Summations Only

Apologies. At least I'm consistent. I'll make fixes. Income from tax free vehicles like municipal bonds is probably included as income, but the whole idea of tax shelters is to move income into categories where it isn't classified as income, or to defer income so it isn't classified as income in the year it is earned. Tax shelters of all types were a huge industry in the years before the Reagan tax cuts.It would be interesting to see your CBO graphs plotted logarithmically. The nature of such charts that divide income into ranges is that categories can never go below zero while the upper end is unbounded. As long as the poverty level remains around 15% it's a close match for the bottom 20% in the chart and will stay close to zero. Minimally participating members of the economy do not benefit much from an improving economy.The right hand chart tells a misleading story. The top 1% and top 20% categories move in tandem, but the other categories move oppositely. This is because of the unbounded upper range. When the median income for a category moves from, say, $30,000 to $40,000 but the total income moves from $3 trillion to $5 trillion then that category has lost share even though it has gained in real terms.Economics isn't like physics where you can graph force versus distance and draw some firm conclusions. There are just too many variables. In economics you can take figures and plug them into equations and charts and graphs, but whether its been done in a way that tells us anything meaningful is exceedingly difficult to determine. That doesn't mean we should just throw up our hands and pray for divine guidance, but it does mean that one has to be very careful about drawing conclusions.The question posed by the thread's title, whether trickle down works, is ambiguous. Undoubtedly trickle down happens, because in general the richer one is the more one spends, and the money one spends goes into the pockets of others who make what use of it they will (saving, investing, spending, etc.), and so on through the economy.I think the thread's title is really asking the veiled question of who is better at disposing of the wealth of the rich to the betterment of all, the government or the rich themselves.--PercyEdited by Percy, : Fix several minor typos.Edited by Percy, : Grammar.Edited by Percy, : Typo.

If the look at the income questions on page 11 of the 2012 Census Form you'll see that there are no lines for income from a trust, which is under the management of someone other than the person filing the census form. The income from the trust is not the beneficiary's income, and so he would not be taxed on it, nor would he report it.As I said before, tax shelters were a huge industry before the Reagan tax cuts. When the top marginal tax rates were 70% and above I'm sure there were many creative schemes for avoiding taxes in addition to trusts. Stock options and grants with vesting periods are still common today, and that's another way to defer income.I understand that you want to believe that the increase in income of the rich that began with the Reagan tax cuts as shown in Straggler's graph is not overstating the case, but before the cuts the rich were making more money than they reported as income. They were giving some of their money to their tax accountants and tax lawyers to protect their incomes, and when the Reagan tax cuts came in it wasn't worthwhile anymore and so they reported more income and paid higher taxes.The reason the rapid rise in income of the rich isn't simultaneous with higher increasing income than shown on the graph is because the graph doesn't reflect the actual income of the rich prior to the Reagan tax cuts. If it did then federal income should have ballooned with that rising income of the rich, but as you can see from this spreadsheet it didn't, see the last two columns that I've added showing percentage annual change in total receipts and total outlays: Federal Receipts and Outlays from 1789 to the presentIn other words, the rich have very little difficulty minimizing how much they pay in taxes, not matter what the tax rate. Well, one would hope not, but it isn't really that dumb a question when expressed in its original terms and measured against other questions that have been asked here. Adam Smith used the term invisible hand in arguing that people pursuing their own self interests contribute enormously to the greater good. I know you're a believer that government can accomplish what it sets its mind to, including allocation of resources, but as Straggler expressed so well a few messages ago, it takes both the public and private sectors. When it comes to the economy, I believe government should serve as overseers and regulators, not as participants. Of course, the huge size of today's governments proportional to GDP makes them a significant participant in many economies, and that's a reality that must also be taken into account.--Percy

No, that's when a trust pays out. Income to the trust is not income to the beneficiary. Income to the beneficiary is when the trust pays out. It's somewhat analogous to a 401K where you pay no taxes on the income from the money already in the 401K, the difference being that a trust's income is declared against the trust and taxes on that income are paid by the trust, not the beneficiary. I was trying to save you the trouble of thinking you had to reiterate what you said earlier. If I misunderstood you then just say so. If you just want to be a dick then piss off.--Percy

You may be seeing what you want to see. Look again at your graph: The rises and falls in medium household income correlate much better with top 5% income. Well, I guess I agree it contradicts what you define as the "key prediction of trickle down theory," but as I said earlier, you like to slice your definitions very thin and then choose those that favor your position.But I'll stick with the definition of trickle-down economics I'm familiar with and which also, I just learned, happens to agree with how Wikipedia defines it. There can be no doubt that trickle down happens. The rich make a lot of money and they spend a lot of money by ordering, say, yachts and cause boatbuilders to hire craftsmen, plumbers, electricians, etc. When they make less money they spend less money, and they cancel their yacht orders and cause boatbuilders to lay off craftsmen, plumbers, electricians, carpenters, etc.So obviously trickle-down happens, but does it work? I guess I don't know what that means. I have ventured my opinion of what people might mean when they ask, "Does trickle-down economics work," but have found little agreement here, so there seems little point in repeating it.--Percy

