Mike the Mad Biologist

What I’ve never understood about the idea of tax cuts for the rich to stimulate the economy is that, as one wealthy person told me, “I spend what I’m going to spend, and the rest goes in the bank.” Tax cuts don’t stimulate growth, unmet demand stimulates growth. Sure, there are some rich people with insatiable appetites who will spend all of the additional money. But most will just stick their money in the bank (or invest and drive up asset prices simply because they have to invest in something). In an environment where banks aren’t lending, that is the worst way to create jobs–the money just sits in the bank.

In an interview with The Guardian, actor Matt Damon thinks the same thing:

Damon appears so disillusioned that, playing devil’s advocate, I ask whether he is considering voting Republican. “Good God, no! I just got a 3 per cent tax cut. Do you think I’m going to start a small business with that money? You’re out of your mind if you think so. I’m going to put it in the bank. So is every other guy that makes the kind of money I make. I don’t think that’s what’s best for the country. I think a stronger middle class makes for a stronger country.”

Really. That’s how most, though not all, rich people will behave. They might spend some of that money and create some jobs, but the government will spend all of it and create many more jobs.

Of course, we could go a little farther and do what Senator Bernie Sanders proposed–a 5.4% surtax on income above $1 million:

Comments

  1. #1 Mokele
    March 16, 2011

    Between this and some of the stuff I’ve heard of him saying via feminist blogs, Damon seems a lot smarter and way more progressive than most actors.

  2. #2 Michael
    March 16, 2011

    The assumption I think you’re making is that when money is put into the bank that it leaves the economy.

    More available money for loans keeps interest rates down and borrowers do not have to compete as hard with each other for loans. Now it’s clear that our current climate doesn’t suffer from high interest rates, but I don’t hear anyone saying we need to raise taxes temporarily. We need to look at the big picture and for the long haul

    I don’t understand why you are extrapolating what Matt Damon siad he will do with money to the entire swath of people impacted by this tax rate and assume zero elasticity in in consumption.

  3. #3 Paco
    March 16, 2011

    The people who will inject any extra cash they get into the economy *GUARANTEED* are the LEAST wealthy. This is Econ 101.

    Add in the multiplier effect of that extra cash being put into the economy and, golly, you might even have a recovery!

  4. #4 Herp N. Derpington
    March 16, 2011

    @2-He didn’t say the entire population making that much money. Read again:

    Sure, there are some rich people with insatiable appetites who will spend all of the additional money. But most will just stick their money in the bank (or invest and drive up asset prices simply because they have to invest in something).

    And only because it is an entirely prudent course of action. It’s not as though he is accusing all monied people of doing some ridiculous thing because one person does it, merely that given his experiences monied people act in a reasonable, conservative fashion. As the saying goes, a man doesn’t get rich by spending all his own money.

  5. #5 GrayGaffer
    March 16, 2011

    @2: it is leaving the economy. Banks are not using those deposits to make loans. Besides, those loans they do make are ony to people with assets and steady incomes, a declining demograhic. And business loans are only sought if the business in question see an umet demand, which they are not in general, and are otherwise still healthy.

    When jobs are created because there is demand to be met, higher taxes are not an issue because the investments made to meet that demand are typically deductible. In fact higher taxes are then an incentive to invest. The diff is the cash was used to create jobs, not to fill the coffers at the bank.

    The problem with the “trickle down” hypothesis is that shit trickles down too and there is more of it.

  6. #6 william e emba
    March 16, 2011

    The assumption I think you’re making is that when money is put into the bank that it leaves the economy.
    More available money for loans keeps interest rates down and borrowers do not have to compete as hard with each other for loans. […]

    And you’re making the exact same error that you’re criticizing, but in the other direction. The money put in the bank came from the bank.

    An accurate analysis has to be phrased in terms of the velocity of money, in the classical terminology, or in terms of the multiplier, in the modern terminology. Rich people sit on their money, poor people spend it. Neither is good nor bad on its own, but depends on the circumstances. An overheated economy is best cooled by the rich, while a depressed economy is best stimulated by the poor.

    Economics, in short, is not about money. It’s about people trading their time and talents and goods. They do so based on current needs and future expectations. Rich people have loftier future expectations by the simple expedient of not spending.

  7. #7 Rebecca
    March 17, 2011

    William Emba makes the right point about economics being about money moving, not money in of itself.

    I have to say: I would not recommend using Matt Damon as a benchmark for the average working/business person earning $250’000 or more.

    In any case: the other element to be considered is insecurity. As long as low taxes are temporary and people remain unsure about their and the nation’s economic future, they will of course be conserving any extra wealth rather than spending it. I think this is true for most people at any economic level.
    If these higher earners had the certainty of long-term low tax rates – and thus knew they had control over their own wealth – it is much more likely to be spent.

  8. #8 Wow
    March 17, 2011

    “More available money for loans keeps interest rates down and borrowers do not have to compete as hard with each other for loans.”

