's typical American is not infrequently tomorrow's wealthy American. This helps explain why the world's poorest are so desperate to reach the U.S. Success in the U.S. of the wealthy variety shouldn't bring with it a tax penalty; rather it should gift the ambitious with a tax reward.

But of greatest importance is the simple truth that intrepid investment is the path to the kind of prosperity that we all want, and that will lift all boats. That being the case, the quickest fix to the relatively bland outlook on Main Street is a reduction in the tax bill for those who live in the hills above it.

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  1. From Hillary’s tax plan:

    Another proposal would limit contributions to tax-favored retirement accounts, including traditional and Roth IRAs, defined benefit plans, and to defined contribution plans such as 401(k), 403(b), and 457(b) accounts. Currently, limitations apply to annual contributions and benefits for each plan an individual holds. However, an individual with multiple retirement accounts may accumulate very large balances within those accounts.7 The proposal would prohibit account holders from making additional contributions to any account once the sum of all account balances reaches a level adequate to finance the maximum annuity currently permitted for defined benefit plans. The account balance limit for an individual age 62 in 2015 would have been approximately $3.4 million under this rule

    1. Step 1? Step 2 would be a penalty tax on amounts over that balance?

    2. Meanwhile, New Financial Rule Censors Financial Broadcasters.

      The main focus of the Labor Department rule has been its likely effects on brokers and their customers. The rule creates a presumption against brokers taking third-party commissions from mutual funds they sell to savers. Because of this, savers who currently pay only a small commission on the execution of an order may have to pay a much larger fee based on a percentage of their assets, which would drive some brokers to simply stop serving middle-income investors. As I note in a new report for the Competitive Enterprise Institute, similar restrictions in Great Britain have caused a “guidance gap” in which brokers have largely stopped serving clients with assets less than ?150,000 ($240,000).

      I’m sure Reason commenters are adequately sophisticated to live without broker advice, but the simple fact is that most Americans are so poorly educated in the American economic system that they are in a state of utter ignorance and need guidance. This is especially true of those with assets less than $240,000.

      Of course the solution is to nationalize IRA, 401(k), 403(b), and 457(b) accounts. We can all trust the federal government to be a wise and faithful steward of our retirement funds.

      1. Thankfully we have the MyRA now.

  2. The decline in American entrepreneurship in the Age of Obama is well documented. It marks the greatest distinction between the Bush and the Obama Administrations.

    The simple fact is that the situation is so bad that more businesses are folding their tents than are starting up for the first time in American history.

    1. B-b-but the price of gas is half what it was in 2008!

      /Prog meme

      1. And Bin laden is dead

        /prog meme #2

      2. So is my investment account, and there weren’t a lot of oil stocks in my portfolio.

    2. They have tried, but the LP should stress( over all else) that they are the party of small business.

  3. Hogwash! The rich don’t take risks with their money! They keep it in a pool and swim in it! All that money is stolen from the middle class and the poor! The rich haven’t paid their fair share, because if they had then they wouldn’t be rich anymore! We need to take those ill-gotten gains and give it back to The People!

    Now let us pray.

    Our Government, who art in Washington, hallowed be Thy name…

    1. And the serpent rose from the sea,it’s name was 1% and brought hunger and disease to the lands

  4. But we’re going to let the ventures of the rich fail, even if the backers are well-connected, right? Because I believe the market distortions from things like Solyndra are as bad as Too Big to Fail banks. If a plan cannot survive in a market longer than the backrs are willing to burn money, its a bad plan. The good parts will be sold at the bankruptcy and someone else can try a different but similar plan when they see an opportunity.

    1. Preach it brother.

    2. Markets fail. That’s why we need government to support businesses that sell things like green energy, or that lend money to the right people. Because if government doesn’t force businesses to do the right thing, they’ll just follow immoral profits and destroy the planet.

      1. That’s why we need government to…

        Cuz gubmint NEVER fails…it’s simply underfunded.

