Inequality.org

connecting the dots on a growing divide

Why Middle Class Tax Cuts Lead To Economic Growth

A middle class family will spend an extra dollar in the local economy and spur growth. A very wealthy family, instead of circulating an extra dollar in the local economy, will place that dollar in lower-return investments, often offshore.

Earlier this month, on April 4, Congressman Bill Foster (D-Illinois) spoke on the House floor against H.R. 1874, legislation that would direct the Congressional Budget Office to selectively use dynamic scoring in its analyses of tax and budget legislation, a move that ends up justifying tax breaks for the wealthy.

Foster also spoke about the return-on-investment from to tax cuts for middle class families, as compared to tax cuts for the wealthy.  If you give a dollar to a middle class family, that family will spend it in the local economy and spur growth, or use it to make a high-return investment, such as paying for a child’s college education.

If you give that same dollar to a very wealthy individual, that dollar will be placed in lower-return investments, often offshore. The historical data are clear: Tax cuts for the middle class have promoted economic growth, while tax cuts for the wealthy have not.

Video of Foster’s speech appears online here. The full text:

Mr. Chairman, I rise today in opposition to HR 1874, and to explain to my Republican colleagues why their tax policies have not worked, and will not work, to produce economic growth and jobs.

I am a scientist who spent over 20 years at Fermi National Lab conducting research, and a successful businessman before that.

A scientist proceeds on the basis of facts, and the historical facts on Republican tax policies are clear. Tax policies during the Clinton years, predicted by the Republicans to restrict economic growth, in fact generated the strongest uninterrupted period of job growth in our lifetimes: over 22 million new American jobs in 8 years.

We shouldn’t pretend that giving an extra dollar to a billionaire is no different than giving an extra dollar to a working class family.

Then, the Bush tax cuts enacted in 2001 reversed those policies, and in the following 8 years, the net number of new jobs was essentially zero, actually slightly negative.

Twenty million Americans entered the workforce during the Bush years and the Republican policies produced zero net jobs for them, opening up a jobs gap of over 20 million jobs, a jobs gap that we are still closing today.

So to the extent that there is a causal link between tax policies and job creation, the data is clear:  Republican policies have destroyed jobs, and Democratic policies have created them.

I will now attempt to explain why this is, and why the simplified macroeconomic modeling promoted by this legislation will fail to match the real world.

Generally speaking, Democratic tax breaks deliver benefits to the middle class, while Republican tax breaks deliver benefits to the very wealthy.  And, as it turns out, the very wealthy spend and invest their money very differently than the middle class.

Mr. Chairman, the macroeconomic models promoted in this legislation typically model our economy with a single aggregated consumer.  Like the Republicans, they pretend that giving an extra dollar to a billionaire is no different than giving an extra dollar to a working class family.

The marginal investments of the wealthy are intrinsically less productive.

However, if you give an extra dollar to a middle class family, they will spend it in the local economy, increasing local economic growth; or they will invest it in some of the highest return investments available to anyone – investing in their children’s college education or perhaps buying a second car so that their spouse can get a job.

Now, if you give that same dollar to a very wealthy individual, they will not change their spending habits, because they are already spending as much as they feel like spending and this will not change. So there will be no local economic growth.

The investments of the very wealthy are also very different since they no longer have available to themselves the high-return investments available to the middle class.  The very wealthy have already spent everything they can to send their children to the finest schools. They already have seven Cadillacs in their garages.

So the marginal investments of the wealthy are intrinsically less productive, due to a basic principle of economics known as the Law of Diminishing Returns.

And since economic growth is equal to investment times return-on-investment, (sorry about the equation!), the economic growth from channeling money to the wealthy is far less than if that same relief had been given to the middle class.

Democratic, middle class policies are pro-growth policies, and Republican policies are not.

Pro-middle class policies are pro-growth policies.

Mr. Chairman, there is also another important effect not captured by the single consumer macroeconomic models in this legislation, which is the increasing propensity for wealthy people to move their money offshore.

If you give an extra dollar to wealthy person, they will turn it over to their money manager, who looks around for high yields, and increasingly, invests that dollar overseas — perhaps increasing the net worth of the wealthy investor, but competing with and destroying American jobs.

Had that same dollar been given in tax relief to the middle class families, it would have been much more likely to stay in America.

So in the real world, Republican policies trickle down, but they trickle down to jobs in China.

And that is why the Bush tax cuts generated zero jobs in the eight years after they were enacted.

Read previous post:
miguel-cabrera
Fast Fortunes: On the Diamond and Beyond

Baseball’s top hitter and Wall Street power suits both ply their trades in a high-speed world. That hitter will make...

Close