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Why should Mitt Romney and the fabled "one-percent"  pay only a 15% marginal tax on investment income ... half the rate charged to a dentist or auto mechanic on wages earned from work?  This was not the case until recent Republican Congresses slashed taxes on passive, unearned dividends and capital gains.

The rationale for that immense tax cut for (mostly) rich investors was simple and alluring - that super-low rates would entice more of the rich to invest in companies within the U.S., helping them to increase their productive capacity and hire more workers. Moreover, the resulting boom in economic activity would then result in so much new tax revenue, even at low rates, that deficits would disappear.

Let's put this in context with a term you may have heard. "Supply side" economic theory maintained that this flow of investment capital would pump up the factory end of things, increasing the supply of goods and services, offering them cheaper, thus stimulating demand.

In contrast, the standard Keynsian "demand side" model was to fight recession by ensuring that poor and middle class folks had enough cash ("high-velocity" money) in their pockets to buy - or "demand" - goods and services. Whereupon producers would be drawn into greater production.

For a more detailed description of the differences between these two economic models, see my earlier missive  A Primer on Supply-Side vs Demand-Side Economics. (It really is one of the top issues of our day and an informed citizen should know about it.) Here in this place, I'll try to be brief.

Who was right? Blatantly, the Keynsian approach worked in the 1940s, when massive government spending on WWII resulted in a boom that ended the Great Depression.  A boom that then continued for 30 years, till Vietnam crushed it against a wall. Throughout that period, high tax rates and stimulative spending seemed to work, whenever the economy needed a little help. Moreover, during that era, a very flat social structure - (CEOs earned only a few times what factory workers did) - combined with the most rapid growth of the middle class and the most vibrant era of startup capitalism in human history.

That does not make Keynsianism perfect! Critics like Friedrich Hayek, have indeed exposed some faults and blunders that later Keynsians, like Paul Krugman, openly admit and have striven to correct. Still, the Demand Side approach can point to many clearcut successes.

In particular, it is plain that during recessions, when economic activity lags and deflation looms, what you want is "high velocity" money in circulation - money that will pass from buyer to seller and then to another seller and so on.  Not money that just sits.

Does Supply Side have a similar track record? Not even remotely.  Not even once. Simple charts - and hard conclusions from the Congressional Research Service - show that the Supply Side assertion was... and is... utter mythology.  None of its predicted effects ever happened.  And let me reiterate.  Not ever, even once.

Specifically, cuts in tax rates for dividends and capital gains have never had any long-term effects upon capital investment, since records were kept in the United States.  (See this cogent article putting the myth to rest, once and for all. Also my article: A Primer on Supply-Side vs. Demand-Side Economics.)

In fact, this is no surprise, for several reasons:

Supply Side assumes that the rich have a zillion other uses for their cash and thus have to be lured into investing it!  Now ponder that nonsense statement. Roll it around and try to imagine it making a scintilla of sense! Try actually asking a very rich person.  Once you have a few mansions and their contents and cars and boats and such, actually spending it all holds little attraction.  Rather, the next step is using the extra to become even richer. Naturally, you invest it.  Whatever the tax rates, you invest it, seeking maximum return.

Instead of enticing the rich to invest, these super low dividend and capital gains rates simply used money taxed from middle class wage earners to give bonuses for speculations wealthy folks were doing anyway.  If anything, the only major effect, other than budget deficits, was a pumping up of asset value bubbles.

2) Now to be sure, some of the rich ... a few... put a fair amount of their wealth into truly bold and risky new enterprises.  I know such men and women, who engage in Venture Capitalism or starting up creative new enterprises. And just so you know that I'm no socialist I believe this kind of investment truly should be encouraged by taxing it at a very low rate!  Not only because of the risk, but also because equity shares that are bought de novo directly from a new firm actually deliver nearly all of that value directly into capitalization and company development.

In contrast, most exchanges through the NYSE or NASDAQ are purchases from other stock-owners who happen to disagree with you about prospects for future capital gains and dividends. It is just as much a betting/gambling system as any Vegas casino, Your trades may marginally raise or lower the posted price, allowing the company to raise a little capital on the side, but almost nothing from your stock transaction actually goes to the company itself, or into new products or plants and equipment.

(Hence, that kind of investing - by far the largest portion - helps industry only at appallingly low levels of efficiency, but diverts management into spending nearly all its time trying to bribe stockholders with short term benefits, ignoring long-term company health.)

No wonder Adam Smith himself expressed contempt for passive investments that he called "rents"... compared to investments in which the owner actually gets involved in starting up or entrepreneurial development of long term company or enterprise health.

