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For three decades the Republicans have conducted a massive economic experiment testing a theory called supply-side economics. This theory is better known as trickle-down economics or Reaganomics. The gist of this theory is that cutting tax rates on big businesses and corporations will give them more money to spend on their businesses and the economy, stimulating job growth and demand. After thirty years, the results couldn't be clearer, supply-side economics has nearly bankrupted our economy, caused wages to stagnate on all but the upper tier, and has contributed to the highest unemployment rate since the great depression. I will now attempt to explain to you why this disastrous economic theory didn't work.

9 Things The Rich Don't Want You To Know About Taxes

Supply-side economics was the brain child of a libertarian economist named Milton Friedman. Libertarians have this optimistic theory that by limiting the size and scope of government, people will naturally thrive and do what's best for the community. Their beliefs do not take into account human nature, that without the government maintaining order society will collapse as people will look out for their own best interests and there will go everything that takes a collaborative effort to achieve. Supply-side economics embodies that libertarian naivety that if government just gets out of the way, people will do what's best.

At first glance, cutting corporate taxes to give business owners more money to work with sounds like a great idea. They will have plenty of money to dump into the economy and more money to invest in their business, expanding it and creating new jobs. A closer look reveals that both these things are fatally flawed. When rich corporate types, who have all the assets they can ever want and then some, get more money; they tend to sit on it rather than spend it. This takes precious money out of the economy, giving the rest of us less money to work with. As for investing that money into the business, this idea comes from a complete misunderstanding of what corporate tax rate is.

Corporate taxes are a tax on the profit a business takes in. The problem is people don't understand what a business profit entails. When a person makes a salary, an income, that income is taxed. What they have left must go for necessities like food and clothing, and whatever is left after all that can go for amenities and other luxuries. When income taxes are lowered, people have more money not only for the necessities, but for everything else. However, taxes on corporate profits are inherently different. Everything a business spends on itself; employee wages, business expenditures, and business related investments; those are all spent before the profit is counted. Whatever is left after all that spending is the profit. That profit is what is taxed, and since a profit is the money you have left after business expenditures, the idea that lowering taxes on corporate profit would increase the amount of money a corporation has to spend on the business is inaccurate and fundamentally flawed at it's face value.

When corporations have tax rates drop, that is money that isn't being circulated into the economy or being invested in business. Lowering taxes on corporate profit is actually very damaging to the economy, and after thirty years of supply-side economics we've all seen the effects. However, there is proven results for higher corporate tax rates equaling more economical success. Higher tax rates means more money for the government to invest in America's future. Taxes are spent in a phenomenal amount of ways to benefit the economy, and the more they spend the more the economy flourishes.

There is also another reason why higher taxes on corporate profit helps the economy. Corporations are driven by profit, they want to keep as much money as they can; that's how business works. When taxes on profit increase, that means the more profit they make, the more the government takes. They want to limit the amount the government takes, so they will invest that money into their business, an asset, so that they can keep that money working for them. This in turn can translate into more jobs and better wages and benefits. The data speak for itself, before taxes on corporate profit were cut in the Reagan era wages increased along with inflation. Furthermore, less profit means less money for corporate interests to buy lobbyists to lobby politicians to cut regulations, lower their tax rates, and cut employee labor unions; all at their benefit but at the cost to workers and consumers.

Republicans are completely bought and sold by the corporations, they do little to hide the fact that their policies are for sale to the highest bidder. Democrats also fall victim to greed after seeing all the money being thrown around by the corporate big wigs. When you get through the miasma of lies put out there by the wealthy corporations, who are only out for their own interests, you come to the inevitable truth of the situation. Tax cuts on corporate profit is detrimental to the American economy, and the more wealth they accumulate, the less there is for the rest of us. Before getting all up in arms the next time someone proposes an increase on corporate taxes, just remember a true patriot is not afraid to give more to benefit their country if they can afford to. The well being of this country and her people is more valuable than lining your coffers with money you'll never spend.

Originally posted to SixDollarLiberal on Thu Apr 28, 2011 at 01:45 PM PDT.

Also republished by Money and Public Purpose.