    3. We should let the ventures fail.

  5. No,no,no.The rich never spend their money and put it back in the economy.They don’t hire people,buy goods made by others or invest.It all goes into a big vault like Scrooge McDuck. And they never,ever,invest profits back into their businesses.

    1. Yep. That’s what government is for. Government takes money that the rich don’t deserve to have, and invests it in good businesses like green energy. Only then does that money benefit the middle class.

    2. Scrooge was a cheap sumbitch. Everything was done by Duckworth except the cooking and the flying.

      1. And even if Scrooge McDuck it and stuff it in a safe, you still are giving some kind of benefit to others by reducing in some small way the money supply and helping hold back inflation. Although since Federal Reserve Notes are no longer tied to anything real they can just ramp up the presses at any time.

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    1. Seriously, can Reason do nothing to get rid of these lying fucks?

      1. The spambot is stuck driving around in a thirty-year-old Saab. Isn’t that punishment enough?

  9. As far as I can tell there are only three things that you can do with money, spend it, invest it, or stuff it in a mattress. The last option is really only an option for fools or for those that fear the government stealing their money through outright confiscation or more concealed confiscation (negative interest rates). If you spend it on goods and services you are creating work for others and meeting your needs in some way. If you invest it you are giving it to someone else to try and create a business or value of some kind. This is why I want wealthy people (and all people really) to retain as much of the money that they have earned rather than have it taken by taxes to be spent how someone else sees fit.

    1. But what if they don’t invest the money in the right things? I mean, they only care about profits. So they’re only going to invest in things that will make them more money. Because they put profits before people, they’re not going to invest in things that will benefit humanity, like green energy. That’s why government needs to take their money away from them and invest it for The People. It’s the only way we’ll know the money is being used properly. All reality-based people know this. Duh.

      1. And here is where we get to the part that progressives and other worshippers of the Almighty State just cannot comprehend; the very nature of what makes up “profit”, how it is achieved, and the basic logic that people are more careful in how they spend their own money than in how they would spend another’s gains.

        1. Profit is theft. All progressives understand this. The reality is that profits represent money that is stolen from workers and customers. It’s unfair to pay workers less than they produce, and it’s unfair to charge customers more than what something costs to produce. It’s more than unfair, it’s theft. Only government can determine what prices should be. That’s why capitalism is so terrible, and why government is the only thing that can save us from being slaves to the corporations. All reality-based people know this. Duh.

    2. A somewhat interesting way to define investment: spending, not consumed, for future production. And then an interesting way to define saving: income not consumed.

      Most of us are not investors – we’re just reallocating our savings in to stocks, bonds, and mutual funds. A company building a factory is spending for future production – and that is a real investment. When you or I buy shares of a stock traded on a stock exchange (or a mutual fund or exchange traded fund) – it’s a secondary market transaction. None of that money is going to the corporation (unless you’re buying an IPO). Buying shares of GE, Apple, or Facebook (for example) provides no capital for those companies. You’re just swapping some of your cash/money market savings for shares of stock, which is just reallocating savings.

  10. At work, I mentioned that if New York State is willing concede that tax breaks will attract businesses, then why not extend the benefits of low taxes to everyone? I was told that, of course, NYS is only extending tax breaks to businesses that would provide a net benefit to the state. Really? When I questioned why the state should be favoring certain businesses over others, I was assured that this is a hallmark of capitalism: government and corporations working hand in hand to create prosperity.

    1. I was told that, of course, NYS is only extending tax breaks to businesses that would provide a net benefit to the state.

      Point them upstate and ask them to describe the net benefit of businesses fleeing the state.

      1. …businesses fleeing the state

        This is why we need laws preventing businesses from leaving a state or the country. They should be forced to stay and provide jobs even if the tax and other conditions are contrary to business interests.

        /progressive

  11. Only central committee knows what’s best for your money. Give it to central committee so the peoples can go to schools for free.

  12. Be thankful for the rich; they pay those who are willing to work.

  13. This is why we need laws preventing businesses from leaving a state or the country.

    Hillary’s on it.

