Welcome to WCS money tutorials. Today's topic is why Republican tax policy never works,
according to a few simple economic principles that anyone can understand. This video is
divided into 3 parts: a brief description and history of republican tax policy,
how economics applies to tax policy, and what is the best tax policy according to economics.
This is a brief overview of Republican tax policy.
Their prime directive is to lower taxes on the wealthy.
Keep the taxes on work but lower or eliminate taxes on investment income and gratuitous
transfers. Pay for these tax benefits by reducing payments to the poor and the middle class
to keep taxes lower on the wealthy. Eliminate the federal debt and deficit.
Reduce government spending that does not benefit the wealthy.
So that the wealthy can keep more of their wealth, reduce the IRS's budget for audits.
No need to worry about getting tax revenue from the poor and the middle class
since most of their taxes are taken out automatically by their employers.
This is why the Republicans opposed President Biden's call for increasing the IRS budget for
audits, even though the wealthy have the most and the greatest opportunity to evade taxes.
To get elected Republicans must appeal to the masses by supporting hot-button issues
such as eliminating abortion and preserving gun rights. Republicans have a long tradition
of serving the wealthy, as you can see in this 1894 chromolithograph.
Their tax policy then, as now, was to lower taxes on the wealthy and pay for it by shifting
most of the tax burden to everyone else. Since the wealthy get much of their income from businesses,
Republicans have also favored businesses since the 1800s,
including protecting monopolies, such as big oil, big steel, railroads, and the subway system. Many
cartoons published in the 1800s depicted the sprawl and pervasiveness of these monopolies.
An effective way of placing most of the tax burden on the non-wealthy is by taxing work the most and
taxing investment income and gratuitous transfers, incomes that accrue mostly to the wealthy,
at lower rates or not at all. This chart shows the effective tax rates of various types of income.
As you can readily see, employment income is taxed much more than investment income
and property sales, which usually benefit from the lower long-term capital gains tax rate. You
can also see that gifts and bequests are not taxed at all to the beneficiaries, though the donor may
have to pay gift or estate taxes if their total value exceeds about 12 million dollars in 2021.
The first 5 million dollars of tax that would ordinarily be assessed on gifts and estates
are eliminated by the unified tax credit, the biggest government handout ever! Even
though work takes the most time and effort it is the most highly taxed form of income,
and it is the main form of income most people need to survive.
The higher taxes on work is why many secretaries pay a higher tax rate than their much richer
employers. Mitt Romney released some of his tax returns for the 2012 presidential election.
In 2010 he earned 21.7 million dollars, yet paid about 3 million dollars in taxes,
an effective tax rate of only 13.89%. Compare that to someone who earned self-employment income
of $20,000 in that same year. Such a person would pay an effective tax rate of 18.75%,
almost 5% higher than what Mitt Romney paid on his $21.7 million he earned in 2010.
This government study showed that in 2009, 22,000 households making more than $1 million annually
paid less than 15% of their income as income taxes,
and almost 1500 of those people paid no federal income taxes at all! One-third of
the 400 highest income Americans paid less than 15% of their income as income taxes in 2008.
Since tax rates are lower on the wealthy in 2021, there is no reason to doubt that the
wealthy continue to benefit from the tax code's disproportionate burden on work.
The classic Republican argument is to lower the tax rates on the wealthy so that they invest more,
then the wealth will trickle down to the rest of the people. But how does reducing tax rates on
investments and gratuitous transfers incentivize people to work? Doesn't taxing work more have
the opposite effect? Instead of working, people may trade stocks and cryptocurrencies,
or pick richer parents. The Republicans presented their idea of supply-side economics with
Laffer’s curve, a curve that Art Laffer drew on a napkin in 1974 to show that higher tax rates
might actually reduce tax revenue. According to the Smithsonian’s description of Laffer’s napkin,
“Art Laffer sketched a new direction for the Republican party.”
I would not call this a new direction. After all, the Republicans have been serving the
wealthy since the 1800s. This is simply a new way to justify lowering taxes on the wealthy.
But does Laffer’s curve justify the Republican position or the exact opposite? I redrew this
curve to illustrate this relationship better. I skewed this curve to the right because most people
have no choice but to work for their living so they will keep working, even at higher tax rates.
However Laffer’s curve looks quite different when applied to gratuitous transfers.
I think I recall reading a government study that showed that people continued to die
regardless of the tax rates. If so then it makes sense that tax revenue
would increase directly proportional to the tax rate on gratuitous transfers.
I think this is a good reason to tax gratuitous transfers more and to eliminate that $5 million
government handout to wealthy people so that they can pass their estates on free of tax.
Although Laffer applied his idea to work, the Republicans wanted to apply this idea
to investments since it was a better way to favor the wealthy. But it is only work that
creates true economic wealth. Buying stocks in the stock market is not a true investment
since the money only goes to other people who are converting their stocks into cash,
not using the money to invest in capital or other economic inputs.
Furthermore, people will continue to invest regardless of tax rates because they have
no other option for their money, which would lose value through inflation if held as cash.
I will now present a few economic principles that will shed light on what the best tax
policy would be. The marginal propensity to consume is inversely proportional to wealth.
