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David Brin

David Brin
San Diego, California, USA
October 06
Bio David Brin’s novels have been translated into more than twenty languages, including New York Times Best-sellers that won Hugo and Nebula awards. His 1989 ecological thriller, Earth, foreshadowed cyberwarfare, the World Wide Web, global warming and Gulf Coast flooding. A 1998 Kevin Costner film was loosely adapted from his post-apocalyptic novel, The Postman. ............................................ Brin is a noted scientist, futurist and speaker who appears frequently on television (Life After People, The Universe), discussing trends in the near and far future, on subjects such as surveillance, technology, astronomy, and SETI. His non-fiction book, The Transparent Society, deals with issues of openness and security in the wired-age. ............................................. David Brin web site: Twitter: Facbook:

FEBRUARY 3, 2012 8:50PM

Must the Rich be Lured into Investing?

Rate: 8 Flag

Why should Mitt Romney and the fabled "one-percent"  pay only a 15% marginal tax on investment income ... half the rate charged to a dentist or auto mechanic on wages earned from work?  This was not the case until recent Republican Congresses slashed taxes on passive, unearned dividends and capital gains.

The rationale for that immense tax cut for (mostly) rich investors was simple and alluring - that super-low rates would entice more of the rich to invest in companies within the U.S., helping them to increase their productive capacity and hire more workers. Moreover, the resulting boom in economic activity would then result in so much new tax revenue, even at low rates, that deficits would disappear.

Let's put this in context with a term you may have heard. "Supply side" economic theory maintained that this flow of investment capital would pump up the factory end of things, increasing the supply of goods and services, offering them cheaper, thus stimulating demand.

In contrast, the standard Keynsian "demand side" model was to fight recession by ensuring that poor and middle class folks had enough cash ("high-velocity" money) in their pockets to buy - or "demand" - goods and services. Whereupon producers would be drawn into greater production.

For a more detailed description of the differences between these two economic models, see my earlier missive  A Primer on Supply-Side vs Demand-Side Economics. (It really is one of the top issues of our day and an informed citizen should know about it.) Here in this place, I'll try to be brief.

Who was right? Blatantly, the Keynsian approach worked in the 1940s, when massive government spending on WWII resulted in a boom that ended the Great Depression.  A boom that then continued for 30 years, till Vietnam crushed it against a wall. Throughout that period, high tax rates and stimulative spending seemed to work, whenever the economy needed a little help. Moreover, during that era, a very flat social structure - (CEOs earned only a few times what factory workers did) - combined with the most rapid growth of the middle class and the most vibrant era of startup capitalism in human history.

That does not make Keynsianism perfect! Critics like Friedrich Hayek, have indeed exposed some faults and blunders that later Keynsians, like Paul Krugman, openly admit and have striven to correct. Still, the Demand Side approach can point to many clearcut successes.

In particular, it is plain that during recessions, when economic activity lags and deflation looms, what you want is "high velocity" money in circulation - money that will pass from buyer to seller and then to another seller and so on.  Not money that just sits.

Does Supply Side have a similar track record? Not even remotely.  Not even once. Simple charts - and hard conclusions from the Congressional Research Service - show that the Supply Side assertion was... and is... utter mythology.  None of its predicted effects ever happened.  And let me reiterate.  Not ever, even once.

Specifically, cuts in tax rates for dividends and capital gains have never had any long-term effects upon capital investment, since records were kept in the United States.  (See this cogent article putting the myth to rest, once and for all. Also my article: A Primer on Supply-Side vs. Demand-Side Economics.)

In fact, this is no surprise, for several reasons:

1) Supply Side assumes that the rich have a zillion other uses for their cash and thus have to be lured into investing it!  Now ponder that nonsense statement. Roll it around and try to imagine it making a scintilla of sense! Try actually asking a very rich person.  Once you have a few mansions and their contents and cars and boats and such, actually spending it all holds little attraction.  Rather, the next step is using the extra to become even richer. Naturally, you invest it.  Whatever the tax rates, you invest it, seeking maximum return.

Instead of enticing the rich to invest, these super low dividend and capital gains rates simply used money taxed from middle class wage earners to give bonuses for speculations wealthy folks were doing anyway.  If anything, the only major effect, other than budget deficits, was a pumping up of asset value bubbles.

2) Now to be sure, some of the rich ... a few... put a fair amount of their wealth into truly bold and risky new enterprises.  I know such men and women, who engage in Venture Capitalism or starting up creative new enterprises. And just so you know that I'm no socialist I believe this kind of investment truly should be encouraged by taxing it at a very low rate!  Not only because of the risk, but also because equity shares that are bought de novo directly from a new firm actually deliver nearly all of that value directly into capitalization and company development.

In contrast, most exchanges through the NYSE or NASDAQ are purchases from other stock-owners who happen to disagree with you about prospects for future capital gains and dividends. It is just as much a betting/gambling system as any Vegas casino, Your trades may marginally raise or lower the posted price, allowing the company to raise a little capital on the side, but almost nothing from your stock transaction actually goes to the company itself, or into new products or plants and equipment.

(Hence, that kind of investing - by far the largest portion - helps industry only at appallingly low levels of efficiency, but diverts management into spending nearly all its time trying to bribe stockholders with short term benefits, ignoring long-term company health.)

No wonder Adam Smith himself expressed contempt for passive investments that he called "rents"... compared to investments in which the owner actually gets involved in starting up or entrepreneurial development of long term company or enterprise health.

3) So what about "targeted investing"?  The towering hypocrisy of supply side tax cuts for the rich is that they are claimed (without a scintilla of evidence) to help create jobs. But then, why treat investments overseas equally to those made in domestic companies? President Obama proposes narrowing the super-low rates to U.S. companies that are (a) startups, or (b) demonstrably adding jobs, or (c) investing directly in new equipment or R&D.  For this he is derided for "picking winners and losers"... even though the list of targeted tax breaks for GOP-favored industries like coal and oil are myriad. (and outrageous.)