    U.S. Democratic presidential candidate Hillary Clinton will announce a planned crackdown on corporations that shift profits overseas, including a new “exit tax” against so-called inversion deals, her campaign said on Monday.

    Clinton will call for spending the revenue raised by her proposed tax to boost manufacturing jobs in the United States, the Associated Press reported.

    1. She going to tax them when they go out of business too?

    2. Clinton will call for spending the revenue raised by her proposed tax to boost manufacturing jobs in the United States, the Associated Press reported.

      Prediction: She’ll sign the bill into law, project the exit tax revenue, and spend it to boost manufacturing jobs producing things no one wants to buy. Then she’ll realize that investors are simply letting their business go belly-up instead of paying the exit tax, so there are no exit tax revenues to pay for the jobs programs. Then she’ll put on her shocked face when the deficit soars, like governments haven’t been spending estimated revenues that fail to materialize for like forever.

  14. I was assured that this is a hallmark of capitalism: government and corporations working hand in hand to create prosperity

    Humpty Dumpty’s School of Economics.

  15. Anderson decried the tax plans offered up by Republican presidential hopefuls given his view that their “biggest beneficiaries would be the top 1%, and they would substantially increase the $19 trillion national debt.”

    FUCK YOU, CUT SPENDING.

  16. Typical Reason bullshit. Defending tax cuts for ONLY the rich proves progressives righr. On planet Earth, we’ve had only two peacetime booms in almost 100 years, following identical tax cuts by Kennedy, then Reagan. Across the board. duh. So Tamny is full of shit on Reagan’s and Kennedy’s tax cuts. And retarded!

    if deficits are Anderson’s concern then he should cheer tax reductions that would actually reduce Treasury’s intake.

    Reason doesn’t know what a deficit IS!

    high-profit countries, like high-profit companies, can run up lots of debt, while low-revenue countries and struggling companies can run up very little.

    Anti-rational, plus Reason defends intentionally increasing government debt!
    The math is simple. Cruz’s 15% flat tax is a 45% decline in revenues … targeted to the rich … creating a $125 billion deficit.
    “But … but … Reagan’s tax cuts caused income tax revenues to skyrocket!”
    Bullshit. FICA revenues skyrocketed, on six FICA rate INCREASES. Income taxes increased by a scant $5 billion per year … entirely from capital gains
    http://libertyissues.com/quacks.htm
    This is the flip side of progressive bullshit,
    A growing economy is like a 3-legged stool — consumers, employers and investors. EITHER leg can cause the stool to collapse. And they each need both confidence and dollars.
    In a free society, government takes NO sides. Who tells the libertarian establishment?

    1. “FICA revenues skyrocketed, on six FICA rate INCREASES.”
      The bigger reason for FICA revenue increases was as of 1984 all new Federal employees (and those that voluntarily switched from the old CSRS retirement system to FERS) started paying into Social Security.

      1. Good point! But most of the analyses I’ve seen conclude that the relatively small initial increases in federal employees was not as great as the 14% combined rate increases.

    2. Reason doesn’t know what a deficit IS!

      Deficit is when government writes a revenue bill and forecasts it will raise $1 million, so they write a spending bill and forecast it will “only” cost $1.2 million of that, then the spending bill actually costs $1.4 million and the revenue bill actually raises $0.8 million.

      Every time we’ve increased federal taxes to reduce the deficit, Congress has spent the increase plus some and the deficit has ballooned.

      1. Reason doesn’t know what a deficit IS!

        Deficit is when government writes a revenue bill and forecasts it will raise $1 million, so they write a spending bill and forecast it will “only” cost $1.2 million of that, …. (blah, blah, blah)

        Umm, it’s when government spends more than its revenue …. even if they never pass a tax increase!!!.
        I kid you not.

