Last week, I wrote about how my explanation of why Mitt Romney’s plan won’t create jobs was dismissed as silly liberal twaddle from someone who has “obviously never started or run a business.”That was amusing.
The reason I don’t think Romney’s plan will fix the economy is because Romney’s solution is to give the richest Americans more money to invest (by cutting taxes on the highest earners), when the problem in the economy is not a lack of investment capital but, rather, a lack of spending money in the middle class.
The middle class spends most of the money in this economy, and, right now, the middle class is broke. And it is very difficult for investors and entrepreneurs to build successful businesses when their ultimate customers are broke, no matter how much investment capital the investors have.
In other words, in the current economy, “trickle down” won’t work.
Any time I make this argument, I get pushback from those who believe Romney’s assertion that “rich people create jobs” (they don’t–not sustainable ones, anyway–it is the healthy economic ecosystem creates jobs). I also get called a “communist.”
This time, in addition to the usual notes, I received a note from a friend who started and runs a successful money-management firm. This friend is extremely smart, so I paid more attention to his note than the usual “communist” ones. (And, besides, it was funny.)
In the interest of advancing this argument, here’s the full exchange…
Homie, When Did You Become A Commie?
All I can say is “OY!”
First, have you really bought into the class warfare trope….what is it with “rich people” ? Some job creators are wealthy and some are from more moderate means. For example, when I started my firm, I had virtually no money….Now we employ dozens of people and probably one of the highest per capita tax bases in the State.
Secondly, you misrepresent Romney’s tax plan which is to lower rates but also wipe out numerous loopholes….(maybe carried interest). So he is not proposing cutting the tax revenues paid, only the marginal rate…what’s wrong with that?
Third, you get the importance of an economic ecosystem, and I agree that we need more consumers (which will happen if we get people working again) but job creators and capital allocators are not investing because of uncertainty and costs associated with the prospect of Obamacare, regulation and concern about the economy due to obama’s deficits.
Hope this is helpful.
OK, first, homie, I’m not a commie. There’s a big difference between observing that the middle class is broke and that inequality has hit record levels–and noting that this is hurting the economy–and thinking we should move to a collective system. Communism doesn’t work. Period. If anyone in power starts suggesting it does, I’ll be the first to ridicule them.
I’m also fine with successful people making gajillions of dollars. I do think the Bush tax cuts should eventually be eliminated, but I’m certainly not advocating raising federal marginal rates to, say, the 70%-90% of the past. We could also consider having higher-than-Clinton-era marginal rates on incomes over $1 million, $5 million, and $10 million to encourage folks to keep reinvesting the money in their businesses, but that’s a separate question.
The reason cutting tax rates on those who make gajillions of dollars won’t fix the economy, by the way, is that the problem right now is a lack of spending not a lack of investment, and most of the folks who make gajillions don’t spend all of it. For example, if you’re in the, say, take-home-$100 million-a-year bracket, my assumption would be that you only spend a small fraction of that and invest the rest. Middle class people, meanwhile, spend everything they make and then some. Because there are so many middle class people, this is the main engine of spending in the economy. And we already have plenty of economic capacity, so additional investment doesn’t help much.
(And I’m certainly not suggesting that successful fund managers and entrepreneurs should be stripped of their wealth–that’s absurd. I’m just suggesting that giving these folks even more take-home pay won’t help the economy much, because it won’t increase aggregate spending–especially if the revenue is made up by eliminating deductions for the middle class. And that’s the problem with Romney’s plan to eliminate all tax deductions, by the way (which I’m theoretically fine with): It hits middle-class people harder than the highest earners as a percentage of income. So he should at least acknowledge that.)
On the ecosystem, your success is incredibly impressive and admirable (and I admire the hell out of it!). My only point is that neither you nor I nor any other entrepreneur would have a hope in hell of building anything if our customers were broke. And ultimately it is those customers who pay the salaries of the folks who work at our companies. To extend the ecosystem metaphor, I’m happy to give us credit for planting a seed and watering it. But to take all the credit for the whole tree would be delusional. (Anyone who thinks we deserve credit for that should go plant a seed in a desert).
Lastly, on “uncertainty,” if what you mean is that companies aren’t investing because of uncertainty about the economy–namely, that future economic growth might be crappy–then we absolutely agree. But if you’re arguing that the lack of investment and hiring is due to uncertainty about “taxes” and “policies,” then I’d say, dude, you’ve been conned! (Are you seriously not hiring more people because your personal taxes might go up next year? Because “Obamacare” might cost you a few more dollars? Are you working less hard? Seriously?)
The deficit is a huge problem, and I admire Paul Ryan for pointing that out and proposing a solution. His solution is highly misleading, but at least he has the balls to put one out there. The Democrats and Obama should do the same. Then we can have an actual discussion about the alternatives…
Hope all well.
Nobody’s cutting taxes per Romney….the 1% or 1/10 of 1% will pay the same 38% of taxes that they pay now…he is talking about reducing the rates AND eliminating loopholes and various deductions tomake it revenue neutral…
Most small businesses are S corp pass throughs so this matters….
I’ll educate you further when I have more time …
Has Romney changed his plan? The plan he issued last fall called for making the Bush cuts permanent, which would keep the highest-bracket income taxes at 35%, not 38%. He also wants to keep capital gains and dividend taxes where they are, which would be a huge boon to the 1%.
(Re the tax deductions, I will be the first to praise Romney if he actually argues to eliminate the “carried interest” deduction. I am happy for all my friends in the fund business that they’ve been able to bamboozle Washington into buying that one, but the justification is ludicrous–don’t you think?)
I look forward to being educated!
I was not referring to rate but to the per cent of overall taxes
Better question, if 1 of of taxpayers paying 37% of federal income taxes is not enough, what is the right amount?
Since carried interest is an allocation of profits, I see no reason it should be treated differently, but that’s a longer story.
And so it went. If I had seen that last response (which I actually didn’t until now), I’d have argued that the reason the 1% are paying such a big share of taxes these days is that the 1% is vastly more relatively rich than the 1% ever has been.
And, for what it’s worth, here’s what I think we should do to fix our economy:
- Put a long-term budget in place that gradually raises taxes (modestly) and trims spending growth over the next couple of decades, with the aim of eventually curing our budget deficit. I am not in any way suggesting that total tax revenue should rise above the peak of about 20% of GDP that it has hit in the past. And I agree with Mitt Romney that, given Congress’s inability to control spending, that we might want to consider capping spending around 20% of GDP.
- Committing to spending an extra $3 trillion on infrastructure over the next decade–roads, bridges, wireless Internet, airports, harbors, pipelines, schools, and repairs of our existing infrastructure. With investors willing to lend us money for 30 years at ~2%, the sorry state of our nation’s infrastructure, and the number of construction workers who are unemployed, this seems like a smart decision that will benefit everyone.
Let the argument continue…