    Which loans are taken up by poorer people who have to pay more for their goods (interest on the loan) than a rich person would.

    Therefore the wealth trickles UP to the person rich enough to put their money in the bank.

    The best and simplest way of reducing this hoarding is to instigate 100% inheritance tax. If you want to give your children the advantages you didn’t have growing up, DO IT WHILE YOU’RE ALIVE.

    Then with the money coming in from inheritance tax, income taxes can fall and you have more money left while you’re alive to spend on your children.

  9. #9 Mac Gardner
    March 18, 2011

    I know you quote Will Rogers, and I think he was a very wise man myself. When Herbert Hoover begged congress to give unconditional millions to banks and insurance companies, he promised that they would end the still young depression through the concept of “trickle down PROSPERITY.” Congress handed out the money and rather than loaning it, the banks sat on the money, just like they did in 2009 and most of 2010. Will Rogers response to Hoover’s idea was “If you place GOLD at the top of the economy, it will FLOAT THERE.” In a nutshell, Rogers described the lunacy of the trickle down theory. Reagan tried it again in 1980, by convincing congress to cut the top income tax rates from 70 percent to 36 percent, because a man named Laffer (the author of the theory “the laffer curve” which was basically Hooveresque economics, which George HW Bush called “Voodoo economics.” Reagan’s economic “achievements” included 2 major recessions, a stock market crash in 1987, massive housing foreclosures, bank and savings and loan failures, 10 percent unemployment in 1985, along with 18 percent fixed mortgage rates, runaway inflation, and a TRIPLING of the national debt (which took 200 years to accumulate) in a span of 8 years.
    “W” Bush owed so many favors to big oil and other corporations that he was obligated to promote another welfare for the wealthy program, resulting in 2 major recessions, 2 stock market crashes, foreclosures, bank failures, etc. Hoover, Reagan, and Bush all made the same stupid mistakes. Fool me once,shame on you. Fool me twice, shame on me. The problem is that most people haven’t read a history book since high school, and most of them must have either cheated on tests or slept in class, or they have no memory beyond the last commercial on Fox. Regarding the utter failure of Hoover, Reagan and Bush’s economic policies, Yogi Berra really said it best. “It’s Deja Vu all over again.

  10. #10 starskeptic
    March 19, 2011

    Wealth doesn’t trickle down – it gets sucked up

  11. #11 Tütüne Son
    March 19, 2011

    Reagan and Bush’s economic policies, Yogi Berra really said it best. “It’s Deja Vu all over again.

  12. #12 Tony61
    March 21, 2011

    William E Emba’s comment about the velocity of money is spot on. Yes, money in the bank does not “leave the economy”, but the multiplier at this time is poor since banks are awash in money and interest rates are rock bottom already. Matt Damon’s cash in the bank will have a negligible effect on lending and economic growth.

    Money spent by poor and working class folks tends to stay local– beer, groceries, bowling alleys– which employs locals individuals. Matt Damon is more likely to buy a German-made BMW or vacation in France, thus the multiplier is lower.

  13. #13 Jim
    April 1, 2011

    How do rich people get rich to begin with? By saving and investing there money. How do the poor and middle class have jobs? Because a rich person puts his money at risk in order to turn a profit. Where does government get money from? Only by taking from others. How does taxing the rich create jobs. It doesn’t. Government cannot create prosperity, they can only create the conditions for prosperity. Which is low taxes, low regulation, and a sound monetary policy.

  14. #14 Troublesome Frog
    April 1, 2011

    Jim:

    How does taxing the rich create jobs. It doesn’t.

    Scenario 1: A rich person hires a person for $50K to do a job. Job created.
    Scenario 2: The government takes $50K from a rich person and hires a person to do a job. Job not created?

    Do you consider the engineers working at Lockheed unemployed?

  15. #15 Soquel by the Creek
    August 3, 2011

    My business is the counter example to Mr. Damon’s bogus claims. While I don’t make over $250,000 now, I did one year. The extra money did go into the bank, along with other savings that I was able to accumulate over time. I used that money as seed capital to start my business. Plus, here in California with its expensive real estate and high taxes, $250,000 isn’t as much as it might seem in many other parts of the nation.

    Could I have started my business without those funds? Sure, by borrowing the money and paying interest, thereby placing a drag on my business.

    Now, if that extra money went to the government, it MAY produce jobs. But, are they PRODUCTIVE jobs for society at large, or just more government jobs?

    If Progressives feel that higher marginal tax rates will help them sleep better at night, believe there to be “fairness” in the world, then fine. Make your decision. But, don’t be surprised that your new tax policy affects people’s behavior and the government actually ends up collecting LESS additional revenue.

    Ask why it is that American citizens and corporations waste so much resources on tax compliance, accountants, and tax lawyers. We don’t need higher taxes. We need a better, more productive, modern taxation system that is competitive internationally.

The site is currently under maintenance and will be back shortly. New comments have been disabled during this time, please check back soon.