A friend of mine posted the following chart on Facebook with the caption: "Clearly lower taxes isn't the cure."
My response: Correlation lololol.
Not an extremely in depth response but worthy of the argument. The thing about these "low tax rates=bad economy" is that no real reason is ever actually proposed... It's more of an argument from faith than anything else.
AustrianSkool...please see here.
Ok, for those who are interested here is the blow by blow of the debate....if you want to call it that: (You'll notice I used some verbatim quotes from this thread and also borrowed from Walter Block, Bob Murphy and Peter Schiff) Also note: Brother 1 and Brother 2 are the brothers of my socialist friend who originally posted the chart.
Me: If you're implying that there is a causal relationship between the two, that's economic non-sense! Remember that correlation does not necessarily equal causation. Do wet sidewalks cause rain?
Friend 1: Clearly lower taxes isn't the "cure"
Me: Deacon, economic science is not positivistic, data can be made to say anything if you torture it sufficiently. Theory is what’s important in economic debates. This means that you can't really use data as proof of what you are saying, but merely to illustrate the theory. The illustration is somewhat irrelevant since there are no constants in economics, only variables. I’d like to hear what your theory is, then you can attempt to use the illustration to back it up.
Me: http://en.wikipedia.org/wiki/File:PiratesVsTemp%28en%29.svg clearly, fewer pirates isn't the cure ;-)
Friend 1: Jesus. Here we go. Then I guess nothing bust be related. No President or Senitor or Congress ever really plays a roll in helping it hurting the country. So then we must only vote based on character. I guess I would still pick Obama.
Friend 1: And if tax can't be correlated with unemployment, then I assume you would say that lowering taxes won't reduce the unemployment? So we should raise taxes on tye rich to reduce the deficit. Good! Problem solved!
Me: It’s true that some economists point to taxes as the primary job killer, and argue that lower taxes will boost employment. While I have sympathy for this view, it misses the larger issue that the burden of government is not only what it taxes, but what it spends. Government spending plays a large role in job destruction. The more money government spends, the more resources it drains from the private sector. Incredibly, for every dollar the government collects in taxes, it now spends about $1.60. I would argue that a dollar borrowed kills more jobs than a dollar taxed. Therefore, cutting taxes and borrowing the shortfall kills more jobs then it creates. This is true because jobs require capital and government borrowing more directly crowds out private capital investment than taxes do. Think of government as a cancer feeding off the private sector. The larger it grows, the more jobs it kills. Unfortunately, most politicians follow the misguided advice of economist John Maynard Keynes, who advocated government spending as a means of job creation. In reality, government spending merely results in government jobs replacing more efficient private sector jobs. But, there are plenty of things the government does that contribute to unemployment. Such as:
Regulation: Regulation acts like a tax on job creation. By subjecting employers to all sorts of extra expenses when they hire people, regulations increase the cost of employment far beyond the wages employers actually pay their workers. In fact, some regulations are specifically tied to the number of workers employed. This provides some employers with a strong incentive to stay small and not hire.
Me: The minimum wage law, which is really just a very visible workplace regulation, actually makes it illegal for employers to hire certain individuals and destroys entire categories of jobs. For instance, faced with high labor costs, some restaurants will avoid hiring dishwashers by switching to plastic utensils and paper plates. On a larger scale, factories may decide to switch to robotic assembly lines if human labor gets too expensive. Other types of regulations, such as those that prohibit discrimination, create incentives for employers not to hire individuals that fall within the protected class. This is the result of potential litigation costs that may result from wrongful termination lawsuits. In other words, the more expensive government makes it to fire workers, the less likely they are to hire them in the first place. Subsidies produce the opposite effect of regulation, but sometimes the results can be just as harmful. Government subsidies divert resources towards politically favored activities, resulting in more jobs in areas such as health care and education, but fewer jobs in other sectors such as manufacturing. The net effect of this transfer is to diminish the productive capacity and efficiency of the economy, which lowers real economic growth and diminishes employment opportunities.
I haven't even gotten into the Federal Reserve and how it's manipulation of interest rates and money creation causes the "boom/bust" business cycle yet. I'll try to get into Austrian Business Cycle Theory later when I have more time. Maybe late tonight.
Friend 1: So your comparison of the pirate graph to my graph is bunk. Good! Glad we have an understanding. As far as all that other stuff you wrote. Couldn't disagree with you more.
Brother #1: So much for the trickle down effect, oh wait, that's not true...