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Comment Preferences

  •  Brilliantly said (1+ / 0-)
    Recommended by:

    I've always wanted to see a straightforward analysis of the rates at which businesses invested in themselves pre- and post-Reagan. How much of that sort of investment was there back in the Ike era, when personal taxes capped out at 90% (I have no idea what the corporate tax rates were at the time).

    "Hatred is the coward's revenge for being intimidated” - George Bernard Shaw

    by Jaxpagan on Thu Apr 28, 2011 at 02:13:26 PM PDT

  •  One more negative (2+ / 0-)
    Recommended by:
    Azazello, psyched

    One more negative about absurdly low taxes on the top.  With all their extra money sitting around from their corporate taxes, they might all start investing that money poorly and create asset bubbles... like dot-com technology stocks, real-estate, credit default swaps, and commodities like copper and oil.

    Too much money available for "investment" is just as dangerous as too little.

    Our Dime Understanding the U.S. Budget

    by maddogg on Thu Apr 28, 2011 at 02:21:01 PM PDT

  •  No one pays money to have people stand around (4+ / 0-)
    Recommended by:
    maddogg, notrouble, psyched, Azazello

    doing nothing.

    A business owner sitting on wads of cash is not going to hire people if there's no work for them to do.

    He's not going to expand his business....if there's no business at his business.

    You can cut taxes to the bone and if there's no consumer demand for goods and services, there's going to be no hiring.

    How is this not obvious?  The way to add jobs is to get more money into the hands of the vast majority of consumers. And you don't do that by making them pay more for Medicare or cutting their pay.

    Freedom has two enemies: Those who want to control everyone around them...and those who feel no need to control themselves.

    by Sirenus on Thu Apr 28, 2011 at 02:32:59 PM PDT

    •  Rediscover (0+ / 0-)

      Spoken like a true demand-side management socialist/commie/nazi.  

      Keynes figured this all out 80 some years ago.  It's sad that our leaders have to rediscover this fact.  Of course, the ones peddling supply-side economics, I don't think they ever thought it would work.  It was just a way to try and justify their political agenda.

      Our Dime Understanding the U.S. Budget

      by maddogg on Thu Apr 28, 2011 at 02:45:27 PM PDT

      [ Parent ]

  •  Unfortunately, corporate America could not care (0+ / 0-)

    less about the economy. It should, of course: consumer spending drives 70% of our GDP, and employees are CONSUMERS. But they're making out like the bandits they are, and have no short term incentive to change.

    My body may be a slave to capitalism, but my brain will never be.

    by GammaRae on Thu Apr 28, 2011 at 02:47:37 PM PDT

  •  Not sure you've got the argument right (0+ / 0-)

    I think you may be conflating "corporate taxes" with taxes on high incomes. The two are not the same and supply side economics specifically targets lowering the tax rates on upper incomes, not corporations per se.  In fact, taxes on corporations in the US are often higher than taxes on corporations in European countries, which opt for higher taxes on middle and upper-middle class salaries instead to pay for income transfers to lower income people.

    Milton Friedman was definitely a believer in the supply side explanation for how the world works, but he was not its founder nor did he do much writing in that area.  That honor goes to Arthur Laffer.

    The income growth in the US since the lowering of upper income tax brackets has predominantly come through higher salaries in the upper income brackets, not corporate profits, and the reason is that corporate taxes have not been lowered anywhere nearly as much as taxes on upper income salaries have been lowered.

    •  You Might Be Right (0+ / 0-)

      I'm no expert on the subject. I took various pieces of information I've heard and put them into an easy to understand argument. Republicans always talk of raising taxes on the job creators in this time of recession is bad, and I've tried my best to explain why raising corporate taxes and cutting all those loopholes will not hurt businesses.

      I'm not even going to bother explaining why raising income taxes on wealthy Americans is a good idea, since that one is a no brainer. The only argument I've heard them come up with against that is that raising taxes is robbery.

      Isn't liberalism delicious?

      by SixDollarLiberal on Fri Apr 29, 2011 at 09:58:26 AM PDT

      [ Parent ]

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