Fall 2017 The Subject is Taxing! - Trickle-down economics — pondering the theory

Trickle-down economics — pondering the theory

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by Stanton B. Herzog, CPA

Stanton B. Herzog, CPA, principal in the firm of Applebaum, Herzog & Associates, P.C., Northbrook,Ill., serves as ERA’s accountant and is a regular contributor to The Representor. He is available to speak at chapter or group meetings on a variety of financial and tax-related topics. He also participates in Expert Access, the program that offers telephone consultations to ERA members. You can call Stan Herzog at 847-564-1040, fax him at 847-564-1041, or e-mail him at sherzog@theahagroup.com


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The beneficiaries of low tax rates are the high-income earners. When it costs very little in taxes to accumulate wealth, people are encouraged to save, not spend.


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As Congress debates a new tax law, I can no longer resist the temptation to open for discussion some theories I have created over the years about the purpose and effect of taxation.

One of the great theories of the last 40 years is that of trickle-down economics. The idea is that by lowering taxes, the wealthy will have more money to spend, and thus money will flow down through the economy and everyone, even the indigent, will benefit. The most recent example is the laws passed during the George W. Bush administration. We know that the economy collapsed in a heap. But why? I have a theory; it’s called “accumulation.”

When people start to acquire wealth, they spend it on things they want and can use — a house, cars, clothes, etc. These acquisitions filter money throughout the economy. As wealth grows, however, the need for more “stuff” diminishes. As one man famously said, “How many cars do I need?” That is the beginning point of “accumulation.”

Most people begin with stocks. Some people are content to buy and hold stocks for a long period of time, while others buy and sell constantly. The idea is that they buy to make even more money, and they accumulate more stocks as their savings increase. Note that stocks may not be involved. There are many routes — classic autos, jewelry, gold, paintings, horses, etc. The idea is the same: buy low and sell high.
The important consideration here is that the groups are more or less finite. There are only so many stocks on the market and only so many paintings worthy of collection. They are owned by relatively wealthy people, selling to wealthy people for, in general, more than they paid originally.

The wealthy get wealthier as the stock market rises (classic autos and famous art go for exotic prices), but NONE of this reaches the average American worker. Companies do not benefit from higher prices on their outstanding stock.

There is a second, even more telling, problem with low tax rates. The beneficiaries of low tax rates are the high-income earners. When it costs very little in taxes to accumulate wealth, people are encouraged to save, not spend. A businessman making “enough” money from his business may be satisfied to not expand his business if he can put that money into investments; businesses cut costs, including payroll, and pocket the profits.

So we have Macy’s with one salesperson on a floor wondering why people find it more satisfying to go online where they can select from a wide range of items, each reasonably described and priced to sell.

Eventually Mr. and Mrs. Middleperson can’t find jobs, can’t afford anything except the basics, and the economy falters.

My theory is that reasonably high taxes will provide an opposite result. High-income earners will try to obtain more money by putting money back into their businesses rather than giving most of it to taxes, and they will have to hire people to make it happen. The government will have more money to help the poor, and the cumulative effect is the economy will be boosted by spending. You can look to the Clinton administration to see that it works and the Obama administration for recovery and further verification. It’s also wonderful for accountants because it gives us the opportunity to save our clients a lot of money with just one idea

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