Brother #2: Actually a correlation would indicate causation depending on time of measurement. e.g. measure the economic growth, then stimulate the economy with higher taxes and measure it again. In the past 100 years or so we see that taxes do stimulate the economy by creating jobs. That's on the record and easy to find. Another way to think about time of measurement (to illustrate, if you will): rain causes wet sidewalks. Oh, and small government causes piracy. Somalia is a case in point. To beleaguer the point: If we pass the hat around at a keg party we can buy a lot of beer and brats if everyone pitches in. But if the richest guys at the party don't pay up and sit behind their fancy cars drinking high priced exports and eating prosciutto , the rest of us suffer. Pay up and join the party.
Friend 1: Real comparisons
Brother #2: Anyway, I'm just happy I could put my $40,000 graduate education to some good use before I retire several years from now (which, thanks to "No new taxes" is when I should have the debt paid off).
Friend 2: Joe, I'm adding 40k to my education as well. I love the structure and the challenge it's giving me but am sad that our educational system has potential to be the next bubble to burst.
Brother #2: Bank debt puts graduates into a situation not so different than indentured servitude. Worse, you pay back the banks rather than putting that payment amount back into the economy. Student loans don't work like home improvement loans where the money minus a small amount of interest goes right back into the economy.
Me: you’re completely wrong on the correlation indicating causation thing. It is possible that the correlating factor is the cause, but you couldn’t know that for sure unless all things were constant except for the one variable. The effective tax rate on the rich is not the only variable. There are too many variables to number in the economy. That is the point I was trying to get across when I said that economic science is not positivistic.
Me: Before we move any further in this debate on employment, it’s clear that I need to start with some very basic economic education for you so you have the proper foundation to build on. We should fist ask why we even have employment? And where do jobs come from? You’re going to hate this, but it’s from PROFITS (or more accurately, the pursuit of profits). We live in a world of scarcity: we want more goods and services than we have available to us. If we already had everything we need or wanted, there would be no need for work or employment. But if we want more things than are now available to us, we must labor to create them. But why jobs? Why don't we each work for ourselves? Or in syndicalist or cooperative communities? That is the goal of my "progressive" friends on the liberal Left. This is because the entrepreneur, the residual-income claimant, brings three things to the table that workers greatly value. First, he bears risk. If the items produced by the workers cooperatives do not sell, they are flat out of luck; in contrast, if what the worker produces for the capitalist is rejected by the consumer, the entrepreneur cannot come to the workers and demand back the wages he paid them. Second, the much reviled businessman offers time, in the form of capital goods. If 100 workers band together in a syndicalist venture, and the product does not come off the assembly line for a year, they must feed and clothe themselves for this entire duration. As well, they must have among them enough savings to purchase the machinery, the raw materials, and the marketing services necessary for a final sale. In contrast, the entrepreneur provides all this to the workers, who, all too often, do not appreciate his efforts on their (and of course his) behalf. Again, if the product doesn’t sell, the entrepreneur suffers a huge loss on all of this investment. Third, the owner of the business firm provides leadership, in setting up the entire enterprise. Why does the entrepreneur do all of this? I must emphasize again that it is the lure of high profits. By taking away those profits (taxation) or cutting into those profits by raising the cost of doing business (regulation), the government makes it less desirable to take the risks associated with starting or expanding a business. The lure of high profits appears further away or less attainable.
Me: Now what determines the level of compensation in labor markets? In a word, productivity. Let’s assume a man can create $15 worth of product in an hour. If he is initially paid only, say, $8, this means that the employer will earn $7 from the sweat of his brow. But, assuming the worker is equally productive for many firms, some other entrepreneur will come along and offer this laborer $8.01. Another one will raise the bid to $8.02. Where will this process end? At the point where no additional profits can be made by attempting to bid this worker away from his present employer. On the other hand, if the wage for such a person gets pegged at a higher level, say $20 per hour, the firm paying him will tend to go broke. This wage level is unsustainable.
Why do we have unemployment? One major source is when wages are pegged at higher rates than productivity. Minimum-wage laws and union legislation are largely responsible for this situation. Another cause of unemployment is unemployment insurance. The more you pay for something, the more of it you will have. If you subsidize unemployment, its rate will rise.
