Can someone explain to me again exactly how tax relief to upper tier income individuals expands our economy?

Question

I'm lost in the concept of how freeing up more money for upper income folks to invest expands our economy and creates jobs.
People who invest money do so where they get the greatest returns. The greatest returns are in countries with expanding economies, like China. Why invest in America with an economy expanding at a 4% rate when you can earn 4 times as much in the Chinese economy, which is expanding at a 12% rate.
Exactly how does this benefit our economy? How does giving upper income people more money to invest overseas create more jobs here?
Why is it less beneficial to give the middle class, who are likely to spend their money within the USA, a tax break?

Answer 1

You understand the basics of the Keynesian Cross. The 'rich' (and, by this definition, even I, with a crappy corporate drone job am 'rich') invest most of thier marginal income, so tax cuts on higher-than-median incomes result in increased investement.

The investment market is global, though many American investors do invest exclusively in America, because it's easier and more familiar - some even out of patriotism. In that global market, every business competes for capital. When better or more dependable returns are to be had in one country or another, investment flows to that country, and returns go /down/ there, while they go /up/ elsewhere. Once you figure in risk premiums, and other factors, at any given moment, a dollar invested in any one capital market in the world is about as good as a dollar invested in any other - as far as the investor can tell, at the moment.

When people say 'returns are higher in China' what they really mean is that returns /have been/ higher there, recently. And that performane has been priced into the market.

So, some money from tax cuts in America gets invested in America, and some gets invested elsewhere. Simillarly, some money from around the world also gets invested in America.

America, though, is a developed country. It needs continued investment, but not nearly as much as developing economies need increasing investment. When economies develop, the standard of living and agregate demand in those countries rise, which increases demand for imports, and makes labor in those countries less competative.

So, even if you assume that much of the investment in the US is going overseas, the 'high returns' it's generating over there are uplifting developing economies, making them less able to 'steal' American jobs, and also increasing demand for American goods and services, which, ultimately, helps the American economy, as well.

It's GLOBAL Trickle down-and-back-up. ;)

Scary stuff, huh?

Answer 2

Judging from your question, you have a very poor understanding of economics and investing.

It is not very important to an individual investor at what rate the economy of a country is expanding. An investor looks a single business venture or transaction to see what rate of return he will get on his money, not how the entire economy is working. That said, the percentage growth of an economy is not the only way to measure its growth. Yes, as a percentage of its much smaller economy, China is growing faster. They have a GDP of only 2.5 trillion, slightly larger than California. The US has a GDP of 13 trillion plus. In absolute terms, our economy is expanding much faster than China (who has a growth rate of 11%, for the record).

Anyway, back to the question. Why do tax cuts for "rich people" help the economy? The tax cuts people generally point out for these are not just income tax, but other things like capital gains and dividends. What this does is limit the rate of return people get by investing money into new business, new equipment, hiring workers, buying bonds that our government needs to function or making loans. This helps our country grow because it is "rich people" who spend 50 million dollars on opening a factory that employs 5,000 workers. Rich people are the ones who make loans that allow people like you and I to purchase cars and homes. Lowering taxes on investments also allows companies and individuals to buy more capital goods that make work more efficient and raise the standard of living for the entire country.

Take a look at the article I included about Iceland. It might help you understand the concept. It deals more with tax revenue than economic expansion, but you'll get the idea.

Answer 3

The idea you're talking about is known as supply-side economics (or "trickle-down economics, Reaganomics"). It's based largely on the Laffer curve interpretation of taxation - that taxing too highly results in fewer total tax dollars for the government to take in because it slows down the economy. By giving tax breaks to people with higher incomes, those people will (in theory) invest and create new jobs in the United States. It does not take into account that many wealthy people invest in and create jobs in other countries.

It's opposite, Keynesian or "demand-side" economics promotes the opposite view - that the best way to stimulate the economy is to assist the less fortunate find employment and spend money. This has been the traditional view in the Democratic party since the New Deal.

Personally? I prefer the Keynesian model. Cut taxes on the middle-class and keep the money in the U.S. But I wanted to answer your question as to why conservatives believe cutting taxes on the upper income individuals will stimulate the economy.

Answer 4

It is not a case to increase job creation; it is the economics of tax collection.

The reason for not giving the middle class a good tax break is they are the largest contributing group to the government's purse.

The upper tier individuals make up a very percentage of the tax dollars collected even if they pay 1000 times an average middle calss person pays.

If you have a population of 300 million people, about 25% may be gainfully employed (75 million people).

Out of that about 2 to 5 % of the gainfully employed are in the upper tier income bracket (0.075 to 3.5 million) people.

