How do tax cuts for the wealthy affect supply side ecconomics?

Question

My thought is that if some billionaire finds an extra $10M in his wallet come tax day, that most if not all of that money is going into the stock market or some other paper interest, and not back into the ecconomy to create more goods and services as is commonly espoused as the justification.

I think I need to clarify. Meg and Mattew O demonstrate an understanding of supply side ecconomics, but are applying it broader than I'd hoped. I want to understand why target the wealthy as opposed to any other economic strata -- e.g. Is $10M to a billionaire more efficient that $10K to 1,000 millionaires and more efficient than $1,000 to 10k poor or middle class?

Answer 1

I absolutely agree with you. I have always believed that.

Answer 2

If the government borrows $10M in the capital markets (or does not redeem debt) and puts it into the billionaire wallet there will be no increase in the money available for investment and there might even be a decrease, because even a billionaire might increase his consumption if he has an extra $10 million. If the marginal tax rate is lowered on high income people, they shelter less income so more money is reported to the IRS. This effect was clear after the 1987 tax cut. If the sheltering of income produce economic inefficiencies then cutting taxes would increase economic growth. If the tax cut applied to income from work effort, movie stars, business owners, etc the tax cuts would provide incentives to work more which would increase GDP, especially if the income could not be sheltered. People who earn money from investments would have an incentive to make riskier investments with lower tax rates, especially on capital gains. This probably played some role in the stock bubble in the late 90's.

It is assumed that the propensity to consume the extra money from tax cuts is greater the smaller the income, so a tax cut for middle income household would stimulate demand not supply. Given the falling savings rates that has accompanied the reduction in the top marginal rates, this assumption may not be justified.

Answer 3

Good answer meg. I think the asker has been fed some rubbish about supply side economics. Supply-side economics is not trickle down economics. It does not advocate cutting taxes to the wealthy. Rather it advocates cutting marginal tax rates, and other disincentives and inefficiencies that government policies create. It was developed during the 70's, when inflation was extremely high. At the time the textbook solution to inflation was to restrict demand. Demand restriction policies are very damaging, particularly to the poor. They create high unemployment and reduce growth. Supply-side policies are an alternative to demand restriction. By increasing aggregate supply you can reduce inflation, expand the economy, and reduce unemployment, all at the same time. It got a bad rap in the media though, because many conservatives (such as Reagan) claimed they were supply-siders.

Answer 4

>>most if not all of that money is going into the stock market or some other paper interest<<

If all $10 million goes into the stock market, it means someone else sold $10 million (in order for the billionaire to buy it) worth of stock and now has real money gain. (or maybe loss)

TOP SECRET: (must never be spoken publicly)
1997 - huge capital gains tax cuts (for those evil rich people)
What happened next ???
.

Answer 5

Companies raise money in the stock marked to create more goods and services.

Answer 6

How do you think companies get money for expansion?
When businesses expand, more jobs are created.