Me: On to your claim that in the past 100 years taxes stimulate the economy by creating jobs. It is illogical to believe that the net result of taxation and government spending is higher employment. It is first important to understand that the government does not possess any wealth of its own. All the government has is what it takes from its citizens. Taxation is simply taking by force the property of one individual and giving it to another. So the government is not injecting any new capital/wealth into the economy that didn’t already exist. They are simply seizing the wealth of some and redistributing it for political purposes to others…buying votes. Now it is true that some individuals will benefit by getting jobs that normally would not have existed without money being stolen from the tax payers and redirected to these unemployed. But the increase in purchasing power that the formally unemployed are experiencing is coming at the expense of an equal amount of purchasing power lost by the tax payers, and the producers and providers of the goods and services that those tax payers patronize. This is a misallocation of resources to less efficient orders of production. You have to ask the question; if these individual were so productive, why were they unemployed to begin with? The reason these newly hired workers were unemployed before is because their productivity did not warrant the wages they were seeking. Now that we have taken capital from the productive to subsidize the inefficient, we have a less productive economy with fewer goods. Fewer goods equal less wealth. Now the bad economist looks only at the small picture and only sees these unemployed people who now have jobs. That is all you see. The good economist can also comprehend the unseen… the jobs that were destroyed, or that never came into being in the first place because of the government’s redistribution/misallocation of resources.
Me: Now I’ve only addressed how the government redistributes wealth through taxation so far. But governments today, along with the help of their central banks, are much sneakier about it most of the time. They use the hidden tax called inflation. They trick people into thinking that they can just create money out of thin air and give it to the unemployed or the struggling businesses and help them out without having to take anything from the taxpayers. This is lie. The government or central bank can create currency, but it cannot create purchasing power. The currency they create simply takes purchasing power from all the other holders of that currency by diminishing the value of the dollars they are currently holding.
Me: Since I’m talking about central banks I might as well get to the Austrian school of economics explanation of the business cycle that I promised you earlier. This is the biggest culprit of our current unemployment predicament. In a market economy, prices really serve a function; they are not mere appendages of exploitative power relations, but instead market prices signal real, underlying scarcity and help everyone in the economy adjust his plans in light of reality. The interest rates on various loans also mean something; they are not arbitrary. In particular, the market interest rate coordinates the "intertemporal" (i.e., across-time) activities of investors, businesses, and consumers. If consumers become more future-oriented and want to reduce consumption in the near term in order to provide more for later years, what happens in the free market is that the increased savings pushes down interest rates, which then signals entrepreneurs to borrow more and invest in longer projects. Thus resources (such as labor, oil, steel, and machinery) get redirected away from present goods, like TVs and sports cars, and the freed-up resources flow into capital or investment goods like tractors and cargo ships. Now when the Federal Reserve artificially reduces interest rates below their free-market level, it sends a false message to entrepreneurs. Firms begin expanding as if consumers have increased their savings, but in fact consumers have reduced their savings (due to the lower interest rates). Businesses that churn out durable goods, such as furnaces, cargo ships, and, yes, houses will find business booming, because these sectors respond positively to low interest rates. On the other hand, other sectors don't need to contract, because (unlike the scenario of genuine savings) nobody is cutting back on consumption. This is precisely why the Fed-induced boom is unsustainable — real resources have not been released from consumer sectors in order to fuel the expansion of the capital sectors. Because modern economies are so complex, the charade can continue for a few years, with entrepreneurs cutting corners and "consuming capital" (i.e., postponing necessary replacement and maintenance on equipment) while both investment and consumer goods keep flowing out of the pipeline at increased rates. But the music eventually stops, since (after all) the Fed's printing of green pieces of paper doesn't really make a country wealthier. When the Fed "cuts interest rates" it isn't really creating more capital for businesses to borrow; it is instead distorting the signal that the market interest rate was trying to convey. During the boom, businesses armed with newly printed Fed dollars must bid away workers from their original niches in the structure of production. In contrast, once the bubble has popped, many firms realize they are embarked on unsustainable projects. They need to lay off their workers. Unemployment goes up, and only as workers reluctantly accept lower wages can they be reintegrated into the economy. On average, workers are earning less during the bust period than at the height of the boom. This is because the salaries and wages of the boom period were exaggerations of the true "fundamentals" of worker productivity, and also because the fundamentals themselves have been hurt due to the waste of capital during the boom period.
