BECAUSE of the recent budget deals and the recession many experts are offering fiscal policies, namely regarding taxation and revenue. A good deal of this is related to how to increase government revenue and to create jobs. And almost everyone proposes incorrect solutions. So I thought that I might clear up at least one major issue, and explain what should be done.
The issue is taxing the rich. The Republicans, somewhat reluctantly, seem to be defending allowing the more successful among us to keep more of what they have. However, they do not do this in the right way. I offer this to them at no cost. The Democrats, as usual, pretty much favor pillaging the rich. Their plan seems to be only simple common sense. As Robin Hood understood, the rich are the ones who have something worth stealing. So when the government needs more money the rich are the most likely sources. However, this is a severely counterproductive policy.
The truth, in this case, is counter intuitive. Explaining why is a simple matter. Suppose that the Federal government wants to give money to some people in order to induce general economic prosperity. In such a case not taxing a group’s income is the same as giving a cash transfer. To simplify the results let the money be $300,000,000. Suppose the population of the US is also 300,000,000. Suppose that the number of really rich people is 300. The two policies are (1) to give everyone $1, or (2) give the already rich people one million dollars each.
The first, purely emotional, reaction inclines us to the give one dollar to everyone. The rich already have all they need. The others need money more. However, need is not related to economic growth policy. If each American has an extra dollar then the effect is likely to be like light rain in the desert. The effect will be so temporary and shallow that no lasting results will occur. Once it is given it will vanish.
However, a rich person, given an “extra” million, is likely to do something big. He might buy a yacht, or a fancy car, or open a business, or expand an existing one, or buy a new house, or invest heavily, etc. It is highly unlikely that he is going to spend it in a non-concentrated way. To repeat the desert analogy, his money is likely to form a pond and help plants grow, and give animals a place to drink. Of course he may not spend it at all, as he already has what he needs. That is, he may simply save it. That is he will cause a large increase in capital formation, so that businesses have increased access to it, via the banking system. Every act will tend towards increased employment, even if only indirectly.
In other words, the infusion (or tax break) given to the rich would produce some more lasting beneficial results. The same money given to the poor would be spent in many places, on small items, and, very soon, thus be gone with the wind. When the rich get richer everyone benefits. New businesses hire new employees. And this has nothing to do with good intentions. Life would be a lot easier if everything were so clear and worked so automatically.
Needless to say, you should not expect such rationality from our leaders. Their intentions are only to appear to be good, rather than doing good. Robin Hood did not care about improving the entire economy of England.
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