Here’s an outstanding essay by economist Thomas Sowell on widely held misconceptions regarding the historical effects of varying tax rates on the wealthy. An excerpt:
The very idea that profits “trickle down’ to workers depicts the economic sequence of events in the opposite order from that in the real world. Workers must first be hired, and commitments made to pay them, before there is any output produced to sell for a profit, and independently of whether that output subsequently sells for a profit or at a loss. With many investments, whether they lead to a profit or a loss can often be determined only years later, and workers have to be paid in the meantime, rather than waiting for profits to “trickle down’ to them. The real effect of tax rate reductions is to make the future prospects of profit look more favorable, leading to more current investments that generate more current economic activity and more jobs.
Those who attribute a trickle-down theory to others are attributing their own misconception to others, as well as distorting both the arguments used and the hard facts about what actually happened after the recommended policies were put into effect.
…There is no need to presume that the scholars who wrote these history textbooks were deliberately lying, in order to protect a vision or an agenda. They may simply have relied on a peer consensus so widely held and so often repeated as to be seen as “well-known facts’ requiring no serious re-examination. The results show how unreliable peer consensus can be, even when it is a peer consensus of highly intellectual people, if those people share a very similar vision of the world and treat its conclusions as axioms, rather than as hypotheses that need to be checked against facts. These history textbooks may also reflect the economic illiteracy of many leading scholars outside the field of economics, who nevertheless insist on proclaiming their conclusions on economic issues.
Thanks to reader Dom for the link.
Want more Sowell? Here’s a five-part interview with Peter Robinson.
21 Comments
You can never have enough Sowell:
The Thomas Sowell Reader [Kindle Edition]
Appreciate you taking the time to distill out the salient points Malcolm. I got to page three (but given my dearth of comprehending powers) it began to resemble voodoo.
Thanks Dom.
Incidentally fellow – it would appear you were correct. Good thing you made the stretch and posted your theory before anyone else chanced it.
Oh heck Henry. I failed to notice you’d commented. Forgive if my comment bears some semblance of clarity.
What theory is that, JK? I have so many…
As a service to your readership, I will helpfully explain why Sowell’s argument is completely wrong.
If the “tax rates” he refers to are income tax rates, he should know that they are largely irrelevant. Entrepreneurs and venture capital firms start businesses with the intention of selling them to an acquirer or bringing them public. Hence the profit on the business is taxed as a capital gain, not ordinary income. (If the company is set up as a pass-through entity, its operating loss flows to the 1040 and can be applied against ordinary income, so a higher individual tax rate is favorable to the entrepreneur).
If Sowell’s argument is that reducing the cap gains rate stimulates economic activity, he has half a point. The current 15% cap gains rate will lead to more capital formation than a 25% rate would. However, as long as the tax is not punitive, it’s not part of the calculus which entrepreneurs use in deciding whether to pull the trigger or not.
I started one business (which failed) and recently started a second (which hopefully will do fine). I have been on the start-up group of more companies than I care to remember. I work in the world capital of venture, where more businesses are started and incubated than anywhere else in the planet. You can’t have a fender bender at Stanford Mall without hitting someone who works on Sand Hill Road for a VC firm. I can report that entrepreneurs don’t start businesses because they want to get rich. Sure, everybody would like to be the next Larry Page, but I know a lot of successful people and I have yet to meet anyone where the pursuit of money was the driving force.
People start businesses for lots of reasons. Some people do it because it’s what they really like to do. I’m guessing that the guy who started Power Station really likes music, and that’s what he wanted to do with his life. Others do it because they don’t want to work for a boss. Some do it because they think they invented a better mouse trap. Most people do it because starting a successful company is the hardest thing you can do in business, and when you’ve succeeded, it is a beautiful thing. It’s almost like having a child: you started out with nothing, and now you have a sustainable enterprise which takes off and flies on its own. Do people work long hours in an uphill struggle — and hire workers and make capital expenditures in the process (the “current investments” Sowell refers to) — because they think they will exit with ten million instead of eight million? Nah — doesn’t happen.
There are plenty of fine conservative economists. Milton Friedman may be the best. Sowell? Not so much. Reading Thomas Sowell to gain an understanding of how business works is like going to Pam Geller to understand Islam.
If income tax rates are irrelevant, somebody should notify your pal in Washington; he harps on them no end.
Here are Sowell and Friedman tag-teaming Frances Fox Piven.
If more people understood Islam as well as Pamela Geller, the West would be a lot better off.
Over and out.
I see nothing that requires forgiving, JK.
:)
Well apparently Henry I needn’t be forgived after all – up there where I first thanked Malcolm I followed up thanking Dom and included this perhaps inartfully:
“Incidentally fellow — it would appear you were correct. Good thing you made the stretch and posted your theory before anyone else chanced it.”
