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A rising tide lifts all boats

The whole theory of “trickle-down economics” was roughly based on the adage that a “rising tide raises all boats”. In other words, if you let the rich make lots of money, that money will trickle down to everyone else.

But according to an amazing new study done by none other than the International Monetary Fund, they got it completely backwards. According to the comprehensive study “there is convincing evidence that lower net inequality is good economics, boosting growth and leading to longer-lasting periods of expansion.”

The study concludes that “redistributing wealth, largely through taxation, does not significantly impact growth unless the intervention is extreme.”

To translate this into language that even Republicans can understand, they offer proof that raising taxes on the rich does not hurt the economy or raise unemployment. In fact, the opposite is true if those taxes are used to lower income inequality. A vibrant middle class increases demand and stimulates the economy.

The stunning bottom line: Raising taxes on the rich actually does a better job of making the rich richer than letting them keep more of their income.

The reason this is true is that income inequality has a significant negative effect on economic growth. And while redistribution (transferring money from the rich to everyone else through taxes) has a tiny — almost statistically insignificant — negative effect, that is swamped by the boost provided by lowering income inequality.

It is a win-win situation. By raising taxes on the rich, everyone gets richer, even the already rich. Or, to stretch the tide analogy, the way to raise all boats is by raising the tide from below. In contrast, trickle down economics is like lifting the yachts in the air, and expecting all the other boats to follow. Not only does it not work, eventually the yachts will crash back into the water.

This agrees with a study I reported on a few years ago, which found that in countries with high income inequality, the rich also suffered. They had a shorter life expectancy and were less happy, compared to countries with smaller income inequality.

And you don’t even have to be some bleeding heart liberal to agree that we need to raise taxes on the rich. You just have to be smart enough to realize that raising taxes on the rich will stimulate the economy and lead to more consumers buying more products, which will lead to more profits for the rich.

After all, being rich is not a zero-sum game. And a rising tide will surely raise everyone’s boat, including the yachts.

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13 Comments

  1. ebdoug wrote:

    We learned that in the 50s and 60s in this country. Taxes on the rich were high, prosperity reigned.
    Buffet, you, my son all want their taxes raised to give more prosperity to this country.
    And the Republican House shelved tax reform.

    Thursday, February 27, 2014 at 5:17 am | Permalink
  2. il-08 wrote:

    And in the 90′s under Clinton it was true. How many proofs do they need to the theories?

    Thursday, February 27, 2014 at 7:59 am | Permalink
  3. Jon wrote:

    What manufacturing business, whose plan is to make a profit, will invest in human or other resources with which to produce goods for which there is no demand?

    Likewise, what seller or reseller of goods, whose plan is to make a profit, will invest in human or other resources in order to buy or sell goods for which there is no demand?

    Giving money to people who already do not spend every penny they earn is the same as putting money in the bank. Where it earns what interest rate in a stagnant economy such as ours? But stimulate demand by providing funds to people who can afford to do nothing BUT spend every dime they have… and suddenly there is: DEMAND for goods!

    Duh.

    Friday, February 28, 2014 at 2:22 pm | Permalink
  4. Mike wrote:

    exactly, Duh. Government is the spoon, without it, the top gets all the fat, and bottom gets burnt.

    Friday, February 28, 2014 at 6:50 pm | Permalink
  5. PatriotSGT wrote:

    2 thoughts on this.

    Give a man a fish and he eats for a day,
    teach a man to fish and he eats for a lifetime.

    From my experience, as long as you keep giving him a fish every day, he will have no incentive to take the initiative to learn to fish.

    2nd thing
    I have heard this argument that there is no opportunity, yet I have not been provided any example of such lack of opportunity.

    From my experience, there will always be have’s and have not’s. As a young man growing up in the 60′s and 70′s I was taught by my parents who were from the greatest generation and spent their childhoods and teen years during the great depression that the most important thing was getting a job, any job. That took precedence over education which was secondary. My first job began at age 10, delivering news papers after school. My older brother had started that way and worked his way up to collection boy and earned more money then me ($3 week). So I quit delivering papers and used the money I had saved (another pillar my parents taught me)to buy a lawn mower. I was now a self employed grounds keeper or back then just a kid who cut grass and I did that from age 12 until I turned 16. I then went to work for minimum wage at a restaurant and was grateful for the opportunity to have a “real” job. My 1st raise came after 4 months, 15 cents I believe it was and that was the last time I ever earned minimum wage. I worked hard and applied myself at any task and also saved my money and bought a 13 year old car. Leading up to my HS graduation I applied for a manager trainee position with another restaurant chain and was accepted. I began my management career the morning after graduating HS. I worked even harder and just before my 19th Bday I was made the youngest store manager in the companies history. A year later the restaurant manager I worked for in HS came into my store, saw what I did and made me an offer to come back to them as an assistant for a pay raise (they were much busier) which I accepted.

