Trickle up, Trickle down, and Squeeze

I have written about this numerous times, but it still keeps raising its ugly head.  I am talking about the economic policy term called the “trickle down effect”.  This is a précis 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.  It has completely failed.  All that has occurred is the rich elite have been hoovering up the national income, and accumulating vastly greater swathes of wealth. And these countries’ economies are all near broke.

Second, there is a successful economic 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 the elite will employ less cleaners, pool boys, chauffeurs, nannies, party organisers etc - many of whom are university graduates in law, accounting, physics, but can't get jobs].

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].  A couple of months ago the Economist wrote “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 you pay the governments’ debts.  It is such sound and obvious good fiscal management, it should be done without thinking.

And it may come as a shock to many middle class it is you that is paying the piper.  Take Australia as an example. Due to bracket creep, over the next four years PAYG tax collections have risen from $140 billion per year, to $199 billion.  That is a 42% payroll tax increase, or 10% per annum.  And there are no tax cuts in sight, so they won’t be getting it back either.  This is broadly consistent with most [presently floundering] western economies.

The UK is another example, with its freeze on middle class public wages and adjustment on pensions announced in the Autumn Statement.

And unlike the Buffet Tax on the wealthy planned in the USA, this is paid by the so called middle class worker.  Let us call this effect the “middle class squeeze”. 

In Australia that tax rise “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 you have mums and dads in Australia running around saying “Don’t tax the big commodity companies, don’t tax carbon”.  Oh and Gina Rinehart Hancock, and Andrew Forrest of Fortescue Metals Group spent millions to stop those taxes as well.  [I am sure they won’t mind if I refer to them as elite earners, being billionaires and all]. Of course they don’t want a minerals tax.  Tax the working class instead. 

Has there ever been such a widespread delusion in the global population whereby the 99% work and vote against their own best interests?

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.