A fellow named Bruce Webb posting at Angry Bear suggested that allowing the tax cuts to expire on the top 2% of Americans might not hurt the economy since these folks aren’t lending and spending money as it is:
The argument against allowing tax cuts to expire on the top 2% is that it would be counter-productive in a time of recession presumedly because it would serve to cut back on investment by that same top 2%.
But if they are all sitting on their money anyway, resisting personal spending and as the controllers of capital sitting not only on piles of corporate cash but also on huge banking reserves hence choking off liquidity via loans to smaller banks and small businesses how exactly is nicking them an extra 3% or so in top marginal rates actually creating a net retreat in investment?
It seems the argument that “If you tax the rich in a recession they won’t lend/invest” kind of fails somewhat if they aren’t lending/investing to start with. What does Kent Conrad know about this equation that I don’t know?
Gosh, if I only knew some smart, forward thinking economists to pose this question to.
Bruce, it doesn’t take a smart, forward thinking economist to answer your question. It only takes someone with a pulse:
If you tax the rich in a recession and thereby take away some of the money they have available to lend and invest, they will lend and and invest less than they would have if you did not tax them.
Goodness!
3 responses so far ↓
1 Knox Marlow // Jul 29, 2010 at 3:13 pm
I’m not justifying the argument, but it sounds like he believes they are currently lending/investing zero (or some de minimis amount), so a tax increase would not impact the amount they are lending/investing (they can’t lend an amount less than zero).
2 Peter // Jul 29, 2010 at 4:46 pm
Knox,
That is what he’s suggesting, but surely if the rich are not lending and investing now they aren’t going to be more inclined to lend and invest when you take more of their money away from them.
3 Knox Marlow // Jul 29, 2010 at 5:52 pm
Right, but he doesn’t care about that argument. His argument is that the “rich” aren’t lending/investing, so we can take some of their excess cash and use it to increase government revenues (decrease government borrowing and deficits).
If you accept the premise that the “rich” aren’t lending/investing, I think his point is logically valid.
Viewed in their entirety, his comments are typical, politically motivated mumbo jumbo:
1- First, he lumps together the “top 2%” of taxpayers in the United States. That range begins around $225k and goes to the very top. Lumping in households that earn $225k and multi-billionaires makes absolutely no sense.
(The sudden classification of households that make $250k as the “rich” is one of my biggest pet peeves. A family that earns $250k in a high-cost-of-living metropolitan area is not sitting by the pool drinking margaritas all day long.)
2- I digressed on point #1. Until I’m shown data to the contrary, I assume that a household at the lower end of the 2% range (a houshold with $225k of pre-tax income) is just as likely to spend any cash savings from a tax cut as a household with $200k of pre-tax income or $175k of pre-tax income.
3- The author apparently believes the “primary argument” against a tax increase is that the households impacted by that tax increase would otherwise “invest” the cash. In fact, there are a number of arguments against a tax increase. Most important, a household subject to a tax increase is likely to increase spending by the amount of cash that is diverted to the federal government. Tax cut policies which increase private spending have been shown to have a significantly higher “multiplier” effect on economic growth than government spending (see much-discussed Romer paper). Finally, an income tax increase will incentivize less work at the margin as upper-income taxpayers pursue other activities (from retirement to golf).
4- In the second paragraph, he lumps together the individual taxpayers with incomes in the “top 2%” with the financial institutions and other public companies that have been increasing cash reserves during the last couple years. The vast majority of taxpayers in the former group (from medical professionals to accountants to other small business owners) have no connection to the latter group. In fact, the latter group is largely comprised of C corporations that would not be subject to a tax increase on the “top 2%.”
5- He jumps from “investing” to “lending.” Frankly, the debate over the expiration of the 2001 tax cuts for high-income taxpayers has nothing to do with the lending practices of large financial institutions. Among other things, the collapse of the real estate market, Federal Reserve monetary policy, and overall macroeconomic factors are driving the lending practices of large financial institutions.
In short, the original post was a hot mess.
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