Thirty years after Communism collapsed in ignominy, it is again fashionable to bash capitalism and the investor classes. The tone of that rhetoric is sufficiently scapegoating to justify a pause here at UD to make a few notes on a case in point.
Accordingly, from the “Further” thread:
KF, 232: >>the following are further interesting for the moment:
>>recovery was bought by a program of tax-breaks, limited for the less well-off but open-ended for billionaires and big corporations.>>
0: Let me add some balancing context, on tax burdens in the US, c 2016:
In 2016, 140.9 million taxpayers reported earning $10.2 trillion in adjusted gross income and paid $1.4 trillion in individual income taxes.
The share of reported income earned by the top 1 percent of taxpayers fell slightly to 19.7 percent in 2016. Their share of federal individual income taxes fell slightly, to 37.3 percent.
In 2016, the top 50 percent of all taxpayers paid 97 percent of all individual income taxes, while the bottom 50 percent paid the remaining 3 percent.
The top 1 percent paid a greater share of individual income taxes (37.3 percent) than the bottom 90 percent combined (30.5 percent).
The top 1 percent of taxpayers paid a 26.9 percent individual income tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.7 percent). [Also cf. here on changes a year later and context back to 1980. And yes, there are state and local taxes, controlled at those levels, not the level of the federation. Those, too, need to be addressed in the context that tax burdens can cumulatively and incrementally — frogs in a gradually heated pot style — pass the point where they choke off growth; in key part through disincentivising risky investment. Where, too, we must never forget riskiness, which implies that what succeeds must pay for what failed, or net, wealth is destroyed not built up. Further, capital assets have to be replaced as they wear out; there is a level of investment necessary just to keep going at the same level much less move to new technologies etc. There is also a problem of multiple taxation on in effect the same process of earning and creating wealth, leading to excessively complex and burdensome corporate tax frameworks. The complexity then adds implicit burdens required to manage the process, for individuals and firms. The existence of a tax preparer industry is itself a sign. And more.]
. . . Given this “progressive” structure, any incentivisation of investment by tax burden relief will naturally be biased towards those who pay the lion’s share of taxes. And, there may be very good reason to do so.
1: Who are the investors in an economy? Those with investable funds hoping for a net present value that is positive.
2: Thus, we see collective and individual investors: mutual fund pools, tax [and tax funded] pools, individuals and artificial persons [i.e. corporations and the like].
3: Any investment led scheme towards growth will reflect that savings are postponed consumption, and that money is transferable across time through rent on its use [i.e. rates of interest].
4: So, in a reasonably free economy with highly distributed planning, hoped for gains across time constrained by insight into possibilities, risks and uncertainties will guide investment flows. (Let me add:
5: Where, there is a correlation between risk and return: to get higher hoped for return rates one must undertake higher risks and subject oneself to growing uncertainty. (Uncertainty, here, is used in the sense, where we do not know enough to provide a credible scale and distribution of risks across outcomes.)
6: In this context, a major investment pool in any reasonably sophisticated economy is pension fund pools of one form or another. (I here mainly exclude legalised Ponzi/Pyramid schemes such as the US Social Security system has been.)
7: So, if one has any retirement savings, direct or indirect s/he is a part of the investment side of the economy. Cumulatively, that pool is big enough to shape economies.
8: Where, consistent innovation, growth, economic structural change and development come from investment-fed initiatives.
9: I trust, this helps to balance the class warfare rhetoric that casts investors as greedy, rapacious, vulture-like villains. Greed is real, investment and risk that feed the wellsprings of a brighter tomorrow are also real.
>> The windfall for the wealthy was supposed to be invested in new plant, new equipment and new jobs>>
10: In other words, you implicitly understand the validity of the Laffer curve and beyond it the Armey-Rahn principle that there is a lower than tax revenue maximising plateau or point, where long term growth is maximised.
11: Further, you recognise that significant investment goes into operations and production, which yields returns that go back to investors and to labour.
