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sagemon wrote

Trickle down economics is basically lowering the barriers for wealthy people who hold capital from investing it in start up companies etc.

It's about capital gains taxes mostly. Anyone with wealth keeps it in assets like stocks/bonds/real estate etc. It stays parked there tax free as it grows, with taxes paid in the form of capital gains taxes only when the person decides to cash out and sell that asset.

So say I invested 20mil in McDonald's stock ten years ago and now it's worth 30 million.. A gain of ten million.

Say you have an awesome idea for the next big social media site, or the next awesome whiz bang gizmo.. But you need 10mil invested in your new startup to get things moving, rent office, hire employees, buy equipment etc..

So you come to rich man me, give me your pitch and sell me on the idea of investing 10mil into your extremely risky startup, knowing I'll likely lose my ten mil, but if it works I could end up making 100mil.. I'm on board, I believe in you and your idea.

Now we get to the issue. Say capital gains tax rate is 50%.. That means I have to cash out 15mil of my 30mil in mcdonalds stock to get the 10mil to hand over to you. Meaning it now cost me 15mil to invest 10mil in your risky startup venture. You have to now convince me it's worth 15 mil to invest 10mil into you..

Now say capital gains tax rate is 0%.. I can then cash out exactly the 10mil you need and invest it in your startup without it costing me 5mil extra cost to do so. That 5mil cost barrier is no longer in the way.

Now think of what a barrier it would be if capital gains tax was say 80%.. I would have to sell 18mil in stocks, just to invest ten in your company and hand 8mil to the govt.

That is the basics, lower the cost and barriers to rich people selling assets to raise cash to invest in new business, instead of keeping all that wealth permanently locked up in assets .. I prefer a more targeted policy like the one I benefited from, say aimed at renewable energy startups for example..

When I was starting up a tech company in the 1990's there was a tax code that allowed investors to defer all capital gains taxes on any asset they sold off as long as they invested the proceeds into a high tech startup within 90 days. Basically zero capital gains taxes if they cashed out stocks to invest in my new company. That made it FAR easier to get investment from wealthy investors, and far easier for me to create 50 new jobs and spread millions around into my local community through my new business.

It's a bit more complex than, and there are drawbacks, but that but that is the basic premise of what people call trickle down economics. The whole crumbs from the table analogy is simply childishly ignorant and simplistic..


josefStallman wrote

That's one facet, but trickle-down has a lot of other components that could theoretically benefit society, but in practice only widen wealth gaps.

That being said, that's a very in-depth and well-informed look at the actual economic theory of lowering capital gains taxes, so thank you for actually contributing to the discussion.


sagemon wrote (edited )

Yes, that's why I favor using trickle down to target specific industries like say no capital gains tax if you invest proceeds of sale of an asset into a renewable energy startup, or no capital gains tax if you invest in say a manufacturing startup in a deprived inner city that has 50% employment. Rather than just a general across the board tax cut.

A general across the board tax cut does stimulate the economy by freeing up capital, but it also allows people to shift that capital around in other ways that don't benefit the economy to an even larger degree and pay less taxes doing it.

As well, the more you keep cutting the tax, the less effect each cut has in spurring growth. Diminishing returns.

What people miss when using the simplistic analogy of the rich guy at the table and the poor guy waiting for crumbs is that there is a big third party involved, namely the government.

So it is a triangle situation, with the government swooping in to snatch at the food on the rich guy's plate, and even worse, the government swooping in to snatch those crumbs as they leave the rich guys plate in mid air before they even get to the poor person, which makes it less likely the rich guy is going to toss any more crumbs down at all.


sudo wrote

Good explanation, but I have to say this.

...and far easier for me to create 50 new jobs and spread millions around into my local community through my new business.

This is a warped, supply-side way of looking at the situation. Capitalism is an inherently flawed system - people shouldn't try to constantly find more ways to create jobs, because that only treats the symptom, not the disease. They should dismantle the system, and build a better one (socialism) where jobs are plentiful, since they don't have to make someone else profit in order to exist.


chokeartist wrote

but that's the moral case for supporting the economic case, not the other way around.

When he had to make the case to the investors he almost definitely included the line "we are selling electricity". So the jobs are the product he talks about while the electricity production is what he mentions to his shareholders. In the same way, the jobs are the crumb he has to create, not the cookie he wants to create.

Jobs are not the goal of business, they are a cost on the balance sheet.


manicatorman wrote

It's basically the idea that if you give rich people tax cuts, they will use that extra money to invest in the stock market which will grow the economy. It works for a very short period of time (because a lot of rich people do invest in the stock market when they have extra money), but it eventually crashes the whole thing because demand hasn't risen whatsoever. You can't grow the economy when consumers don't have any spending money, and giving more money to the wealthy isn't giving any more money to consumers.

Here's a metaphor: Imagine I want to grow a shoe company, but nobody has any money to buy shoes. If I give more money to the people who own the shoe company, is that going to make the shoe company successful? It might allow it to coast for a bit, but there is still the central problem that nobody has any money to buy shoes. And that lack of demand will eventually crash the shoe company, no matter how much money I give to the owners.

Personally I say we should end the whole game and just build anarcho-communism, but there's a short rundown of it using the language of capitalism


PatrickMorris wrote

manicatorman: "You can't grow the economy when consumers don't have any spending money,"

This is the central truth that the supply siders ignore. In 2008 we bailed out the banks, because they convinced Congress that they were necessary to the economy. If we had instead bailed out the consumers, especially the homeowners with junk and outright fraudulent mortgages, foreclosures and subsequent layoffs would have been partially averted, and the bankers would have gotten the money eventually anyway, just after it passed through middle class hands.


Tequila_Wolf wrote

There are a bunch of rich assholes eating a good meal at a table. Occasionally bits of food and crumbs fall from the table, and the poor people get to fight over it.

Trickle-down economics says that the solution is to give the rich assholes more food, since there will be more crumbs.


WillSee wrote

I prefer the analogy: If you give the horses more oats the sparrows will eat better.