Trickle Down Economics

Do tax cuts pay for themselves? For example when President Bush lowered the top tax rates on those making over *$250K from 36% to 33% some thought that by freeing up money then people would buy more goods, start or invest in more businesses and generally help the economy. This is a common conservative theme repeated almost as much as "government is the problem."

*Why set the bar at $250K? I remember reading an article that asked the question "why does LeBron James pay the same tax rate as his dentist?" and thinking that it was a very good question. In 1913 the marginal tax rates were introduced and the top level was defined as $500K. That was quickly changed in 1916 to have a top level be a $1M. The top % on those that made $1M year rose to an incredible 94% in 1944. The level stayed above 90% until it was replaced with a top level being defined as $250K. That top level has fluctuated with a downward trend to the current level of 33%. Why did the United States decide to make such a big swing from taxing the ultra-rich at such a high rate to not even differentiating between the rich and the ultra-rich? Would it make more sense for a progressive tax rate to have those making between $250K and $500K to pay 33%, those making between $500K and $1M pay 40% (near Clinton's level for the top rate) and those making over $1M to pay $45%? You can disagree with the %s, but it seems like a logical plan to tax the $250,001th dollar at a different rate than the $1,000,001th dollar.

So do supply side economics work? I will look at this at a very micro level and look at my own financial situation with my wife. We are in the lucky position that we make more than we spend. What do we do with our extra money? After you take away the money we spend on restaurants, rent, car maintenance, groceries,entertainment etc the rest of the money goes to the following;

• Stock market: The majority of our extra money goes to the stock market. We are saving up for a house, kids, retirement, etc. What happens to this money? It goes to corporations like Target, Apple, Diageo Chipotle and Intel. The majority of the corporations are headquartered in America, but also have significant operations in other countries. It is rare to find a large company that doesn't have an internationalal presence
• Our savings account
• Trips: Most of our trips are domestic, but occasionally we go to places like Spain, Austria or our upcoming trip to London and Paris.
• Gifts: I enjoy giving back to Miami University as well as buying normal birthday/Christmas gifts for family and friends.

From the above four points I can see that a good portion of my money does trickle down to help the domestic economy out. (Example: I went to Las Vegas this weekend and my group of four did our part to help the local economy.) However, a lot of my money does not trickle down to help create any jobs in America. If I invest in a stock that then decides to employ someone in Russia that doesn't help the unemployment here very much. If I save my money then I don't see how that helps anybody but myself. If I go on a trip to London and spend all my money buying William and Kate decorative items then I'm probably not helping some factory in Fort Wayne, Indiana.

My point is that if you give me a tax break then there is a good chance I will spend more money, and likely some of that will trickle down to the domestic economy.  However, there is zero chance that will be a 1 to 1 ratio, which makes the theory that trickle down economics will pay for themselves invalid.