Me: One last point I want to address to (Brother 2) and (Friend 2). You both mentioned the ridiculous costs of college tuition. And I agree that college is way too expensive. But I’d like both of you to realize the reason you are paying (or have paid) so much for college tuition is precisely government intervention. The government guarantees student loans. So when a kid wants to go to college he has access to tens of thousands (even hundreds of thousands) of dollars that are lent to him regardless of what he plans on studying, and regardless of credit worthiness. This creates artificial demand which drives up the costs. Colleges then have the ability to charge much more than they would be able to in the free market. Recognizing that the government is seemingly lending to anyone regardless of merit, they have widened their areas of study and lowered qualifications to broaden their customer base as wide as possible and maximize profit. The result has been the churning out of many more degrees of lower quality, thus diluting the value of a college degree. The government has made college degrees much less scarce than they used to be. Without these government guaranteed student loans there is no chance that a bank would lend money to an 18 year old kid with no credit who wants to go major in things as useless in the job market as Philosophy, Music Therapy, Women’s Stuidies, Dance, Art History etc. The bank would go to great lengths to make sure that they get paid back. Part of that would be only lending to students with great aptitude who are studying a field that is in great demand in the labor market. Without government guaranteed loans there would be a lot fewer dollars flowing to colleges and universities and the prices would necessarily come down dramatically. Then, it would be possible again to pay your way through college by working part time without accumulating any debt. This was the case in the past, before the government decided to step in and “help.”
Me: Now I realize that I’ve gone on for quite a while and I apologize, but it takes some effort to try and fill in the gaps in economic understanding that our public schools seem to have left.
Brother 2: My point was misinterpreted, I think probably for the same reason that you apologized: it takes a lot of words to discuss this stuff. When I went to college the first time in the 1970's the taxpayers picked up a larger portion of the bill. When I got out I went to work and rather than paying a bank, that amount of money went back into the economy. The cost of maintaining a classroom exceeds tuition even at today's rates so getting the government out would completely destroy education. When I went back to college in the 1990's, I needed loans because of, well: "no knew taxes". I'm not complaining about paying the loans, I'm just saying if the taxpayer would invest more in education more money would be returned to the economy. People, including the rich need to pony up. If we don't come to realize this, it's a race to the bottom that we will surely win.
Friend 1: The only thing I have left to say is, no matter what your view is about my graph. You need to be consistent on that view. I've had debates with you in previous threads where you felt lowering taxes on millionaires will help create jobs. In turn, lowering the unemployment rate. And now you tell me that there is no relationship between taxing millionaires and unemployment. It's hard to take someone seriously when they contradict themselves.
Me: Deacon, I have been consistent. My thesis is that government intervention in the market causes a misallocation of resources, inefficiency, and ultimately unemployment. I do believe that taxation increases unemployment. But in this thread I expanded the definition of taxation to more accurately include inflation. I pointed out that this hidden tax of inflation is actually even more destructive than the income tax. If an income tax was the only government intrusion in the market, and it was removed, that would then result in a net increase in employment. However, if you only lessen the one form of government intrusion, while increasing the others such as inflation and regulation, you will not necessarily see the benefit. The reason I commented on the graph to begin with is because it seemed to be implying that raising taxes on the rich would create employment. I then showed why that isn’t the case. To quote myself from earlier: “Why does the entrepreneur do all of this? I must emphasize again that it is the lure of high profits. By taking away those profits (taxation) or cutting into those profits by raising the cost of doing business (regulation), the government makes it less desirable to take the risks associated with starting or expanding a business. The lure of high profits appears further away or less attainable.” I don’t see how that is inconsistent.
Friend 1: Your arguing with your own past arguments. Now covering your tracks
Me: Please deconstruct my arguments on a theoretical basis if you feel I'm wrong…
Me: I should also add that my biggest objection to the income tax is on a moral basis. A person’s income is the wages that they receive in exchange for their labor. When a person has the fruits of their labor taken from them by force, they no longer own their labor. What do you call someone who doesn’t own their labor? A slave. I think we should all be opposed to slavery.
Friend 1: I don't think you can compare any paid job with slaves? It's a rediculous immoral thought. Slaves were beaten and raped for no pay. And we have Unions to make sure people are treated fairly.
Me: I somehow knew that comment was coming. Just because there are vast differences in severity does not make my statement less true less true.
Friend 1: Ehhhh...
Brother 2: In modern times, a civil society needs revenue to remain a civil society. Dave, you seem to want a free-for-all. That's not the way it works in a civil society.
Friend 1: I guess we are suppose to depend on our neighbors if a disaster strikes.
Me: I don't really have time to get into a long explanation of Liberation theory and philosophy, but I'll just say that there are private sector solutions to literally every possible scenario you can think of. Anything the government does can be done better and more efficiently by the private sector...from law enforcement, to roads to whatever. As for disasters, that's what insurance is for. And your friends and neighbors would have a lot more money to be charitable with if they weren’t being robbed by the government. This country thrived for quite a few years before FEMA.
