In the prior blog I brought up the issue of the recent tax cuts to corporations and the wealthy. The argument for this to stimulate the economy is based on the Laffer curve that was seized upon by Jack Kemp and others during Reagan’s administration. It was termed supply side economics. The argument goes like this – if rick people keep more money, they will invest which will increase jobs and therefore increase wages for everyone else. The economy will grow at such a rate that the tax cuts will pay for themselves. Ok, I agree that people can be overtaxed, but the reality is that while this economic theory continues to be discussed by academics, it has NEVER worked in reality. Ever. And the reason why is obvious. While the wealthy will invest, there is no guarantee that those jobs will be in the US. In fact, over the last 35 years when this economic policy has been used, the jobs increase faster overseas. The reason is obvious – and we only have to look at Henry Ford to figure out why. Major corporations are global. They sell all over the world. They sell where the market is not saturated with goods. That is not the situation in the US. We are pretty saturated and have been since the 1970s. The market is overseas, but they cannot buy the products we sell. So adopting the Henry Ford model, we have them build the goods, pay them a decent salary so they can buy the products they make, while keeping costs down so the corporation increases the number of goods sold, and the amount of profits sent to shareholders (the rick investors). That leave out the people in the US, which is why this economic model is doomed to fail. It also ignores what is the likely real challenge behind stagflation in the US in the 1970s. The market was saturated with good in the US and Europe. Nixon saw this on opened China. Carter expanded those relations. There are 1,2 billion Chinese – big, untapped market, but we need to build goods there to allow them to buy them. That means hire Chinese workers. Worked in japan. Worked in Germany after WWII. There was an economic lesson, but we missed. It.
Now back to the Laffer curve. What Art Laffer argued was that there was an optimum tax rate – if it was too low not enough m revenue was generated, while if too high people would be less encouraged to invest and reap profits for tax reasons. Kemp and company seized on the tax rates being to high as a means to create political capital with the public while never contemplating the potential reality that reducing taxes would increase revenues. But they never evaluated whether that was true. And they were wrong. We were not of the wrong side (see Laffer curve). We never reached it. And they ignored the fact that the tax rates on the super wealthy were 90% before 1964. Certainly that did not inhibit economic growth. The Post WWII was one of out great growth periods, not one of strife. The economy expended. And there may be a reason why. Taxes are only paid when investments are sold, not when they are held. Hence if tax rates are high, investments are helped. That creates stability for companies and lessens challenges by corporate raiders. Hence perhaps this tax policy has confounded the tax collection problem and adversely impacts the stability of corporate jobs and production of goods. An area than needs a lot more study….