3) So what about "targeted investing"?  The towering hypocrisy of supply side tax cuts for the rich is that they are claimed (without a scintilla of evidence) to help create jobs. But then, why treat investments overseas equally to those made in domestic companies? President Obama proposes narrowing the super-low rates to U.S. companies that are (a) startups, or (b) demonstrably adding jobs, or (c) investing directly in new equipment or R&D.  For this he is derided for "picking winners and losers"... even though the list of targeted tax breaks for GOP-favored industries like coal and oil are myriad. (and outrageous.)

4) In fact, we spoke earlier about how stock and equities markets have lately become the tail wagging the dog.  Instead of serving the capital needs of companies, firms like Mitt Romney's Bain Capital show that productive corporations making goods and services are now like cattle, farmed by Wall Street, to be bled or dissected at whim.  Nor is the whim even human anymore! Most trades are now propelled by hyper-aggressive, parasitical "flash trading" computer programs that vastly amplify volatility, sap investor earning potential, and threaten our entire economic system in a dozen ways.

5) The reduction of dividend and capital gains tax rates almost to zero has coincided with the rapid ending of the relatively flat social structure that we inherited from the Greatest Generation of the 1950s and 1960s.  Back then, the rich managers of major corporations earned only ten or twenty times what factory workers got, a situation that still exists in Japan. Only now, American wealth disparities are approaching levels not seen since the American Revolution.

The last thing that the GOP or Fox wants you to do is look across the last 6000 years.  The class that they call "job creators" used to have another name. Lords.

 The outrageous inherent unfairness of passive dividend-clipping getting far better tax treatment than earned wages is inherently suspect. It is exactly what you would expect rich and powerful men to lobby for, whether or not their supply side rationalizations were true!  It should be no surprise that, in our money-drenched political system, those with such power and influence have benefited immensely.

But are the arguments and rationalizations valid at all?  At minimum, supply-siders should bear some burden of proof.  Their experiment has been run, now, for more than three decades, and never once has their core predication come true... that cutting taxes on the rich will result in increased overall revenues and a vanishing federal deficit.  The results are utterly conclusive.

Supply side is disproved, top to bottom.

What we need in this depression - and by most of the metrics it has been a depression, not a recession* - what's needed is what ended the last one. The circulation of high velocity money that goes hand to hand very quickly, generating economic activity with every transaction. Not the exact opposite, money that sits in portfolios, not helping capitalize industry but simply fostering the aggrandizement of a parasitic caste.  One the the founding father of free enterprise - Adam Smith himself - quite despised.

"All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons."

Smith is not talking about charity, but the vigor of trade.  In this case, we "share" by buying from one another.  The middle class is very good at that.  It is the middle class that - assisted prodigiously by technology and science - propelled our economy to be the wonder of the world.

It is the middle class who should get whatever tax benefits can be doled out.  They'll use it to make small startups.  They'll use it to educate bright, competitive kids.  They'll spend it!

They are the real "job creators."

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Comment Preferences

  •  Tip Jar (18+ / 0-)

    Things to repeat: "CITOKATE -- Criticism Is The Only Known Antidote to Error." "IAAMOAC -- I Am A Member of a Civilization"

    by David Brin on Fri Feb 03, 2012 at 05:41:05 PM PST

  •  Follow the discussion at -- (8+ / 0-)

    http://davidbrin.blogspot.com/

    Let's have a great year and make this a rout.

    Things to repeat: "CITOKATE -- Criticism Is The Only Known Antidote to Error." "IAAMOAC -- I Am A Member of a Civilization"

    by David Brin on Fri Feb 03, 2012 at 05:42:12 PM PST

  •  two questions (2+ / 0-)
    Recommended by:
    Gooserock, Orinoco

    First, why use taxes in this case?

    And just so you know that I'm no socialist I believe this kind of investment truly should be encouraged by taxing it at a very low rate!
    doesn't that undermine your main argument about taxation?

    Second, how the hell can we convince a majority of Americans when even most democrats now subscribe to 'supply side' economics? Even Obama uses tax cuts as a cornerstone of his economic policies. There don't seem to be a voice within the political class who agrees with you or is willing to stand up to the supply siders and argue the point.

    America could have chosen to be the worlds doctor, or grocer. We choose instead to be her policeman. pity

    by cacamp on Fri Feb 03, 2012 at 06:46:57 PM PST

    •  There's No Party for a Stable or Democratic (4+ / 0-)

      economy, none for a military appropriate to the threats faced by our nation-state, none for addressing climate change appropriately as science shows the problems to be, none for a journalistic mainstream information environment, and much more. Basically, none for a civilized nation.

      We've had 2 conservative parties for over 30 years, 2 rightwing parties in many core economic and some other ways.

      Doesn't mean we shouldn't discuss what the facts actually are, or what's actually needed.

