Supply-Side Fallacy

Supply-side economics is a theory that asserts an economy’s ability to supply more goods and services is the primary component in generating economic growth.  Also known as ‘trickle down’ economics, this theory states that a reduction in tax rates on wealthy individuals and corporations will incentivize them to increase private investment, which in turn will bolster the economy’s production capacity.  Increased investment creates new businesses and allows existing companies to expand.  The wealth created from these new investments is supposed to ‘trickle down’ to the rest of society in the form of job creation and higher wages.  But the most important concept in supply-side economics is that people will be substantially more encouraged to work and invest if their tax rates are lower.  It is an unwavering, religious belief in the elasticity of the labor supply.  The promise of a slightly higher net income will bring more people into the labor force, and this larger tax base is supposed to make up for the revenue lost due to lower rates.  Supply-siders believe that capital gains and dividend taxes must be reduced to encourage investment, and marginal income tax rates must be reduced to encourage employment.  If this happens, the economy will grow, everyone will have a job, Jesus will love you, and the world will be a better place.

Generally speaking, there is some truth to this hypothesis.  I suppose there is some level of taxation that would discourage people from work, assuming they had other means to provide for themselves.  If the top marginal rate was 75% and we reduced it to 30% overnight, the psychology of labor and investment may change to some degree as noted above.  Unfortunately, these little tidbits of truth have nothing to do with the United States of America in 2011.  Tax policy would have to be transformed dramatically, such as in the previous example, to produce any meaningful change in behavior.  And while excessive taxation may have been part of the problem in the 1970s, it is not a problem now.  Tax rates are as low as they have been the past 100 years, and they are among the lowest in the developed world.  They were higher during the economic expansion of the 1990s, when over 20 million jobs were created.

Supply-side zealots do not understand that relativism matters.  I got news for you shitheads; the labor supply is not that fucking elastic.  If you increase the highest marginal tax rate from 35% to 39%, it will not have a dramatically negative impact on investment behavior or labor participation.  And if some rich douchebags refuse to work under a 39% tax rate, than they can go fuck themselves, and it won’t have an effect on GDP.  The world is awash with liquidity and corporate balance sheets are stacked with cash.  A haircut on someone’s net income will not change that.  Obviously there are other reasons why businesses are sitting on this cash rather than expanding, such as a lack of demand for their products and services.  Unfortunately, since supply-siders do not believe consumer demand is relevant, their only remedy for a stumbling economy is to cut taxes.

The people who bloviate about this shit on TV all day will have you believe that supply-side principles are a proven scientific formula for economic greatness.  Any deviation from this incredibly simplistic view (such as going back to what the highest rates were under Clinton as part of a budget compromise) will cause an economic meltdown.  If you raise the highest marginal rate from 35% to 39%, people will stop working and employers will not hire anyone.  If you raise the capital gains rate from 15% to 20%, nobody will buy real estate or invest in new businesses.  This is not an academic theory, it is a fucking religion, and Ronald Reagan is their god.  The people who preach this shit are either mindless idiots, or they are manipulating the mindless idiots who listen to them and read their books.  Most of them are greedy, rich assholes who don’t want to pay any taxes.  Some of them are Tea Party morons who were instructed to preach this nonsense by the greedy, rich assholes.  It is easier to believe in some bullshit about cutting taxes than it is to actually read an economics textbook.  Within the context of this country’s current economic predicament, taxes do not have any impact on job creation.  It’s just a fact.  Anyone who says otherwise is full of shit.

According to these jerkoffs, consumer demand is totally irrelevant when it comes to economic growth or creating jobs.  As long as rich people (I’m sorry, ‘job creators’) have extremely low tax rates, they will start businesses and hire people.  Hell, let’s assume that one of these rich pricks actually does own a small chapter ‘S’ corporation or LLC that is taxed at the highest marginal rate.  Supply-side proponents believe the tax rate will drive his decision-making process on whether to hire more people and make capital investments.  The overall demand for this person’s product or service is irrelevant according to them.  Does this make any fucking sense?  No, of course not.  That marginal rate could be 25% or 40%, but if there is demand for his product, he will hire more people.  That is how people make decisions and that is how capitalism works.  With all the fucking deductions available for small businesses, this guy’s effective tax rate will be half the marginal rate anyway, and he knows that.  The same is true for investment.  Let’s assume someone has the means to make a substantial long-term investment in stocks, bonds, or real estate.  When the opportunity presents itself, a 5% increase in the capital gains tax will not prevent them from pulling the trigger.  And if you really believe otherwise, than you are stupid.

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