12: However, there is more: investment in financial instruments has two effects in a world with fast moving financial markets, it feeds both operations and financial markets. Thus, multipliers.
13: Of course that is fairly short term, longer term the technical coefficients in the economy are changing . . . precisely because of innovation.
>>and, to be fair, some of it has been. >>
14: As was pointed out, investment is partitioned out and cycles of investment converge on a cumulative effect captured by various multipliers.
>>But an awful lot more has been spent, as predicted, on stock buy-backs>>
15: A way to pay back investors in a world of multiple taxation on the same income, a distortion imposed by politics and in part through class warfare.
16: Trace onward. Investor x_i has cash from a buyback. What does s/he do? Consume some, save some, invest some. Even putting under a mattress is saving at 0% interest as a way to hold against uncertainty. If that sum is big enough because of a bad general situation, you get a crash into depression. (That’s one reason why policies that create bubbles are ill advised.)
17: Let’s say, x_i buys a luxury yacht. That rewards investment in making same, paying workmen with relevant skills (such as using an adze to shape wood), and feeding into the economy, going into the multiplier.
18: Let’s say, some goes to the bank, some to a mutual investment retirement support fund, some to buying stocks and bonds, maybe even those for the holding company that owns the boat builders. The bank invests onward to make money to pay interest and cover its costs and expectations of its investors. The mutual investment is much the same. The financial markets are much the same.
19: Now, suppose, there was a punitive luxury tax imposed on such yachts. The market will dry up or shift to where labour of adequate quality is cheaper and has advantages through trade deals. Bye bye luxury yacht industry and well paid blue collar jobs, clerical and managerial jobs, thus a multiplier working in reverse. (And this did happen in the US some decades ago.)
20: Now, suppose a new govt reverses the policy and tries to get back such jobs. Maybe we see some effect but after a time the intuitive skills and productive teams will have been lost.
21: So, we need a stable, growth oriented policy consensus rooted in sound understanding. Exactly what is being undermined.
22: To make it more complex, some overseas investment is also needed in a global world, and peaceful trade and development are a lot cheaper than fighting major wars. But we have a world in which aggressive ideologies are a fact of life and the need to defend the global sea trade routes is also a fact of life.
>> to further inflate the worth of the already wealthy. >>
23: See above, investment is in hope of profit, but in a reasonably functional economy investment feeds innovation, growth, employment and development.
>>And the other predictable effect is that the already-terrifying national debt is being ratcheted up even higher.>>
24: This is not a necessary consequence, the root issue is that entrenched government spending has outstripped reasonable growth potential. That entrenching is largely ideological.
25: So, the issue is fiscal and monetary sanity, understanding that though necessary, government intervention in a macroeconomy is tickling a moody dragon’s tail.>>
I trust, we can rebalance discussion. END
F/N: Regarding the irrelevance of the usual political/policy spectrum — and illustrating how Stalin’s trick of labelling the National Socialist German Labour Party [proper name of the NAZI party] as right wing. A US Professor has tweeted on how she (and many others of similar ilk) perceive the US political spectrum:
A commenter aptly noted: “. . . Consider who the farthest-left commonly acknowledged figures are: Mao, Stalin, etc. “Mao and Stain are the [left wing] equivalent of Jeb Bush and Mitch McConnell.” That’s the quality of insight here.” Another said: ” This is what meant by “the Overton Window shifting left”. When a socialist is considered a centrist then no wonder Stalinism is considered “moderate” and half the country are considered “Nazis”. “
And of course, as was suggested: add in, “far right = nazi.”
The polarisation and hostility on the left/progressivist end of the spectrum suddenly snaps into lurid focus. (And notice the clever colour reversal, where suddenly red is the colour of the far right. A glance at relevant flags will show that it is normally the colour of communism.)