      The rightwing didn't take over the Republican Party and the nation by compromising with the Rockefellar types.

      We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

      by Gooserock on Fri Feb 03, 2012 at 06:54:21 PM PST

      [ Parent ]

    •  Patient Capital (3+ / 0-)
      Recommended by:
      Nova Land, Spoc42, GDbot

      A concept which emerged out of the wreckage of the southeast Asian financial crisis in the late 1990s was the idea of patient capital versus hot capital.  Hot capital was comprised of those flows invested in speculative investments intended to secure quick returns.  Conversely, patient capital was invested in projects which would show returns over only a number of years.  Some of the southeast Asian nations decided that hot capital was not worth the cost it created in their societies because is distorted the economies beyond usefulness.  A sensible tax policy would ensure that patient capital had extremely low or zero tax rates while hot capital was taxed at multiples of the tax rates on labor and current income.  Those folks playing at the stock market casino with their flash-trading should be paying something northward of 90% on their speculation, which does nothing to promote any benefit for the general society.

      "Love the Truth, defend the Truth, speak the Truth, and hear the Truth" - Jan Hus, d.1415 CE

      by PrahaPartizan on Fri Feb 03, 2012 at 10:57:00 PM PST

      [ Parent ]

  •  If only Romney and Gringrich continue their (5+ / 0-)

    battle of a 1000-paper-cuts until June or so, I believe that the possibility of giving a re-elected President Barack Obama a BLUE CONGRESS is better than fair.

    Even life-long Republicans are having a hard time with their candidates this go round.

    Imagine, the Family Values Party, having to choose between an ethically challenged, 3-time married, two-timer who was forced from the Office of the Speaker of the House after ethics charges were proven and a Mormon with secret Swiss bank accounts and Cayman Island bank accounts and if any more of those sorts of tidbits pop up, some people may well start asking questions like, "what, is he into money laundering?"

    As campaign manager for a candidate to the US House, I'm all about the precincts - I believe that feets on the ground this summer and fall will be what can give us a US Congress that will work WITH our President, instead of AGAINST him, starting Jan 21, 2013.

    Nice diary, great points. Too bad our mainstream media hasn't made it to Step 8 in their Nuz Rehab Program yet (where they publicly confess to ignoring actual news in favor of gossip), or they'd be ready to tell The People the true facts about JOB CREATORS, and whom they are (and are not).

    * * *
    I like paying taxes...with them, I buy Civilization
    * * *
    "A Better World is Possible" - #Occupy

    by Angie in WA State on Fri Feb 03, 2012 at 06:50:32 PM PST

  •  If you ask someone who has actually created a job (5+ / 0-)

    whether tax cuts or a "business-friendly" market made one whit of difference in whether they put out a "help wanted" sign, you will get laughed out of the room.

    Jobs are ALWAYS created because market demand for goods or services exceeds capacity. Period.

    And market demand occurs when consumers have money to spend and what to buy what the producer is selling. Period.

    It ain't exactly rocket science. But then, pretty much everything appears to be rocket science to the gullible who can swallow Republican codswallop hook, line and sinker.

    TERRIFIC diary, David!

    "Respect for the rights of others is peace." -- Benito Juarez, president of Mexico

    by Blue Boy Red State on Fri Feb 03, 2012 at 07:22:01 PM PST

    •  Yup (0+ / 0-)
      Jobs are ALWAYS created because market demand for goods or services exceeds capacity. Period.

      But over-sea's, though now we're begging and giving to oversea's companies to do here but at cheaper wages etc. needed, as they recognize the markets here, while the 'job creators' within either hoard their riches or do their work in other countries and ship back, and ever changing countries, Burma's now on the radar for extremely cheap labor, if needed for markets here and we Don't get product any cheaper! The reason they do is businesses, or better corporations, aren't regulated, thus all the throwaway crap bought and constantly changing with beta products instead of quality, as well as the recalls on product whose numbers are constantly growing once again because quality

      CCR:"If you're a torturer, be careful in your travel plans. It's a slow process for accountability, but we keep going."

      by jimstaro on Sat Feb 04, 2012 at 05:24:08 AM PST

      [ Parent ]

  •  And Who Da 'job creator' (0+ / 0-)

    {just a couple of very recent examples}

    The 'O' apparently:

    Google Plus chat with Obama has big impact on Texas family

    Jennifer Wedel's life has turned upside down since Monday.

    That's when she chatted online with President Barack Obama about a controversial program to hire highly skilled foreign workers — and the president ended up asking for her husband's résumé.

    Since then, she said, her phone has been ringing off the hook with calls from news media, recruiters, the Texas Workforce Commission and various companies about possible job opportunities for her husband, Darin.

