Hillary Clinton brought up “trickle down” economics at the debate last week.
She said it doesn’t work.
A few years back, when this writer opined on a different blog, she wrote a longish story about a rich man who went to Maryland and bought a custom made yacht. When he wrote a check for the down payment, the yacht builder was able to pay his own bills, and his salary as well as those of his employees. Then the yacht builder then was able to pay for a tow truck, and his wife her new books from Amazon. She also went and got a pedicure, and the nail technician was able to put money toward new screens in her house thanks to the tip she got from the ship builder’s wife. The story went on and on, and in the end, the new yacht helped keep over a dozen people from poverty.
THAT is, at its heart, how economics – specifically, “trickle down” economics – is supposed to work. The people who have money to spend, spend it on goods and services. Some of those goods and services might seem frivolous, but if someone is willing to pay the price, another individual will offer the service. (That’s how prostitution works.) As more money is put into the economy by people who have it, economic expansion happens, and more and more people are employed.
It’s really that simple, and yes, it does work contrary to the assertions of George H.W. Bush, Hillary Clinton, and all sorts of other politicians who seem to think that it is possible to tax a nation into prosperity.
See, what the politicians seem to forget is that We the People still learn math in school. For financial purposes, not much beyond sixth grade math is needed, even for those who have actually passed differential equations. We can tell when our paychecks are smaller due to higher taxes. We also know that having less money, means prioritizing spending. That means, as the business owners in Greenwich, Connecticut, are learning, what isn’t needed doesn’t get purchased. And if the tax burden is too high, the people who can get up and leave move to a cheaper location.
The tax rate, by the way, is a sore point, and possible reason behind the departure of the likes of Paul Tudor Jones and Thomas Peterffy, who switched their permanent residences to Florida. The state income tax there is zero.
In 2015, Connecticut boosted the income tax for individuals making more than $500,000 and couples above $1 million to 6.99 percent from 6.7 percent. Levies on luxury goods rose to 7.75 percent from 7 percent on cars over $50,000, jewelry over $5,000 and clothing or footwear over $1,000.
Sternlicht said at a conference two weeks ago that this was why he relocated to the sunshine state. “We used to have no taxes,” he said wistfully, recalling Connecticut before it enacted its income tax in 1991….
One problem is that risk levels have gone through the wringer. Members of the younger Wall Street crowd are quite conservative, says Robin Kencel, a broker with Douglas Elliman. “They used to say Oh, I’ll stretch.’ Now they’re more practical. They’ll ask ‘What are the utility bills? Oh, wait — I don’t want it.’”
And THAT is what is choking off the American economy as much as anything else. People at the top of the economic ladder do not want to spend what they do not have to. Yes, in Greenwich, luxury items are still purchased, just with much lower pricetags. In the end, that means less revenue for government, if such things are taxed, less in commissions, more DIY beauty treatments, fewer sales of higher end clothing which translates to fewer donations to second-hand and resale shops* which are vital for the people at the bottom….
It becomes a vicious circle, and the people with means are then vilified for trying to conserve their cash.
What begins the process of pinching off the trickle down flow of money – just like manure, it eventually will roll down a hill – is to restrict the amount the people at the top have to spend. For the majority of Americans, higher taxes does that. For employers, regulations, environmental and otherwise, also add a financial burden that puts a damper on economic growth. Corporate taxes do a pretty good job of that on their own, but add regulations to that, and just like the hedge fund people moving from Connecticut to Florida, corporations leave the country.
It’s that simple, and fining and blaming business owners and citizens for doing what is in their best interest is just a losing strategy, because eventually, what little money the people at the top are left with will be spent elsewhere.
It will “trickle down,” just not where it would have if government had not interfered.
* Word came to this writer that one of the local resale shops, one that is actually a charitable enterprise, will be closing soon. Why? It is not generating enough money to be sustainable. The main factor seems to be that the high end items that brought in most of the income are not coming to them for resale. Either they are not being bought, or the people buying them are just not giving them away for a tax deduction.