Me: Hey guys, I had a little time on my hands tonight so I decided to look into the actual data that is supposedly being represented in this graph because it didn’t feel quite right to me. What I learned was the blue line (unemployment) wasn’t represented correctly at all. I’m unable to paste the tables or charts into this comment field, but here’s the link for the BLS where you can find it yourself:
You can change the dropdown box for the years to “From” 1995 and “To” 2009 and make sure you check the “include graphs” box. You’ll see what that blue line is actually supposed to look like. You’ll also see a table below with the actual data. Notice that the unemployment rate is by no means steadily rising while the effective tax rate of the rich has fallen. In fact you’ll see that the unemployment rate is on a nice steady slope downward from 1995 until about 2001 when you see it spike upward. Is it possible that the bursting of the tech bubble and/or the 9/11 attacks may have had something to do with this? Then the Fed intervenes by lowering interest rates even further and Congress (through Fanny and Freddie) interferes with the housing market and create the housing bubble and you see the unemployment rate drop again. The unemployment rate continues to fall until the housing bubble bursts and recession ensues. Whoever put together the chart you posted clearly had an agenda because they didn’t use the actual data. They selectively chose the data points which supported the agenda they wanted to push and only charted those, while ignoring the data that contradicts their narrative.
Me: And the "red line" isn't completely accurate, but it paints the right picture. The "rich" have been paying a lower effective rate. So that means they're paying less taxes and contributing less to the "general welfare", right? Only if you suck at math. Revenue doesn't come from simply raising tax rates, but is instead a function of rate times taxable income. So while rates fall from about 23% to 17% for the "top 400" from 2002 to 2007, incomes go up by about 3.6x, meaning approximately, let's see: 17 divided by 23 times 3.6 = . . .2.7 times as much (inflation-adjusted) revenue from the "top 400"! But I thought they were paying less in taxes? Well the taxes might not have been as much of a burden for them, but "society" certainly got more of it. So everyone wins, right? Not if you subscribe to the mythology that inequality means "the 99%" lose while "the 1%" exploit us or whatever those occupiers claim.
Drastically rising incomes for the rich, coupled with slightly lower tax rates, means more revenue for the government. And for most people who will even be complaining about the rich making a lot of money that should be a good thing. It should also not be forgotten that taxes fell sharply because of the recession (because people are making less money), not the other way around. Lowering taxes doesn't cause recessions. Recessions lower revenue because people make less money.
Thanks for the tips John James. I'm quite stubbornly attached to my Internet Explorer, but at least I know now to copy my text before I attempt to post.
Your friend misunderstood your argument from the beginning. He thought that because you said correlation does not equal causation that you meant that there cannot be any causation in general and more specifically that taxation cannot therefore have any effects on the economy. Essentially he thought you were saying that if you cannot prove a particular cause then there can't be any causation. Clearly not what you were saying and a logical fallacy if I ever saw one.
The actual point was that the qualitative effects of taxation can only be known through a priori theory.
I knew I was in for a long ride the minute I saw "senitor". I couldn't even get through the majority of that. Aristippus is right, intentionally or not, he straw manned your point and ended up debating something you weren't saying. I think that's a big part of the reason I couldn't get through it.
I wouldn't blame anyone for not reading through all of that, it's a lot of writing and probably pretty elementary stuff for people on this board. The reason I kept at it for so long is because the guy who posted the chart originally does this type of thing on Facebook all the time and he and his brother's are kind of the ring leaders of the young socialists in their circle. He usually has a lot of people following his posts and commenting about how capitalism is evil etc. I have seen people attempt to disagree an defend free markets but they're typically ill-equipped and it turns into a nonsensical Republican vs. Democrat debate and they get shouted down by the Leftists until they quit. Since I had the time this weekend I wanted to mix it up and slay as many fallacies as I had the energy for so all followers could see and maybe make them think about their positions a little deeper. I wonder if that was somewhat successful because only 3 other people participated in the debate. Usually there are at least a dozen or so more. I'm assuming they realized the conversation was out of their league.
You're probably right. But that's a good thing. It could mean less readers/followers for that particular conversation, but it could also mean more. I'm sure you gave more than one person something to think about.
It's also always a good idea to offer a link to some place that will get them more info...and start them on a learning journey. A rabbit hole, of sorts.