Normally, I and others like to refer to neoclassical economics (NCE) as a “steaming heap of crap — frustratingly filled with untested assumptions, magical leaps in logic and completely unfounded conclusions — that universities are still dumping all over their students to indoctrinate them and inoculate them against logic, science and critical thought.” However, one of the more coherent aspects of NCE macro theory strongly recommends progressive taxation: the theory of marginal propensity, or consumption function. Here’s why:
Any taxation regimen is a redistributive process. The important questions are
- Who gets the money? and
- What they tend to do with it once they have it?
Question #1 is historically both a moral and pragmatic issue — an extension of the idea that budgets are fundamentally moral documents, and reflect the dominant value systems that create them. The concept of “trickle-down economics” was created to overshadow and obscure the moral arguments with pragmatics: “Sure, it might be more moral to distribute the money to poor people, but, darn it all to heck, it just ain’t good for the growth and overall health of our Economy…” Plus, poor people wouldn’t even know what to do with money, right?
That supposedly pragmatic reasoning reveals itself as complete bullshit when we examine question #2 (above) according to the economic theory of marginal propensity. Marginal propensity exists as two inverses: a) the Marginal Propensity to Save (MPS) and b) the Marginal Propensity to Consume (MPC), based on the premise that people are either hoarding their money or recirculating it — one way or another.
The higher your income, the greater percentage of your money you (are able to and) choose to hoard (i.e., save; more wealth = higher MPS). In contrast, the lower your income, the greater percentage of your money you immediately reinvest back into the economy (i.e., consume; less wealth = higher MPC). The correlation between someone’s tendency to spend/save and their income or wealth is so strong that it is no longer a question of whether it occurs, but why.
The banking and loan system depends on savings, and according to federal law must only keep a fraction of the money on hand to secure the loans it gives (“securities;” ostensibly balanced by the amount of risk entailed in the loan; higher risk loans would require the backing of a larger portion of liquid assets). Increasing savings increases loan capacity (often generously called “financial assistance” — loans are the expanding yo-yo’s of the financial system) while consumption (money circulation) allows people to make payments. Hopefully you can begin see the implications and the importance of balancing this system…and how its imbalance, under the guise of “trickle down economics” has led to many of the financial problems and economic crises that we face today. A loans- and universal deficit-based economy? Hmm, that doesn’t sound stupid or dangerous, right?
As a side note, the financial crisis we are currently in is due in large part to a massive increase in loan risk, an outsourcing of that risk with no concurrent increase in securities to cover a higher frequency of increasingly intense loan defaults…third parties (with respect to the lender and the lendee) take on the risk in exchange for profiting off the results of the loan, giving lenders incentives to increase the risk and lie to both the lendee and their investors about the nature of the loans being given and securities being traded. In other words, predatory lenders were simply working in their “rational self-interest” in a system that encourages predatory lending. Both investors and lendees are paying the price.
A regressive tax policy (short term) and top-heavy economy with no middle class — where the wealthy controlling the vast majority of financial assets — (long term) will provide a lot of fodder for the savings and loan industry expansion, but comparatively little opportunity for the targets of the loans to pay back. This is a core reason why the risk and investment complexity of the savings and loan industry of the financial sector has increased exponentially. Conversely, a progressive tax policy (short term) and balanced economy — where financial assets are more or less equally distributed amongst various socioeconomic classes — with a strong middle class (long term) will provide less fodder for the savings and loan industry while making for a healthier, more stable economy for several reasons: 1) less dependence on loans to make ends meet 2) better ability to pay back loans when given 3) lower savings and loans complexity and risk and 4) Stimulus through normal people creates jobs that serve normal people, rather than creating jobs in the decadent wealth service industry that are dependent on unhealthy wealth disparities. The economy itself is healthier (as are all the people), and less income and economic growth comes from the savings and loans industry.
So in case you were wondering, this is what Barack Obama meant by that now-infamous phrase, “Spread the wealth” — basically moving us back to a healthier economy that wouldn’t collapse under its own weight. We live in a sad world if that’s the “socialism” so many people are decrying.
This framework also serves to explain why both Bush and McCain were so full of shit when they were saying “the fundamentals of our economy are strong” only a few months ago. Because it was literally quite the opposite: we had (have) an economic system that is increasingly calibrated to giving loans while increasingly being unable to make payments on those loans. The increasing complexity in the trading of securities can be seen as a symptom of this tendency, which in turn was fostered by the idea of wealth redistribution from the poor to the rich under the mantra of “trickle-down economics.” As a direct result, our savings and loans system had become bloated in relation to the relative circulation of owned money in the system. Much of the anemic circulation is boosted temporarily by an influx in the circulation of loaned money. When the going gets rough, people (who may be taking cues from our government’s massive debt [much of it foreign-owned] and deficit spending) whip out the credit card. And help build a castle on air. The only problem is, that nice castle is sitting on top of nothing, and will come crashing down to earth.
Back to the original premise, though: Tax breaks, economically speaking, are a way in which the government can invest in the economy and promote economic growth. The problem is, it’s not a very efficient investment, dollar for dollar, when most of the money goes to the top income brackets. They save most of their money and make even more interest off it by lending it to us people who frequently can’t afford to make even basic ends meet without a loan. Question #2, above, is a matter of efficiency — and wealthy people just aren’t very efficient with money in this respect. For example, raising taxes on wealthy person A by $10 and cutting taxes on poor person B by $10 will allow more of that $10 to go directly back into the economy, yielding a positive net economic stimulus, even though no additional taxes have been raised (and the size of government stays the same). Sound familiar? It’s “spreading the wealth.” As a beneficial side-effect, it’s also more compassionate. But that’s just a side-effect (according to those damned insensitive economists!).
Another way to frame this: The so-called “poor” and “working class” and “middle class” are the true fundamentals of the economy — the foundation of the castle — precisely because most of our income does not come from “earned interest,” and we are nowhere near overwhelmed by spending possibilities. Quite the contrary, many (most?) of us wish there was some way we could spend less and save more! We have no choice but to invest directly and immediately in the economy to pay our basic living expenses without having to resort to loans. The result? Dollar for dollar, a more efficient economic stimulus package.
So, the bottom line is this: if you are an economist, and you endorse tax cuts for the wealthy over tax cuts for the poor, working and middle class, then you are a hack (pragmatically speaking) and an asshole (morally speaking). If you are not an economist, then you can be excused as being simply ignorant about how to manage our economy (McCain…). Another implication: Whether you disagree with him, Obama is entirely within the economic mainstream with his progressive taxation proposal. Which also means the baseless McCain/Palin “socialism” slander of progressive taxation (which dates back to Adam Smith) is complete bullshit.