That actually is in reference to what turns out to be an Egyptian.
I’m glad you cleared that up, JK.
I have a strange feeling that “I’m not in Kansas anymore.”
Nope Henry. Nowhere near Kansas.
Otherwise you’d know the US had a President Atchison. You’re in fine company though so take heart – the US Mint wasn’t aware of it either.
I’m not confused anymore, JK; maybe bewildered, though …
Well why don’t I try to remedy that Henry. Besides you just might need an excuse to get outta the house and away from your keyboard as I sometimes need to.
Thought Atchison Kansas’ sole claim to fame was being the birthplace of Amelia Earhardt?
Not so. Atchison actually was given it’s current name by being named after a Kansas Senator. There’s an old Sante Fe railroad depot in the town which besides railroad memorabilia also features the smallest Presidential Library in the United States. Maybe on the entire planet.
Don’t know what the weather on March 4th 1849 was like, whether cheery like Arkansas’ today or cold and blustery like Malcolm was complaining about last October.
I do know it was a Sunday. And one James K. Polk and his VP resigned from the Executive. Zachary Taylor however was for whatever reason “churchy” maybe – averse to taking an Oath on the Sabbath. Sabbath or not – no matter how nice it might be nowadays – it simply wouldn’t do for the United States of America to be without a President.
Atchison though he was pretty tired was still however, prior to noon anyway, Head of the Senate thus he was next in line to fill the position of CinC.
The story goes he spent much of the day sleeping. Or trying to anyway. He kept getting woke up by friends pestering him for Cabinet seats.
Some few years ago our millinial(sic?) version of the Congress passed legislation for a series of one dollar coins featuring on the obverse, the face of each of our “having served as President” thus, over the past few years the US Mint has been issuing sets featuring, four each year, the wholesome and less so likenesses of our US Presidents.
I noticed (what it is is, I make annual purchases of the uncirculated sets to give to my Grandkids at Christmas) when the set featuring Mssrs. Polk and Taylor came out, President Atchison was missing.
I called the US Mint on my landline – gotta use a landline if you want to speak to someone in authority – anyway the “authority” had never heard of the President named Atchison.
Did I clear your bewilderment sufficiently Henry?
Don’t forget Topeka.
(Yes. Well I was gonna link that so’s Henry could read with a soundtrack. Then I grew afraid Henry might think I was pushing him into the arms of the Westboro Baptist Church.
I’d got him outta the state of confusion – that mighta left him in bewildered.)
[img]http://www.snopes.com/history/graphics/atchison.jpg[/img]
According to Snopes, this claim is
bullshitfalse.Wha… HENRY?!!!
You mean to tell me you’re gonna trust Snopes over the always reliable, truth-telling JK?
You really do need to get away from that keyboard. (I suppose you could just pick up a phone.)
913-367-6238 and ask for a Mr. Chris Taylor, he’s sitting as I type in Atchison’s Sante Fe RailRoad Depot. If for some reason you don’t have money for gasoline here’s an email link:
gowest@atchisonhistory.org
I’m traumatized Henry. Oh ye of little faith!
Henry?
I’m not really interested enough to fork out $ for a subscription merely to buttress JK’s veracity but it’d really do you some good to learn Snopes sometimes fails to do adequate research.
The old timey reporting news source for things Washington DC related was the National Intelligencer. The archived article date Snopes should take a look at is the entry of March 8, 1849.
http://www.genealogybank.com/gbnk/newspapers/explore/USA/District_of_Columbia/Washington_DC/Daily_National_Intelligencer/?kwexc=&group=%5Bu”]&kwinc=Senator&formDate=1849&lname=Atchison&textloc=False&fname=&type=&processingtime=&pg=2
JK,
I’m just yanking your …, er, pulling your …, er, tingling your …
I’m keeding, bro!
Of course I trust your truth-telling more. Snopes are dopes, I always say.
BTW, that phone # you listed was answered by someone who calls herself “Miss Cleo” …
Miss Cleo?
But you did ask for Chris dincha? You realize Henry, when, “Florida authorities challenged Perris to prove that she really is a Jamaican shaman” all they did was depend on those ratbags at Snopes too.
Don’t worry though – I sent Florida the proper link to Jamaica’s Shaman Licensing Agency. Went ahead and forwarded a pdf of her cerificate to Snopes, fortunately Jamaica’s websites don’t hide behind paywalls.
Of course I wonder whether the lazy ratbags at Snopes ever check their email.
Henry?
Got to thinking you might not afterall have doubted ol’ JK raising your brilliance quotient where President Atchison is concerned. Rather that the US Mint wasn’t issuing Presidential Coins.
http://www.usmint.gov/mint_programs/$1coin/