    This is how I worked all the time and moved up and out and in my late 20′s I changed direction completely trying my hand as a stock broker (i’m not a salesman though) and then found the Army. They taught me there is nothing I cannot accomplish and I thrived there, moving up quickly. I learned to take calculated risks when there was opportunity and began to start and finish my college as a working parent. I got books and read how to fix and remodel the older home we lived in and we drove the same cheap cars for 10 years and used the money we saved from no car payments to pay off my mortgage faster. I then used that equity to buy and investment property and became a landlord. I remodeled it myself to save money. I repeated that process 4 more times. I also found time to play ball with my sons and my wife made them study and we told them college was not an option. My oldest son got almost a full scholarship to Johns Hopkins and is midway through a degree in Bio-Medical Engineering, his little brother wants to be a doctor.

    People look at me now and they see a 50 something guy in a million dollar house with 5 other houses who’s children go to private school or college, but they don’t see or care how he got there, only what he has now that someone else doesn’t. They don’t see the guy who worked 2 jobs, went to college, rehab’d houses and saved every penny and invested smartly in the stock market. They don’t see the guy who only took his wife or family out to eat 3-4 times a year for ten years, they only see the guy that took his wife on a 20 year anniversary trip for 10 days to Paris and Italy, and they are jealous.

    People see us as we are now not where we came from. I’m not naïve enough to think that everyone had to work as hard as me and I hope my children don’t, but it did not stop me from achieving. There is opportunity everywhere out there for those that stop looking at the door that’s closed and start looking at the open ones. Sure there are people through no fault of their own who will always need our help and I am more then willing to help. But there are way too many people out there perfectly capable of helping themselves, but they are waiting for the guy to give them the fish instead of getting a book and teaching themselves how. As long as there are a steady supply of fish some people will never learn to fish for themselves.

    In my parents time and mine, a span of 90 years, there has been high and low income inequality, prosperity and depression and it has never affected me or my families opportunity.

    Friday, February 28, 2014 at 8:07 pm | Permalink
  6. David Freeman wrote:

    PSgt, I am sincerely impressed.

    Your parents taught you to fish. My parents taught me to fish, perhaps not as well as you but well enough.

    Whose going to teach all those folks who don’t have parents like ours how to fish so they can compete fairly with us?

    In my opinion, the current extreme income inequality is not a result of the few working harder (though many do). I believe extreme income inequality is the result of extreme opportunity inequality. One area of opportunity inequality is the bad luck of not having your parents or mine. Giving poor kids a school lunch and WIC funds to buy shoes is a pretty scrawny fish to make up that difference.

    You really do have my admiration and I agree that many wealthy people worked hard like us but I also believe it is very naive to assume that the working poor aren’t doing better because our social safety net is too generous.

    Saturday, March 1, 2014 at 12:23 am | Permalink
  7. ebdoug wrote:

    PSgt, I think you would enjoy reading the book about Warren Buffet called “Snowball” His start was like yours, also middle class parents.
    I did not have the “pull yourself up by the bootstraps” bit that you did. But with two alcoholic parents, I wanted not to be dependent on them. My first job was clipping the poodles of the friends of my parents. $5 a piece which was a lot. I did bath them in my big bath tub and blow dry them.
    At twelve I started baby sitting for at .50 an hour for one .65 for two or more. During college I worked in the nursery at the hospital which was my first introduction to prejudice. My school was all white. I was the only white in the staff and was to be called Miss while they were called by their first name. I said “no, way unless dragon lady is around.”
    Because I refused to go to boarding school and refused to become a debutante “Plan the party, but I won’t be there,” I wasn’t given a car on graduation. I wasn’t given a house like one of my siblings. Other two got one from their in-laws.
    In 1973, I moved to one room in a barn on 40 acres with my two small sons. I started working on another barn and did that until 1984. Like you, I learned to build, unlike you I didn’t have a house to tear apart, I could start from scratch with the studs. In 1984, we went on vacation leaving the house in the hands of a 13 year old who, apparently, couldn’t read. He burned the house down. Lots of insurance money.

    I had to stay close as I had 50 ewes in lamb. So I bought a sterling homex piece of junk house down the road with four acres. I started building again. With the insurance money I got the studding for a new additions so I have a five bedroom, two full and two half baths. Location is everything. Here the 2600 sq ft goes for $150,000, not what you have.
    I after my new car bit the dust, I started buying junkers cash in the 70s and kept saving until I could buy new cars cash. I’m on my third new car now 2006 with 26,000 miles (Amazon and the Internet take care of my needs)

    Somehow I inspired my sons because each has been industrious in his life. I hope you are able to pass that along to your offspring.

    Also in my time doing taxes, I’ve met many industrious people who seem to practice barter.

    And in my time as a nurse, I’ve met many who can’t work mentally or physically. Those we have to care for.

    Obama is right back where he started in Chicago with the job training for the young blacks. Go for it, bring the jobs back from China so these people have self worth in a job.