4) In fact, we spoke earlier about how stock and equities markets have lately become the tail wagging the dog.  Instead of serving the capital needs of companies, firms like Mitt Romney's Bain Capital show that productive corporations making goods and services are now like cattle, farmed by Wall Street, to be bled or dissected at whim.  Nor is the whim even human anymore! Most trades are now propelled by hyper-aggressive, parasitical "flash trading" computer programs that vastly amplify volatility, sap investor earning potential, and threaten our entire economic system in a dozen ways.

5) The reduction of dividend and capital gains tax rates almost to zero has coincided with the rapid ending of the relatively flat social structure that we inherited from the Greatest Generation of the 1950s and 1960s.  Back then, the rich managers of major corporations earned only ten or twenty times what factory workers got, a situation that still exists in Japan. Only now, American wealth disparities are approaching levels not seen since the American Revolution.

The last thing that the GOP or Fox wants you to do is look across the last 6000 years.  The class that they call "job creators" used to have another name. Lords.

6) The outrageous inherent unfairness of passive dividend-clipping getting far better tax treatment than earned wages is inherently suspect.  It is exactly what you would expect rich and powerful men to lobby for, whether or not their supply side rationalizations were true!  It should be no surprise that, in our money-drenched political system, those with such power and influence have benefited immensely.

But are the arguments and rationalizations valid at all?  At minimum, supply-siders should bear some burden of proof.  Their experiment has been run, now, for more than three decades, and never once has their core predication come true... that cutting taxes on the rich will result in increased overall revenues and a vanishing federal deficit.  The results are utterly conclusive.

Supply side is disproved, top to bottom.

What we need in this depression - and by most of the metrics it has been a depression, not a recession* - what's needed is what ended the last one. The circulation of high velocity money that goes hand to hand very quickly, generating economic activity with every transaction. Not the exact opposite, money that sits in portfolios, not helping capitalize industry but simply fostering the aggrandizement of a parasitic caste.  One the the founding father of free enterprise - Adam Smith himself - quite despised.

"All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons."

Smith is not talking about charity, but the vigor of trade.  In this case, we "share" by buying from one another.  The middle class is very good at that.  It is the middle class that - assisted prodigiously by technology and science - propelled our economy to be the wonder of the world.

It is the middle class who should get whatever tax benefits can be doled out.  They'll use it to make small startups.  They'll use it to educate bright, competitive kids.  They'll spend it!

They are the real "job creators."

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Do you know what country has the lowest spread between its top executives and the lowest?

It's very very informative, especially since they "lost" the war.
Yeah, u got it. Japan. There's a five per cent (roughly) spread at the very top and bottom, but the rest are in between. You want to create an "economy" where all the participants feel equally where they have something to gain or lose, try that.

It's certainly worked for them. Are you a sci-fi writer or an economist? I can't figure it out. Do you have any other interests? You're a mystery man. You could have won every award known to man, it means nothing if you aren't in communication. It don't get better than this.
I very foolishly tried to explain this to someone yesterday myself...I am grateful I can stop banging my head on the wall and simply hand this over to be read. Thank you for another excellent post!
What s left out of the analysis is that the people in charge of re-arranging the taxes are now responsive to the people who can see they remain in office. The voters respond to the power of the election campaigns which, basically, respond to the money spent on media of communication. Essentially he air waves belong to the people and are licensed to the communication industries. There is no reason that election communications should not be fairly apportioned to each office seeker at no expense as a public service thus cutting the stranglehold the wealthy have in the ability to sequester elective capability to those who will see to it that their tax rates are kept at a minimum to the demise of the bulk of the population for lack of proper government. At present it is obvious that all three divisions of government, the legislatures, the judicial, and the executive are under tight control of the wealthy elite in their hold on the ability to get elected, thus totally destroying democracy.
This is just one out of many cases where Republicans and the right wing engage in magical thinking covering for ideology. What they are really interested in more than anything is not the betterment of society but pure power for themselves.
Personally I think the rich should be lured into small aircraft. It might not make sense until you learn that Steve Appleton, CEO of Micron Technologies was laying off people in Boise left and right to outsource jobs. I already have enough competition looking for a job so I breathed a huge sigh of relief when I learned he crashed and and died today.

Jobs and Appleton, two down, how many more to go until we're all safe? If we could lure all the investors into their own little planes then the rest of us might have a chance to survive.

l'Heure Bleue, killing them is certainly an appealing idea. In fact, it's probable that some genuinely pissed-off and laid-off people will start opening fire on the One Percent in their hideouts, havens and on Wall Street itself.

However, I don't like the idea of "luring" the rich to do anything. I also don't like the Saw version where they are kidnapped and self-tortured to death. I like the Trading Places concept where you make rich people unhappy by making them poor.

Force them to invest in American infrastructure. Put confiscatory taxes on large amounts of cash, and bonds and stocks not sold or traded, unless they are used to build American factories and provide American jobs. If necessary, nationalize their wealth for that purpose.
Since the rich have bought the government, the cops and the military, advice on how to change things might better be given to God who at least has the reputation of caring.
The notion that Republicans peddle that public policy must seek to prevent investor "uncertainty" is actually a huge redistribution of political sovereignty to the upper classes.

Since "certainty" is such a subjective concept, and is often severed from the real-life merits of particular economic policies (note how economic "panics" or runs on the bank can be started by nothing more than false rumors) Republicans are basically saying that our democracy must cater to the arbitrary and capricious whims of the oligarchy by doing nothing to disturb the serenity of the "job creating" investor class -- such as electing Democrats for example.