Thursday, April 14, 2011

Can you do math?

The idea that the Bush tax cuts are the reason of the deficit is just wrong. Allow me to demonstrate.
The math
How annoying the facts get in the way. The CBO (Congressional Budget Office) estimated that extending the tax cuts would cost 2.8 trillion dollars for extending them through to 2017 (from 2007). But these are the cuts for everyone. The "rich" bracket tax cuts will cost about 700 billion for the ten years. That's 70 billion per year. But yes, that 70 billion will magically solve the 1,480 billion dollar deficit (this is just an estimate; imagine the actual deficit). So that would only leave 1,410 billion dollar deficit. (As a tangent, the richest people in the US no longer have enough total combined assets to pay off the deficit for one year.)
Idle money
If you think that the money could be better spent helping small businesses, you don't know how banks work. When a rich person (or any person) has money, they don't just put in under a mattress or in a safe. That would lose money (because of inflation) at a rate between 3 and 5 percent. So they seek elsewhere to put it. One option is to invest it in the stock market. The upside is that one can make significant increases, often out-pacing inflation. The downside is that one stands to lose money (called risk), and it is not easy to pull small amounts of money out from the market (one needs to find a buyer). One could also invest it in bonds, but the risk of loss is traded for lower returns. The last option (leaving out investments in hard commodities) is to place one's holdings in a bank, which will pay moderate rates for very low risk.
But the bank doesn't make money by paying you interest, and holding on to your cash. They loan it out, or invest in (which is also like loaning it). This money does not sit idle in a bank vault, collecting dust, waiting to be withdrawn. It gets re-invested, helping those small businesses, either by buying stocks in the public ones or giving loans to the private ones.
Bar stool economics
I could explain what this is here, or I could just link to a video. As explained in the video, the rich already pay most of the taxes, and it is logical that a tax cut for the rich will end up being a larger dollar value, because it is of a larger amount.
I hope I have offered up a convincing case to at least end the rich bashing for a few days. The idea that it is the rich that are bringing down the US is flawed to its core. In my opinion, it is overbearing government, supported by both big businesses and big unions, that is killing the country. If it were simply easier to start a business, it would be easier to become wealthy, and then the divide would be lessened, allowing good people to rise to the top, and not just those who were there first (who are being unwittingly entrenched by the well-meaning but misguided regulators).

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