Instead, I suggest a different spectrum model I put on the table here at UD some years back:
In this model, state power, lawfulness and type of leadership come together to allow us to analyse a pattern of political systems from autocratic, arbitrary and absolute power to utter anarchy in a state of nature. Constitutional, representative, tamed democracy is in the middle. Limited Government power under law, with leadership committed to democratic freedom under just law with a regular audit of government by general election. However, such is inherently unstable and must be stabilised through social-cultural forces.
I have come to believe that recognition that there is a built in law responsible, rational, morally governed freedom is central. A law testified to by conscience but rooted in the source of reality, which — to resolve the IS-OUGHT gap — must be inherently good and utterly wise. That law includes inescapable, known first duties of reason: to truth, to right reason, to sound conscience, to fairness and justice, etc.
As Aquinas has been summarised:
Let me add thoughts by Cicero:
>>—Marcus [in de Legibus, introductory remarks,. C1 BC, being Cicero himself]: . . . the subject of our present discussion . . . comprehends the universal principles of equity and law. In such a discussion therefore on the great moral law of nature, the practice of the civil law can occupy but an insignificant and subordinate station. For according to our idea, we shall have to explain the true nature of moral justice, which is congenial and correspondent with the true nature of man.
[–> Note, how justice and our built in nature as a morally governed class of creatures are highlighted; thus framing the natural law frame: recognising built-in law that we do not create nor can we repeal, which then frames a sound understanding of justice. Without such an anchor, law inevitably reduces to the sort of ruthless, nihilistic might- and- manipulation- make- “right,”- “truth,”- “knowledge,”- “law”- and- “justice”- etc power struggle and chaos Plato warned against in The Laws Bk X.]
We shall have to examine those principles of legislation by which all political states should be governed. And last of all, shall we have to speak of those laws and customs which are framed for the use and convenience of particular peoples, which regulate the civic and municipal affairs of the citizens, and which are known by the title of civil laws. Quintus [his real-life brother]. —You take a noble view of the subject, my brother, and go to the fountain–head of moral truth, in order to throw light on the whole science of jurisprudence: while those who confine their legal studies to the civil law too often grow less familiar with the arts of justice than with those of litigation. Marcus. —Your observation, my Quintus, is not quite correct. It is not so much the science of law that produces litigation, as the ignorance of it, (potius ignoratio juris litigiosa est quam scientia) . . . . With respect to the true principle of justice, many learned men have maintained that it springs from Law. I hardly know if their opinion be not correct, at least, according to their own definition; for “Law (say they) is the highest reason, implanted in nature, which prescribes those things which ought to be done, and forbids the contrary.” This, they think, is apparent from the converse of the proposition; because this same reason, when it is confirmed and established in men’s minds, is the law of all their actions. They therefore conceive that the voice of conscience is a law, that moral prudence is a law, whose operation is to urge us to good actions, and restrain us from evil ones. They think, too, that the Greek name for law (NOMOS), which is derived from NEMO, to distribute, implies the very nature of the thing, that is, to give every man his due. [–> this implies a definition of justice as the due balance of rights, freedoms and responsibilities] For my part, I imagine that the moral essence of law is better expressed by its Latin name, (lex), which conveys the idea of selection or discrimination. According to the Greeks, therefore, the name of law implies an equitable distribution of goods: according to the Romans, an equitable discrimination between good and evil. The true definition of law should, however, include both these characteristics. And this being granted as an almost self–evident proposition, the origin of justice is to be sought in the divine law of eternal and immutable morality. This indeed is the true energy of nature, the very soul and essence of wisdom, the test of virtue and vice. >>
With that in mind, we may now use our recognition of the warped nature of how the commonly perceived political spectrum too often operates — “I” [the progressive] am the happy medium, those to my right are nazis or nazi influenced — to understand the sort of rhetoric being responded to in this main post.
I trust, we will seek a sounder, saner view on politics, policy and economics. Where, unsound politics and policy lead to bad economic thinking and disaster.