Serious tax question: which has a greater impact on the economy:

[yodermon]

1) tax increases for the wealthy (back to Clinton-era rates)
2) preserved tax cuts for the middle class (families < $250,000)

POTUS and the CW are saying that #2 is the absolute most sacrosanct policy that must be preserved at all costs.

But wouldn't #1 offset #2 (if #2 were to fail, i.e. taxes go back up for everybody)?
Are there numbers on this?

[Crazy Dave]

1. All I can say is...

People were doing pretty darn good under Bill Clinton and we had a surplus.

[Statistical]

2. Raising taxes on rich doesn't "help" the economy.

It helps the long term budget of the govt (i.e. size of national debt) but in a recession the amount of national debt is really meaningless. It is like worrying about how much water costs while your house is burning. The goal of fiscal policy is to increase aggregate demand. In a situation where demand is rising employers will hire, build plants, buy equipment and that will lead to hiring, equipment, plants etc creating a virtuous cycle. A recession is simply a giant gap or hole in aggregate demand. Facing falling demand companies layoff workers, close plants, sell equipment that leads to less demand and has a spiraling effect.

So *IF* for the sake of argument you had to either:
a) preserve all tax cuts (rich & middle class)
b) repeal all tax cuts (rich & middle class)

there was no other options

a is better for the economy. The stimulative effect on tax cuts for the rich is very low (they tend to save not spend the "extra" money) however it isn't negative (i.e. it doesn't reduce aggregate demand). So even if we replace low with 0 there is stimulative effect to middle class tax cuts so the net change is positive (an increase in aggregate demand). Repealing all the tax cuts would put a $700B "hole" in aggegate demand. In the face of falling demand companies would lay off more workers as there isn't sufficient demand to employ them.

**** NOTE ATTENTION WARNING ****
Before I get flamed I am not saying tax cuts for the rich help the economy (well technically any tax cuts improves aggregate demand but the effect is minimal essentially a poor "bang for the bunk"). I am simply saying tax cuts for the rich don't HURT the economy and raising taxes on rich don't help the economy thus the very limited question defined by the OP only has one valid answer.

[yodermon]

3. thanks for the reply. So,

what about the theory that raising taxes on the rich, i.e. the business owners, actually gives them incentive to keep capital in their companies. So instead of taking out profits in the form of high salaries & bonuses -- which will all just be taxed extra now -- instead, invest in plants, equipment, R&D, products, and hire people! & increase wages... all this would have a stimulative effect on the economy, especially if companies start hiring people, so they can actually turn around and buy the stuff they're creating.

[Statistical]

6. The cold hard reality.

Companies don't hire people to save on taxes. Companies hoard cash to save on taxes and that doesn't help the economy either. The S&P 500 has more cash on balance sheet than at anytime in last 40 years yet it hasn't translated into hiring.

Why do companies hire people? THIS IS THE MOST IMPORTANT POINT.

Why do companies hire people? Because the have no CHOICE. Thats right companies hire people when it would cost them MORE money not to hire people. Statistical you say that is insane how can NOT hiring someone cost money. Easy. Lost contracts, defective product (via pushing workers too hard), missed deadlines, etc. What would cause a situation like that. AGGREGATE DEMAND being higher than what the company can support.

Say you have a company and with 50 workers you can produce 200 widgets per day (4 widgets per worker). Now lets say for simplicity sake you are the ONLY widget maker in the world. What happens when demand for widgets drops to 80 per day? Simple you fire half your work force. Keeping extra workforce without demand is a good way to lose money very rapidly. Employees are expensive and they are an ongoing cost. You can never "pay off" an employee you simply keep paying forever. So what would make you hire worker back? Higher demand.

That is the point of fiscal policy to increase aggregate demand. Companies WILL ONLY hire when there is demand to support that decision. You increase aggregate demand via stimulative legislation. Things like unemployed. If people get UI checks they may keep buying widgets and that may prevent you from laying off workers. Other stimulative legislation is things like tax holiday or lowering taxes. If people have more money they will hopefully buy widgets. You can also build roads or bridges (if roads or bridges use widgets). Maybe start up a research program that needs a good supply of widgets.

The point is for fiscal policy to fill the gap in demand caused by the recession. Eventually orders for widgets will exceed you companies output. So you have two choices. 1) lose all the lost sales 2) hire more people so you can make 120, 150, 200, 300 widgets per day and profit. As you hire people they add to aggregate demand creating a virtuous cycle.

[11 Bravo]

9. How have the Bush tax cuts been working out for the last 10 years?

Exploding deficits, a tanking economy, and jobs in the shitter are the first words that come to mind.

[Duer 157099]

4. WRONG!

Here is how tax cuts for the rich hurt the economy, and conversely, raising taxes on the rich would help the economy:

It preempts the attempt by the deficit-hawks to cut social safety nets, those that actually STIMULATE the economy (like UI benefits, for example).

As the deficit decreases, more money is spent on things that stimulate the economy, such as "entitlements" and other things that benefit society. Conversely, if this deficit keeps building, those things will actually be CUT.

[Statistical]

5. Well that was rude.

Social programs can be cut for any reason.

However the good news is that Dems & Repub love spending money they don't have. We will gadly deficit spend in good years we certainly aren't going to cut spending even social programs IN A RECESSION.
You are aware Obama is the President and he would have to sign any bill cutting social programs right?

The question the OP outlined was limited I answered the question as outlined.

[AdHocSolver]

7. Taxes are of less importance to the economy than trade imbalances and jobs.

Giving more money to the middle class won't help the U.S. economy when most dollars spent just fly to low wage countries like China or India for cheap imports. The problem with the U.S. economy is the debt owed foreign countries, and unless, and until, the trade deficit is dealt with, giving people more money to spend is going to exacerbate this country's economic problems, NOT help them.

Giving more money to the wealthy won't help because they most likely will use it to invest overseas where they can make more profits. For example, rich people could use their windfalls to invest in companies moving factories to China.

The economy is a lot like the cooling system in a car. Coolant circulates between the engine where it absorbs heat, passes through a radiator hose to the radiator where it loses heat to the atmosphere, and is returned to the engine via another radiator hose where it absorbs more heat, and so on. If a hole develops in a radiator hose or the radiator, then coolant will leak out and the engine will overheat, and eventually quit.

Money is to an economy what coolant is to a cooling system. Money has to circulate within the economy to maintain economic health. All the imports are "draining" money from the U.S. economy and that is why we have unemployment and so much debt.

The outflow of our circulating medium (money) is why the economy is in recession. The only cure is to bring jobs back to the U.S. so that the money we spend goes to other Americans, and the money they spend eventually comes back to us. At the same time, working Americans pay taxes which would automatically reduce the government deficits.

Reducing taxes is the wrong solution to the wrong problem. It will NOT prevent a deeper recession. It will NOT improve the economy. The whole argument about taxes is total horse manure.

Corporate cartel agreements like NAFTA, the WTO, the IMF, and their ilk are the main cause of the U.S. economic problems. The U.S. can never produce enough goods for export to countries such as China and India to overcome the trade imbalance when anything that we could sell them, they can make more cheaply in their own countries. The NAFTA-like trade agreement being proposed with Korea is like throwing gasoline on a fire. It will make the U.S. economy collapse even faster.

The tax argument is a total distraction to the real problems with the U.S. economy which are the trade deficit with its attendant debt owed foreigners, and the loss of jobs.

[yodermon]

8. self-kick