Around 2002-2003 they don't even go in the same direction, and the magnitude of the slopes are much more consistently proportional for top 5% income.But I'm afraid I have to keep coming back to the same point. Trickle down *does* happen. The more the rich make, the more any homogenous group makes, the more they spend in the aggregate. Straggler thinks his graph shows that trickle down doesn't happen, but obviously it does. There's no way it couldn't. It's not possible.So what does it mean to say that trickle-down economics works? This is where you get into tax policy. As Wikipedia says, "Proponents of these policies claim that if the top income earners are taxed less that they will invest more into the business infrastructure and equity markets, it will in turn lead to more goods at lower prices, and create more jobs for middle and lower class individuals." As I've been saying all along, it's a question of who can do the most good with the money, the people who's money it really is, or the people who want to tax it away.--Percy

Hi all!There are a few too many replies for me to respond to them all, so this single response will have to serve.I can see that the way I phrased the question rubbed a lot of people the wrong way. A more neutral way of asking the same question might be, "Would raising taxes on the rich harm or benefit the economy?" Straggler posted this graph in support of the position that it would benefit the economy: But what this graph actually shows is median household income rising and falling in synch with top 5% income. In the early 1980's the slope of the top 5% curve (both upward and downward) increases because the drop in the top marginal rate reduced the motivation for sheltering income, and increased the motivation for increasing income.But that only explains the graph. It doesn't answer the question, and I don't think the data on the graph is sufficient to answer it.--Percy

The risings and the fallings in median household income and top 5% income are in sync with each other. That means the risings and fallings happen at the same time, not that the lines are close together on the graph. US GDP per capita doesn't even move in the same direction around 2002-2003. Here's the chart again: In order for the chart to be evidence against a trickle down effect, which is how Straggler presented it and which was the point I was addressing, median household income would have to be largely unaffected by rises and falls in top 5% income, but that's not what the graph shows.What the graph does show is that since the Reagan tax cuts top 5% income has risen in rough tandem with US GDP per capita. There seemed to be a strong feeling in many of the replies that if the rich didn't make and keep so much money that the rest of us would be better off, but while related to the question of whether trickle-down economics works, it's a much more wide-open question.By the way, it's not a first derivative graph because it's showing percentage change from a fixed point in time. It's not a graph of the slope of the lines. For example, the median household income line, before being converted to a percentage, was in units of $/year. The first derivative would be Δ$/year. For example, the percentage figure for median household income in 2010 looks to be in the neighborhood of 20%. Obviously median household income did not rise 20% in 2010. All the graph is saying is that median household income was 20% higher in 2010 than in 1965, adjusted for inflation.--PercyEdited by Percy, : Typo.

Hi Crash,In the first quote in your message you left out the important part: Correlation doesn't mean things track together in roughly the same place on the graph. Lines that rise and fall together (meaning at the same time) are very likely correlated. Rises and falls of 20% on one line corresponding to rises and falls of 5% on the other line that happens consistently is a very, very strong correlation.If you plugged the data into a correlation analysis program it would give very high measures of correlation between the top 5% income line and both the GDP and median income lines. Whether any two lines happen to "track" close together on the actual visual presentation isn't much of a factor, except that maybe it stands out to humans.Cause and effect is much more difficult to establish.--Percy

Who cares? Well, if you want to correctly interpret the data then you should care. As I pointed out, around 2002-2003 GDP doesn't even move in the same direction as income.Visually eyeballing a graph to reach conclusions about correlation has got to be fairly error prone, and that's what we're all doing. Maybe I'm wrong, maybe you're wrong, maybe we're all wrong, we can't know the correlation for sure without the help of an analysis program. But you're not even considering one of the possible correlations because you mistakenly believe that lines have to track visually to be correlated.If it helps with your doubts concerning whether top 5% and median incomes are correlated, all the sine waves in this image are 100% correlated, including the one that's barely moving: Correlation is a measure of predictive power. In this case, if I know the value of a particular sine wave at any point in time then I can precisely calculate the values of all the other sine waves at that time.When I look at the income graph I see that whether top 5% income is rising or falling is very predictive of whether median income is rising or falling. For GDP, still pretty good, but not as good as top 5%.--Percy

Hi Crash,Maybe what you're really looking at is strength of the effect instead of strength of the correlation. Just going visually, it appears that the strength of the effect of changes in GDP is much stronger on top 5% income than on median household income. The rich benefit to a much greater degree than the average household from the effects of increasing GDP, but the average household still benefits. The correlation is not zero, and neither is the strength of the effect. The increasing income of the rich deriving from their efforts within the economy to either manufacture or sell or provide services is a significant contributor to GDP and *does* trickle down. It's right there in the graph.I can tell that many in this thread believe they have less because the rich have more, but this is the kind of "Kill Ivan's goat" thinking (referring back to the joke I quoted in Message 23) that hurts an economy. Taxing the rich more won't necessarily make things better for everyone else, and as I've already argued, the rich are very good at protecting themselves.I'm not just talking through my hat here. The top marginal rate in the US is 35% on income over $400,000, but Romney paid only 15% on income of $20 million. How does that happen?I don't know how many of the rich are paying only 15% on their income, but certainly any who fall into this category are not paying their fair share, and government should fix this, but increasing the top marginal tax rates isn't the answer. Closing loopholes is the answer. But as I've said before, the rich wield considerable political power in congress where loopholes are born, and I wouldn't be optimistic about a solution.--Percy

