Sorry to have taken so long in posting, but the older I get, the more responsibilities, etc. Okay, that's only half true. The other half is that since the first Presidential debate, I've been in the fetal position, metaphorically. And Andrew Sullivan's total and complete freak out wasn't helping. Not. At. All.
Well, we then got to see the VP debate (Malarky!), and the second Presidential debate (Binders of Women!), and everyone on the Left is doing much better. Plus, Andrew Sullivan is off the ledge, which is helping my spirits on the Presidential race significantly.
Now before I go into my rant below, I want to add one more thing about the debates - I love politics. I've followed politics the way some people follow sports. If anything, I think of myself as a former minor leaguer who developed a love of the sport, and never looked back. With that said, Twitter and the internet have increased my enjoyment of these debates immensely. The immediate and free-flowing snark, the immediate creation of internet memes (a.k.a. inside jokes), and insight is mind-blowing.
But there is something missing from the President's economic message - why does raising taxes on the wealth raise revenues and seemingly drive economic growth at the same time? After all, that's what Bill Clinton did, and we had tremendous economic growth. All Obama seems to say is - look at what Clinton did, and it worked. But he really has to describe the why it works, and why trickle down economics doesn't.
I've talked about this before, but it bears restating. Having a higher tax rate on the wealthy drives economic growth because it encourages them to invest their money. Now, the classic Milton Friedman theory is that if you cut taxes on the wealthy, they use that money to spend on boats, houses, and other crap. Which, like everyone else, they do.
But wealthy people aren't stupid - and even if they are stupid, their economic advisors are not. Their first priority with their money is live like Lord Grantham in Downton Abbey (um. . .my girlfriend is a fan), but their second priority is to make sure their kids can live like Lord Grantham, and then their grandkids can live like Lord Grantham. (Okay, I might have watched a few episodes*).
*Editor's note: The author has totally watched both seasons, including the Christmas special.
In other words, rich people don't throw their money away, they invest it in stuff that is safe and gives a reasonable rate of return. After all, if you have $100 million, a 5% return is $5 million. The estate becomes something to protect above all else. And with a low tax rate - a guy like Romney can pay 14% of his income in taxes (which is way less than what I pay, mind you) - the wealthy have every incentive to try to keep their money with their descendants for forever and a day.
But, when there is a high marginal tax rate (rate on the highest income earners), there is more incentive to invest that money to get a higher rate of return. Let's take a guy who's makes $5 million a year in income. If he pays a tax rate akin to Romney, he's paying something around $750k in taxes that year. While that $750k is painful, he still walks away with over $4 million. If, however, the tax rate on that $5 million is 40%, then he's paying $2 million in taxes. . .unless he finds out some way to lower his taxes.
One way of doing that is investing what would have been the $2 million tax bill into a business that has an interesting, but iffy business plan - like 90% of the internet companies in the 90's. In fact, business losses, which are tax deductible, are almost preferable to gains. After all, the guy is going to lose $2 million anyway, so he might as well gamble with it. That gamble, in turn, helps create jobs.
Now, as the Matt Yglesias notes in his post, this positive effect of income taxes only applies to income taxes. So, if there is a small business owner wondering whether or not to hire more people, the same effect applies - the additional workforce is a tax write-off. If the owner was going to lose that money to taxes anyway, he or she will be more inclined to spend the money.