        But Reason just invented a new excuse for deficits, crazier than what you describe. It’s because we’re a “high-revenue” country!!! … As “proven:” by tax cuts in the 20s, 60s and 80s … which were NOT tax cuts for only the rich! (OMG)

        Reason is now like the Progressives who, when they say “no tax cuts for the rich” mean ANY tax cuts for the rich … even if the middle-class gets most of the cuts (like the Bush tax cuts). Reason wackily defends tax cuts for ONLY the rich … by defending tax cuts for EVERYONE!

        This was predicted in the early years of libertarianism, when we said “always be pro-liberty, never anti-government.” The anti-gummint mentality celebrates anti-gummint rhetoric over liberty – leading to wacky bullshit like this. from Reason, Cato and the Paulista cult … but not a single solution to expand liberty anywhere

        So the libertarian brand is rejected by 91% of libertarians. But it’s a libertarian moment, (lol)

  17. Hey buddy, I’ll wipe down the windshield of your Learjet for five dollars! Or some single malt scotch if you have any.

    1. I’ll do it for four dollars! Competition reduces prices!!

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  19. It seems like we are closing the barn door after the horse is gone. We pay taxes then bitch/moan/complain about how da guvmit spends it. I think the real trick is not to pay the fucking taxes in the first place. It’s kinda like this: if the wife grouses about how much you spend on beer, porn, hunting/fishing gear….find a way to generate what I call NWR funds-Non Wife Reportable. I know lots of people that hustle side jobs, flip cars on CL, drive for Uber at night, whatever it is-doesn’t matter. The objective is to have money (green, hard, cash) that your wife (or guvmit) can’t get their hands on. From personal experience, it’s harder to keep secrets from my wife than it is to hide income from da guvmit. For the most part, my wife knows about the cash tree that I have and she is cool with it. Not a big mystery here folks-it called the black market. Gangsters and drug dealers often go up on tax charges cuz da guvmit is already looking into their affairs. Final words of advice/encouragement: don’t be stupid and don’t be greedy. Also, rule #1 is don’t talk about Cash Club.

    1. I think the real trick is not to pay the fucking taxes in the first place.

      Click our heels three times!.
      This is the funniest satire I’ve read in years!!!

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  23. SO in the last 8 years debt is up about $ 10 T. The total cumulative rise in GDP is about $3.6 T. So simple math would say that $1 dollar of government debt has the multiplier to add 36 cents to the economy. Or another way to put it. Big Govt skims 64 cents off every dollar stimulus (debt) to pay for their services.

    Try running a business that 36 cents of value for every dollr the consumer spends.

    1. So simple math would say that $1 dollar of government debt has the multiplier to add 36 cents to the economy.

      The math is simple, but you’re using totally wrong numbers.
      1) Unless you believe GDP is comprised entirely of government debt.
      2) Plus GDP is up $3 trillion per YEAR.
      3) You’ve combined total accumulated debt with one year of GDP. Roughly like dividing the price of your car by its MPG.

      Big Govt skims 64 cents off every dollar stimulus (debt) to pay for their services.

      For that we divide government spending and/or revenues by GDP.

      For 2014, GDP was $17.3 trillion, total revenues were $3.0 trillion or 17%. of total GDP
      Spending was $3.5 trillion or 20.5% of total GDP. These are the most reported numbers but if government is 20% of GDP then it’s kinda like double counting.

      If we divide PRIVATE GDP of $13.8 trillion by the $3.5 trillion in spending, then government spending is 25.3% of the private economy.. And $3.0 trillion in taxes takes slightly less immediately (25%)

  24. Unlike Capitalism, Globalization is a Pyramid scheme and Zero-sum WITHOUT https://en.wikipedia.org/wiki/Basic_income

    1. Wrong link. That’s to a Guaranteed Basic Income for all.

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  29. running a business that 36 cents of value for every dollr the consumer spends.

  30. Lastly on debt, another “solution” to it would be tax increases so substantial that taxable economic activity would plummet. A severely depressed U.S. economy would similarly make U.S. debt unattractive Admit Card 2016, but since Anderson desires growth it’s hard to imagine he would countenance such a plan.

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