October 2011
This month we are going to look at an economic policy term called the “trickle down effect”. This is a precis for supply side economics, which says in simple terms, “if we lower the tax for the high earning elites, their added expenditure will help the whole economy and job creation”.
It will trickle down, so to speak.
This tax cut policy for high earners has been applied extensively over the last few decades to many of the western economies. And there is many things wrong with this theory. First of all, it has now proven to be irrevocably wrong. All that has occurred is the rich elite have been hoovering up the national income and accumulating vastly greater swathes of wealth. I covered this in a previous KVV. And these countries economies are all near broke.
Second, there is a proven effect, that if you change taxes at the other end, that is, raising the tax free threshold on all incomes, it is proven that those at the lower end [I dislike calling it that, but means must], the multiplier effect on the economy is 1.75 times. That is for every extra dollar a person on a low income gets, the economic impact is $1.75. This is because those at the lower income scale, are more likely to spend their additional money from tax savings and thus help the economy.
You read it here first; we are going to name that the “trickle up effect”.
Yet every time a soft period in an economy comes around, there would be the pollies and lobbyists calling for cuts in taxes for high income earners to create the trickle down effect. Think Tea Party in America. They are presently arguing that increasing taxes on the rich will undermine job creation. [I assume that they will employ less cleaners, pool boys, chauffeurs, nannies, party organisers etc].
Now lets look at this another way.
All over the world broke governments are intending to raise taxes and especially on the wealthy or even the not so wealthy, such as landowners [Greece]. As I write this I found the Economist writing “The horns have sounded and the hounds are baying. across the developed world the hunt for more taxes from the wealthy is on.”´
This is exactly what they are meant to be doing as this crisis unfolds. Are you listening USA?? This is how they pay the governments’ debts.
And it may come as a shock to you here in Oz, but you too, although I am grateful to Greg Smith quoted in the SMH last month for the details. Due to bracket creep, over the next four years PAYG tax collections are rising from $140 billion per year, to 199 billion. That is a 42% increase, or 10% per annum. And there are no tax cuts in sight, so you won’t be getting it back either.
And unlike the Buffet Tax on the wealthy planned in the USA, this is paid by you, the so called middle class worker. Let us call this effect the “middle class squeeze”.
As Greg said, “This dwarfs the $8 billion minerals tax, this dwarfs the $8 billion carbon tax. Personal income tax collections will climb from 9.8% to 11.2% of GDP in four years.” And yet there we have all the mums and dads funning around saying “Don’t tax the big commodity companies, don’t tax the carbon”. Oh and Gina Rinehart Hancock, and Andrew Forrest of Fortescue Metals Group. [I am sure they won’t mind if I refer to them as elite earners]. Of course they don’t want a minerals tax.
Tax the working class instead.
And in case you are still not sure what is meant by the “trickle down effect” it has been described this way: “If you feed the horse enough oats, some will pass through to the road for the sparrows." That is, if you give the rich enough money through tax cuts, maybe you will get some in the economy.
Good luck with that.
So trickle down, trickle up, and middle class squeeze. We are lucky we do not have the former, lucky we don’t need the central effect, and we are getting the latter.
Disclaimer: This is not advice. I am not licensed to give advice of any kind. Advice can be understood as individual advice to a person about their particular financial circumstances, or general advice about investing. So you cannot, and should not, rely on anything written here. You should only rely on advice from a licensed advisor. If this article has sparked interest please seek out a licensed advisor.