Average middle class net income is about 25,000 per year

300,000,000 X $25,000 = 7,500,000,000,000

Average Tax collected ($755 + $2617.50) X 300,000,000 =

$1,011,750,000,000



There are about 90,000 upper tier income earners (above $250,000 per year). Guestimate average net income oth these 90,000 people $1,850,000

Average Tax collected
($755 + $3465 + 10,877.50 + 22,568 + 59,977.50 + 529,707.50) X 90,000 =
56,461,545,000



0.5% decrease in the Average middle class income tax =
$5,058,750,000

0.5% decrease in the upper tier income tax =
$282,307,725

It would cost the Federal Goverment $4,826,442,275 if they reduced the total income tax of the middle class income tax brackets instead of the total income tax upper tier income tax brackets.

This is a very simplified example but shows the great difference of tax reductions for the majority of tax payers against the very small minority upper tier tax payers.

As I stated, it is not a matter of freeing up more money for upper income folks to invest expands our economy and creates jobs.

It is simple economics.

Hope this helps.

Good Luck

Answer 5

The growth of our Economy is controlled. What you do not see with a 4% growth rate vs. 12% is the impending 12-14% Mortgage rate. This has been intentional, since the days of FDR.
There is no comparing the two.
Why do people not ever just go to the IRS website and check tax rates and taxes collected.
The Tax rate went down for EVERYONE and the "Loopholes" decreased for the rich.
We collected more taxes in 2006, adjusted for inflation, than at any time in our history....

Answer 6

Let me try. If I am the government and i tell you you can earn 200,000 a year and I will take 30% that leaves you with 140,000. Now if your top of you earning potential now but can add employees and earn 300,000 at the same 30% that leaves you 210,000. But if when you move to 300,000 I take fifty percent you get only 150,000 plus you are paying for your expansion which leaves you with less than before you created the new jobs.

I had a job once where I got a $.10 raise every month that was great until it changed my tax bracket and I brought home less money with higher pay. This was back a few years when we had more tax brackets than we do now.

Answer 7

Simple.

Higher income folk are more likely to invest/bank the money and/or purchase durrable goods, thusly driving the ecconomy.

The little guy is just gonna spend it on bills and/or buy cheap chinese goods from walmart.

Not everyone is investing in China. China has an artifically inflated their ecconomy at the expense of the lower classes and it's bound to backfire before long.

You're probably on of these libs that think the president is an omnipowerful being that can do their will aat the wave of a hand. Federalist government doesn't work that way.

Those who say a trickle down doesn't work forgets the fact that Regan and the first Bush had a stable ecconomy on the rise, which Clinton promplty screwed up till the GOP took over congress and got things under control. You apparently can't tell the difference between a conciously controlled ecconomy and an artificially inflated one.

WAKE UP !!!

Answer 8

Given your question and many of the answers so far, I'll have to talk slowly in a, no doubt, vain attempt at educating people who are too set in their ways to change. Nonetheless, I venture forth.

Regarding taxation, think of a single dollar. Is it better to have the government take a portion of that dollar, or is it better to let an individual have the entire dollar?

The government takes the portion of that dollar and starts transferring it from one bureaucratic entity to another. By the time the dollar supposedly makes it to where it's supposed to go (welfare, agri, SSI, subsidies, etc.), it's been used to pay for the various bureaucracies and is barely cents on the dollar.

The individual, left to his/her own decisions, is left with three choices: invest the dollar in a bank account (includes stocks, funds, bonds, etc.), invest in a business, or spend it. In all cases, he/she is fueling employment and taxes. Even if the dollar goes into a savings account, it still generates business for a bank and data processor.

In short, liberals need to learn business before they yap their trap.

Answer 9

"Why invest in America with an economy expanding at a 4% rate when you can earn 4 times as much in the Chinese economy, which is expanding at a 12% rate."

You can? Well, if it's that simple let's all run out and buy some shares on the Shanghai Stock Exchange Monday morning, shall we? ;-)

"How does giving upper income people more money to invest overseas create more jobs here?

Why is it less beneficial to give the middle class..."

You're seriously confused, Binky. You are infected with the far-left wing idea that all income belongs to the various governments under which we live and, in their munificence, they "give" some of it back to us.

That's backwards - we EARN it and we agree, under the law, to pass on to our governments not one thin dime more than is legally required.

Now - to the central point of your question: just about every economist in this country agrees with the premise that globalization is a net plus - for us and for our trading partners. With that out of the way, let me just suggest that the upper income folks that you think the government is "giving" money to are not at all heavily invested in the Chinese economy - UNLESS it's through Western & Japanese multinationals doing business there. Those multinationals do plenty of business in this country as well so what's going around is coming around (those would be dollars coming and going around).

Lastly, don't forget that as of 2005 the top 10% of taxpayers were paying 68.19% of the Federal income taxes in the U.S. You can only go to the well so often before it comes up dry. Believe it. Or go get it here: http://www.taxfoundation.org/taxdata/show/250.html

Answer 10

What makes you think that the majority of middle class money helps only US companies? I don't see many shoppers in Target or Wal-Mart examining products to see where they were made before buying them. The people who slam me for driving a foreign car fail to realize that the plant that made my foreign car is right here on US soil, employing Americans! Additionally, I don't know any investor who puts all their eggs into one basket by investing all or a majority of their investible cash into one market.