There's more than one way to ask a question. You naturally prefer your own phrasing, but the way I phrased it is not different in any meaningful way. It all boils down to the same fundamental issues. You're going to have to get used to the fact that people who aren't you aren't going to express things the way you do. In short, your graph is insufficient for drawing such a conclusion. What happened to earlier in the thread where the search was on for more data?--Percy

This gets back to the question I asked earlier: What does it mean to say that trickle-down economics works?Clearly trickle-down happens, but what we're debating is whether the government could take some of the money of the top 5% and use it to better economic advantage. A lot of our attention has focused on Straggler's graph. Claims that his graph settles the issue are greatly exaggerated. Sorry if my choice of words led you to think I was making the correlation/causation mistake. I still believe what I said in Message 115: "Cause and effect is much more difficult to establish." But it is right there in the graph. Median income is not a flat line, it just has smaller slopes than for top 5% income. How ironic! You begin with a denial that anyone here has ever said anything like they have less because the rich have more, then you make a comment exactly along these lines yourself: "The wealth of the rich actually impoverishes everyone else over time as they loan it out."You're exactly right about the long term capital gains tax being only 15% and therefore the likely explanation for Romney's low effective tax rate. But while of course I can't know this, my bet is that Romney has an effective tax rate of roughly 15% every year. How is he making most of his income come out as long term capital gains year after year? You don't think there's some special provisions in the tax code that allow him to funnel his income, huge proportions of which just have to be interest and dividends taxed at the top marginal rate, into investment vehicles that magically transform it into long term capital gains? It's the loopholes that are the problem, not the tax rates. Nobody gets everything they want, even the rich. What I was saying before is that the higher the marginal tax rates on income the higher the motivation to employ tax avoidance strategies. In the years before the Reagan tax cuts such strategies included not only trusts, but also many types of payment in kind that weren't taxed back then, such as a company car, an apartment in Manhattan, free use of the company jet, etc. And who knows what other avenues were employed, I'm not an expert on the history of tax shelters. In this era of a lower top marginal rate the motivation for tax avoidance is less and the rich are willing to expose more of their income to the tax code.What we as a people do not want to do is act against our own best interests because a graph just looks so convincing. It's like the shells on mountaintops for creationists: it just looks so convincing that a flood did it until you dig (literally) a little deeper.--Percy

I last said this in Message 50, quite a while back, and realized shortly thereafter that it would be more clear in this thread to say that trickle-down happens, and I've been saying it this way ever since. Why do you keep quoting from Message 50? Also notice that I said "trickle-down", not "trickle-down economics".So to say it again the way that should be less open to misinterpretation: "It isn't a question of whether trickle down happens or not. Of course it happens."I don't know the details of the economic situation in the UK, but your analysis is flawed. First, you don't say what you're comparing to. Doing nothing? Raising taxes? Increasing public spending? Lowering VAT? Some combination?Second, whether it works or not isn't whether you end up with "prosperity for all" or not. It's whether the outcome is better than it would have been had they taken the actions you preferred, whatever those might be, and that's a much tougher question to answer. It's one of the reasons economics is called the dismal science.--PercyEdited by Percy, : Typo.

As I explained earlier, top 5% income didn't actually begin a dramatic rise after the Reagan tax cuts. What began rising was the amount of their income they were willing to expose to the tax code. Lower marginal rates decreased the motivation for tax avoidance strategies. We haven't yet come to any consensus in this thread abou the criteria for measuring whether trickle-down economics works, but I personally am not at the moment in possession of any evidence that makes a strong case that trickle-down economics "works", whatever that means. I'm only claiming that no one here has presented any evidence that it doesn't work.--Percy

"The poor" is a fairly diverse group, cutting across multiple categories. Some poor work but have low incomes. Some poor are disabled and can't work to earn enough money or can't even work at all. Some poor are elderly. Some poor have too many children or live in a region too expensive for their income. Some poor have debts. Some poor have expensive medical issues. Some have legal issues.Cutting social services to that portion of the poor who require those services is counterproductive. Desperate circumstances breed a continuing cycle of desperate circumstances that cause crime, drug dependency, poverty, and a host of other social problems.But on the slip side (and there's always a flip side when it comes to government), once you define a set of qualifying criteria for government services you create motivation for meeting those criteria. In other words, once you begin providing government services the ranks of those receiving those services will only grow. I forget who the famous British advocate for "the dole" was, but once the second generation began hitting the dole he changed his mind.When it comes to government, never forget the law of unintended consequences. Many of the poor don't even work. Non-participants in the economy cannot benefit from an improving economy, regardless of whether rising or falling tax rates were the cause. Sacrificing social programs in the name of tax cuts would be very shortsighted. I hope that's not what's really happening in the UK and that it's just a claim that, because money is fungible, while not false is exactly true, either.--Percy