Wednesday, November 1, 2017

WHY TRUMP'S TAX PLAN IS A REALLY BAD IDEA

I've been under the weather since Saturday night (hence the yacht post). I finally went to see a doctor, got some antibiotics, and am feeling somewhat better. I expect to be close to normal tomorrow. In the meantime, if you're looking for something to read that explains why we shouldn't pursue the Republicans insane tax cuts for the rich program, this article from the online journal "Evonomics: The Next Evolution in Economics" does a great job of explaining why giving more tax breaks (and wealth) to the rich is a really, really bad idea. It's not just bad economics, but it's bad for our civilization.
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By Steve Roth

Remember Smaug the dragon, in The Hobbit? He hoarded up a vast pile of wealth, and then he just hung out in his cave, sitting on it (with occasional forays to further pillage and immolate the local populace).

That’s what you should think of when you consider the mind-boggling hoards of wealth that the very rich have amassed in America over the last forty years. The picture at right only shows the very tippy-top of the scale. In 1976 the richest people had $35 million each (in 2014 dollars). In 2014 they had $420 million each — a twelvefold increase.

You can be sure it’s gotten even more extreme since then.

Bottom (visible) pink line is the top 10%.

These people could spend $20 million every year and they’d still just keep getting richer, forever, even if they did absolutely nothing except choose some index funds, watch their balances grow, and shop for a new yacht for their eight-year-old.

If you’re thinking that they “deserve” all that wealth, and all that income just for owning stuff, because they’re “makers,” think again: between 50% and 70% of U.S. household wealth is “earned” the old-fashioned way (cue John Houseman voice): it’s inherited.

The bottom 90% of Americans aren’t even visible on this chart — and it’s a very tall chart. The scale of wealth inequality in America today makes our crazy levels of income inequality (which have also expanded vastly) look like a Marxist utopia.

American households’ total wealth is about $95 trillion. That’s more than three-quarters of a million dollars for every American household. But roughly 50% of households have zero or negative wealth.
 
Now of course you don’t expect 20-year-olds to have much or any wealth; there will always be households with none. But still, the environment for young households trying to build a comfortable and secure nest egg — the American dream? — has gotten wildly competitive and hostile over recent decades. (If we had a sovereign wealth fund, everyone would have a wealth share from birth.)

But here’s what’s even more egregious: that concentrated wealth is strangling our economy, our economic growth, our national prosperity. Wealth concentration drives a vicious, downward cycle, throttling the very engine of wealth creation itself.

Because: people with lots of money don’t spend it. They just sit on it, like Smaug in his cave. The more money you have, the less of it you spend every year. If you have $10,000, you might spend it this year. If you have $10 million, you’re not gonna. If you have $1,000, you’re at least somewhat likely to spend it this month.

Here’s one picture of what that looks like (data sources):


These broad quintile averages obviously don’t put across the realities of the very poor and the very rich; each quintile spans 25 million households. But the picture is clear. The bottom quintiles turn over 40% or 50% of their wealth every year. The richest quintile turns over 5%. For a given amount of wealth, wider wealth dispersion means more spending. It’s arithmetic.

Now go back to those top-.01% households. They have about $5 trillion between them. Imagine that they had half that much instead (the suffering), and the rest was spread out among all American households — about $20,000 each.

Assume that all those lower-quintile households spend about 40% of their wealth every year. They each get to spend an extra $8,000, and enjoy the results. Sounds nice. And it’s spending that simply won’t happen with concentrated wealth. The money will just sit there.

 Now obviously just transferring $2.5 trillion dollars, one time, is not going to achieve this imagined nirvana. Nor is it bloody well likely to happen. That example is just to illustrate the arithmetic. Absent some serious changes in our wildly skewed income distribution (plus capital gains, the overwhelmingly dominant mechanism of wealth accumulation, which don’t count as “income”), that wealth would just get sucked back up to the very rich, like it has, increasingly, for the past forty years — and really, the past several thousand years.

If wealth is consistently more widely dispersed — like it was after WW II — the extra spending that results causes more production. (Why, exactly, do you think producers produce things?) And production produces a surplus — value in, more value out. It’s the ultimate engine of wealth creation.

In this little example, we’re talking a trillion dollars a year in additional spending and production. GDP would be 5.5% higher ...
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You can read the rest of the article by clicking here.

- Mark

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