    Saturday, March 1, 2014 at 6:47 am | Permalink
  8. ebdoug wrote:

    Oh, and my mortgage from 1973 to 1983 was $89.03 a month. Since then all has been cash.

    Saturday, March 1, 2014 at 6:50 am | Permalink
  9. jerry wrote:

    PSGT:

    Teaching to fish is fine–if there are fish to be caught. Eventually you will run out of fish if that concept is followed. So what is the backup plan to “There are no more fish”?

    Saturday, March 1, 2014 at 11:10 am | Permalink
  10. PatriotSGT wrote:

    David and Ebdoug, thank you!

    Ebdoug – you are a unique example of bucking the trend, sticking to your principles and overcoming whatever hardship gets thrown your way. Outstanding!

    David – The teaching should start with our current President, he’s a great example of overcoming and excelling. He should team up with Dr Ben Carson although they see things differently they are cut from the same cloth.
    On your statements ” believe extreme income inequality is the result of extreme opportunity inequality. One area of opportunity inequality is the bad luck of not having your parents or mine. Giving poor kids a school lunch and WIC funds to buy shoes is a pretty scrawny fish to make up that difference” that is the point I was trying to make.
    We cannot continue to just give fish. It will never be enough or change anything. We must start a revolution to hold parents accountable, to stop rewarding poor decision making and to set on a pedestal those examples of hard work that pays off. Our leaders including our President need to get out in front and tell those making bad decisions to stop, call them out pin responsibility on the problem. Tell them to stop being selfish and do something for someone else, mainly their children.

    Here are examples of what we should not reward. I had a tenant who had 5 children by 3 different men none of whom wanted to stay in her or her children’s life. We could lock them up, but she is as much to blame as they and that wouldn’t help the children. If you have one child you can’t afford to take care of you should not be rewarded to have more. She told me she kept having more because she got more money, but it didn’t seem to dawn on her she would also have to spend more. She was getting food stamps, Medicaid, a monthly check and wanted to know if I would consider converting the house to section 8 so the state could pay her housing. No where in the conversation did personal responsibility seem to be a part. Just how to get more money from the gov’t. Another case, I went to the local 7-11 on my way to work the other day for a coffee and there was a man in front of me. He used an EBT card, which is how food stamps are delivered now. He got a sandwich and drink and left. When I went outside to get in my 2012 Fusion he was in the one next to me. It was a 2011 Mercedes S500, which today is worth 50k. So where is the gov’t accountability and care of our tax dollars? 47 million people getting some level of food stamps, come on, where’s the accountability in that. Lets just give away more fish and keep them on the government payroll.

    Jerry, when we run out of fish everyone will be in trouble even the 1%ers.

    We need to stop rewarding poor choices as step one to getting people moving toward self sustainment. Anybody but maybe the disabled or mentally ill can do it. There is opportunity everywhere. I challenge anyone to give me 1 example of some able bodied, sound minded person who cannot find opportunity, just one. When you do I will lay out a plan for them to find and take advantage of the abundant opportunity that exists. My guess though is they won’t want to take the hard way, follow my advice, but would just rather wait for the G-man to come along with the fish.

    Saturday, March 1, 2014 at 5:48 pm | Permalink
  11. Iron Knee wrote:

    Interesting discussion going on in here while I’ve been busy!

    I must say that I agree with the arguments on both sides on this one, but I may not agree with the conclusions. The right way to decrease income inequality is not to hand out fish to the poor. The right way is to first make it possible for people to fish (opportunity) and secondly to protect and help the fish so there are plenty for everyone (infrastructure). I think Obama brilliantly did both of these things in his stimulus package, which used its funds to lower taxes for the middle class, helped students pay their student loans, and built infrastructure (roads, etc). I also think health insurance reform (Obamacare) increases opportunity greatly and also helps keep people healthy by giving everyone access to health care.

    Sunday, March 2, 2014 at 10:29 am | Permalink
  12. ebdoug wrote:

    I ran the WIC program in my county when I was a public health nurse. There are no funds. Just vouchers to buy food for pregnant and nursing mothers (and formula) and for children four and under. The foods the can buy are very limited: milk, cereal, cheese. Starting next year vegetables are going to be added. The only way they can cheat is to bring the formula back, get a refund and buy beer. No shoes.

    Oh, and having followed Obama since 2006, I just love the way he gets what he wants that is good for the people of this country.

    Sunday, March 2, 2014 at 4:46 pm | Permalink
  13. Z wrote:

    Can we all say “non sequitur” together? The point is that cutting taxes on the guy with more fish than he can eat isn’t going to get him to invest in new fishing boats. On the other hand, tax him on his excess fish and use that to, say, give loans to people so they can go buy their own fishing boats and bait shops and fish restaurants and everyone is better off. And, ironically, the rich guy also ends up richer.

    Monday, March 3, 2014 at 8:37 pm | Permalink