One would be forgiven for believing that all good economic outcomes must flow down from the wealthy to the masses, given how much of our tax code has been designed for such an effect. Capital gains tax rates, dividend tax rates, and the carried interest loophole are just a few of the ways our federal tax system has been tilted to enable the wealthy to accumulate ever more wealth by retaining a high percentage of their financial earnings after taxes. And politicians keep dishing out the favors.
The economic argument that is presented to justify this approach is based on the mistaken belief that if we allow the rich to keep more of their income they will invest it in creating more private sector jobs. In other words, by granting more tax breaks (and often favorable treatment under the law such as removing, weakening or simply not enforcing regulations that are in the public interest), the belief has been that the wealthy would use their higher after-tax earnings and expanded access to national resources to invest in new ventures and businesses that will employ more people. Now of course it is true that some of this untaxed income does end up in job-creating investments, but a large percentage is simply saved or used to purchase existing assets as investments and does not flow back into the economy in ways that increase sales and employment.
Unfortunately, this approach to economic policy has taken root in both of our major political parties. The decades-long pattern of tax cuts, deregulation, and lax financial oversight has continued irrespective of who holds office. Rather than creating a bigger economic pie for all, these policies have resulted in the extreme concentration of wealth at the top in levels not seen since before the Great Depression, while the wages of the typical worker have been losing ground to inflation for a generation or more. Workers are getting less and less of the pie. It doesn’t take an economist to realize that this can’t go on forever without serious consequences.
Capitalism can and does take many different forms since it is a product of the rules we design and how we enforce them, along with the culture and ethic of the time. It is deeply troubling that the version we have been shaping via tax policy and legislative action for the past several decades is highly self-destructive since it is parasitic to the primary driver of economic growth: broadly distributed incomes (not to mention the negative impacts on a nation’s democratic institutions and shared natural resources that typically accompany such concentration of financial power).
The good news is that since markets are made, they can also be re-made. We have gotten into this situation by changing the rules and we can get out of it the same way. But first we must gain a clear understanding of what makes modern economies work well so we implement the right kinds of changes.
Under capitalism, the economy grows with sales, not savings. This simply means that it is the general spending levels in the economy that matter most for investment and job creation, not the amount of cash that corporations and billionaires have accumulated. Businesses hire only the number of people they think they need to produce the output they think they can sell. And businesses build up capacity only when they can forecast an increase in sales sufficient to cover debt service and obtain a return on their equity.
Sales drive capitalism, and sales come from incomes being spent, not profits saved. This is why we see corporations holding onto cash or buying back their own stock during recessions instead of investing in new growth.
We’ve been focused entirely on the wrong end of the problem. Tax cuts for the top do very little for the economy, and when allowed to continue for decades, often lead to extreme levels of wealth disparity and unhealthy shifts in power relations: dynamics we observe all too often today.
It is imperative that we restore incomes and jobs from the bottom up if we are to return to rising real wages for the majority of working families. The responsibility for this lies both with policymakers and business leadership. Fiscal policy (how we tax and where we target spending) must play an important role in maintaining a robust economy, in addition to a more responsible corporate culture that takes a long term view of prosperity for all stakeholders.
For policymakers, it isn’t that federal tax cuts are never beneficial to the economy. Rather, it is that we are giving them to the wrong people. Rather than lowering taxes on hedge fund profits and real estate investments, we should be evaluating cuts to payroll taxes for the average wage earner. Such changes would result in more spending in the economy, creating more demand for goods and services. More sales for businesses = more jobs. Entrepreneurs rapidly respond to increased market demand for goods and services with new products and services. This is the kind of organic bottom-up, sales-led growth that sustainable and balanced economies require. Instead we create ever larger pools of managed funds chasing returns in assets.
Fiscal policy should also recognize that an increase in minimum wages and raising incomes for our senior citizens in retirement will spur more sales and healthy economic growth than a similar increase in take-home pay for the wealthy. And as the issuer of the currency the federal government needs to take seriously its role in supporting domestic employment. In addition to tax policy and spending on infrastructure modernization and other programs serving the common good, it could also effectively end unemployment by paying for transition employment for anyone between jobs, thereby also stabilizing private sector employment levels.
Jobs don’t come from rich people. When we see the big picture, it becomes clear that capitalism runs on sales, not savings. We need growing incomes and spending across the entire population to create more jobs, not accumulation of cash hoards for a few.
We are asking that our politicians to stop pandering to millionaires, and focus on what will help our economy grow. Raising minimum wages, lowering taxes on wage earners, and ending tax favoritism for unearned income is a good place to start. There is so much more we can do to create a far more prosperous economy and enriched society.
Geoff Coventry is a founding member and owner of Tradewind Energy, Inc. Prior to this position, Geoff was a co-founder and vice president of NetSales, Inc. Additional postings by Geoff can be found on his blog "It's The People's Money."