    Now, three years after he lost his job as a semiconductor engineer at Texas Instruments, she's hopeful that he will find a new one soon.

    "We've been praying for this to happen for three years," said Wedel, 29. "Did we think the president would have to get involved? No. As for why he chose this way, maybe God will enlighten me on that in the future. But I'm very optimistic."  read more>>>

    As the street, not an investment for growth game under the new capitalism, nor the teabag 'job creators' have yet to create, a decade counting and that part of economic, 'jobs', growth started as soon as they got them tax cuts. While if asked, and rarely done so, they use a rule changing meme of 'not sure what washington will do' while owning that damn town or the politics in, certainly the politicians!

    DC Event a Model for Programs across the Country
    WASHINGTON – February 2, 2012 - With the success of its recent “Hiring Fair” in Washington, which resulted in more than 500 tentative job offers for Veterans, the Department of Veterans Affairs is looking at ways to expand VA’s traditional hire-a-vet program with major Veteran-focused career fairs throughout the country.

    “America needs to put the skills, dedication and resourcefulness of our Veterans into the workforce to help rebuild an economy that lasts,” said Secretary of Veterans Affairs Eric K. Shinseki. “America’s Veterans need to know that, across the federal, private and non-profit sectors, hiring managers are ready to put them to work.”

    Over 4,100 Veterans attended the 13-hour career fair Jan. 19 at the Walter E. Washington Convention Center.  To date, more than 500 Veterans received tentative job offers and other job offers may follow.  About 2,600 Veterans participated in interviews with public and private employers.

    Participating federal agencies included the departments of Homeland Security, Defense, Interior, Agriculture, Labor, and EPA.  They were joined by over 20 private-sector partners, such as Microsoft, Lockheed Martin, Citigroup, Safeway, Washington Metropolitan Area Transit Authority, Philadelphia Police Department, Johns Hopkins Hospital, and JPMorgan, among others.

    About 700 Veterans created online accounts for VA benefits or received information about VA’s extensive array of programs for Veterans.  Thirty homeless Veterans were referred to care.  read more>>>

    Now there have been Veterans job fairs, put on by a Veterans group started a few years back. They only hit a few major cities in the country, only a couple, and months apart. They've had a couple near here at Charlotte motor speedway over the pass couple of years. These are very small as to businesses looking to maybe hire, they have as many schools giving out information as they do employers, and those total only count some ten to fifteen tables if that. Rightfully so they are geared more towards today's returning vets then us older vets. But the programs this Administration, the Va Administration and especially the 1st and 2nd ladies have implemented with the private and public sectors has led to this:

    Post-9/11 veterans unemployment drops in Jan.

    3 February 2012 - Amid a host of new and planned programs to help veterans find jobs, the government reported Friday that the unemployment rate for Iraq- and Afghanistan-era veterans fell significantly in January to 9.1 percent.

    That jobless rate for veterans who separated from active duty since the 2001 terrorist attacks is down from 13.3 percent in December and from 15.2 percent a year ago. read more

    "Supply Side' economics, i.e. new capitalism, has worked just as detractors said it would as it was first talked about then implemented, one being a scourge of most of the dems, Ralph Nader, and many others, who should have been listened to then. It collapsed as soon as it was followed by wall street and the new robber  barons, remember the reagan huge recession, I certainly do, construction almost totally collapsed around the country and with it a dramatic change in the business models, do more with fewer actual working trades people and stagnate wages and benefits while also changing from a professional to just skilled labor to maintain the need for lower wages while real estate and construction costs rose rapidly thus profits at the top and for investors.

    A couple of the main reasons that collapse was stopped and the con of 'trickle down' was brought back to life were the ever changing easier credit scheme's for the masses especially, and the newer investment scheme's on the once wall street which became the standard for watching the economy but not for growth in but growth in money changing, a giant roulette wheel with the wealthy getting wealthier and yet not using their own capital but the capital of the smaller investors who were flocking into the market either within some of the investment scheme's or as individuals, and with the emergence of this technology not for economic investment of growth but things like day trading for their own bottom lines.

    By the way, the collapse started a couple of years prior to the mortgage fiasco, I was watching it happen on the new and rehab construction side, commercial,industrial and residential. The bush tax cuts started that collapse, they didn't bring better investments, the masses small cuts were gone out their exhaust pipes even before the bill was signed as gas prices started rising rapidly thus so did food and other needs. The top just started playing the invest game with more and not for economic growth but their own.

    People bought into and still do because with the credit scheme's they actually thought they were getting trickle down or that it was right around the corner, the herders leading the sheep to slaughter!!

    CCR:"If you're a torturer, be careful in your travel plans. It's a slow process for accountability, but we keep going."

    by jimstaro on Sat Feb 04, 2012 at 05:14:34 AM PST

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