This means that at lower income levels, people spend more of their income, which makes sense,
since people must spend some money simply to survive. But as people become richer,
they spend less of their income, opting to save or invest more. But only consumption directly drives
the economy. Even investments must eventually be spent to earn a real return. So investments do not
lead to economic growth until the money is spent. A higher velocity of money increases tax revenue.
Governments receive most of their revenue from transaction and transfer taxes, such as income,
sales, and value-added taxes. Therefore, more transactions would generate more tax revenue
because lower income people consume more of their income as it increases lowering taxes on them
would lead to a higher velocity of money which would generate more tax revenue. Like the marginal
propensity to consume, the marginal utility of money is inversely proportional to wealth,
meaning that money has more value for the less wealthy. Therefore, higher tax rates on work
dramatically decreases the standard of living for the poor and the middle class because they
need that money to survive. However, the value of each dollar declines as wealth increases.
Many people do not understand why the wealthy spend so much money for art and other artifacts
with seemingly little value. The wealthy pay so much for art because the value of money is so much
less for them, and they pay these outrageous prices to show the world how rich they are.
It is the way that the wealthy measure themselves among themselves!
So higher taxes on the wealthy are less burdensome. They will just have to pay $25 million
instead of $100 million for a painting that Picasso painted in a single day.
Even though the marginal utility of money is highest for the poor, the biggest difference in
tax rates occurs at the lowest income levels, making it difficult for the poor to survive.
The rich are getting richer faster than everyone else.
The difference in income between the top quintile and the lower quintiles continues to increase.
Why should the wealthy be taxed more? Because as Willie Sutton, the famous bank robber,
explained to a reporter who asked him why he robbed banks: “Because that's where the money is!”
Reducing the top tax rate simply gives the top 1% a bigger piece of the economic pie.
Republicans often argue that lowering top tax rates increases economic growth but a
congressional report examining past top tax rates and real per capita GDP growth shows virtually no
correlation. Even when marginal tax rates were as high as 90% or as low as 25%. The same is
true with long-term capital gains tax, where the rate has varied from about 15% up to 35%. In fact,
real per capita GDP growth actually increased with a higher long-term capital gains tax rate.
National income is the sum of all income to a country's residents.
Economists also measure the division of national income between labor and capital.
A falling labor share often reflects greater growth in labor productivity
than in average labor compensation, meaning that the wealthy receive more of the additional
compensation as productivity increases. Since capital returns are taxed less than labor,
the government receives less tax revenue as a percentage of GDP. Increasing the top tax rates
decreases the share of the total income of the top 0.1% while also increasing the share of income for
labor. This graph plainly shows the increasing gap between labor productivity and real wages,
which partly explains why inequality has been increasing. The wealthy are getting a
bigger piece of the national income pie as labor's share decreases, yet labor pays higher tax rates.
Note how labor’s share of income increased when the wealthy paid higher tax rates
during the Clinton presidency
and how much it has declined after Republicans gave major tax breaks to the wealthy.
The only government budget surplus since 1969 was during President Clinton’s last term, achieved by
increasing taxes on the wealthy. It was also one of the biggest budget surpluses since the
Great Depression. During Bill Clinton’s years as president, the economy boomed, and the federal
deficit turned positive for the first time since 1969. By contrast, the Republicans passed tax cuts
for the wealthy at the end of 2017, arguing that the economy would grow enough for the
tax cuts to pay for themselves. We could see the results here. The deficit grew larger and faster
even before the Covid-19 pandemic. Even though the Republicans carp about the federal deficit,
the deficit virtually always increases when they have full control of the government
because you cannot constantly give tax breaks to the richest Americans
and expect to pay for government. To summarize, these economic principles show the best way to
stimulate the economy is to lower tax rates on labor and lower incomes, such as Social Security.
Attempting to pay for tax cuts to the wealthy by reducing payments to the poor
or by cutting government services will depress the economy, not stimulate it. Tax cuts to the
wealthy never pay for themselves. They just increase the deficit.
Taxes can be raised on the wealthy without hurting the economy if lower income people have
more money. Raising taxes on investment income and gratuitous transfers will greatly increase funding
for the government and allow lower tax rates on work so most people, including their children,
can live better. As the wealthy accumulate an ever-increasing portion of the economic wealth,
the only way to fund government is by increasing taxes on the wealthy.
So the best tax policy would be to reduce tax rates on the poor and the middle class
so that they have more money to live better, and let it trickle up to the rich,
who are already living better. Increase tax rates on the wealthy to pay for lower tax
rates on the poor and the middle class instead of subsidizing the wealthy with higher taxes on work.
There are many benefits to this. The poor and the middle class will be able to live better and be
happier. It will reduce the need for government handouts to the poor and the middle class.
It is the best way to stimulate the economy. Lower taxes on work will incentivize people
to work more, which will increase both economic growth and the growth rate. This is supply-side
economics applied to labor, the side of this argument Republicans did not want you to hear.
Higher consumption increases the velocity of money, which will increase tax revenue.
Lower-income people will spend more money, which will increase the wealth of business
owners and the wealthy. And that is how the money really flows. It trickles up! On the other hand,
how does it trickle down? The rich will continue to live well but so will everyone else!
This is the end of my video. Thank you very much for your time. If you liked my video, please
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Also check out my website at https://thismatter.com
and check out my books at https://williamspaulding.com. Thank you.