Conventional Republican wisdom is that cutting taxes on the rich stimulates the economy because of “trickle-down” as they spend and hire as a result of the added income. I don’t know if anyone has definitively shown this to be true, and I don’t know if you can. But here’s a thought experiment (which admittedly may be too simplistic):
Imagine $50,000 in “tax cuts.” Should we give that benefit to the top income earners, middle income earners, or bottom income earners?
Consider an extremely top earner earning $500,000 a year. Does the $50k change their life? No. Are they likely to spend it? Not immediately, and most likely not in a stimulative fashion. Does the tax cut reduce their burden on the government? No, because they’re already not a burden, i.e. they aren’t leveraging Medicare/Medicaid, welfare, food stamps, etc.
Now consider two top earners making $250k a year each. They get tax cuts of $25k each. Does it change their lives? Probably not. Are they likely to spend it? More likely, sure, often times on debt or major purchases (home, car). Stimulative effect? Minor, but some. Reduced burden on the government? Not really, again because they’re not likely utilizing expensive welfare services.
Now consider four middle earners making $125k a year each. They get tax cuts of $12.5k each. Does it change their lives? Probably doesn’t change their lives, but it can make some big differences. Credit cards get paid off. Down payments on a home get made. Car gets paid off. Or, if stuck in savings, now someone who more than likely didn’t have a significant savings “buffer” now has a few months of money to help them whether the storm. This buffer saves them even if they lose their jobs, or have emergency medical expenses, or wreck their car. Again, this earner is less dependent on welfare, etc., but they’re now less likely to ever need it because they’re in a “safer” spot financially.
Finally, consider 16 low income earners making $32k a year each. They each get tax cuts of $3.2k. Does it change their lives? Significantly. Simply spread out over the course of the year it’s enough to make the difference between being in the red at the end of each month and being in the black. A family of four could move from a 2 bedroom apartment to a 3 bedroom apartment. Healthcare insurance becomes a possibility. Medicaid is less necessary. Food stamps are less likely. Overall quality of life shifts subtly but significantly from sinking to staying afloat. And all the money spent is most likely spent at local businesses, subject to sales taxes, benefitting the local community, and directly employing other low wage workers.
Simplistic, sure. But certainly a more compelling and detailed argument than simple “trickle-down economics.” In the case of the top earner, the tax cut is more like a bonus, a cherry on top of an already comfortable, ultra high quality standard of living, with the most likely beneficiaries being other high income earners in the form of commissions on investments, etc. In the case of the bottom earner, the tax cut represents a make or break amount of money, the difference between a livable and poverty lifestyle, a reduction of secondary costs to the government, a healthier, lower-stress population spending money at the local level.
In all cases, the surface cost to the government is the same $50k in loss tax revenues. I think it’s pretty clear which category benefits the most people to the greatest extent.
Tags: government, politics, taxes