Reaganomics

Tackles the flawed assumption that wealthy people solely invest in companies that create jobs rather than a slew of exotic tax shelters and non-job creating wealth instruments like arbitrage.
Photo: Courtesy Ronald Reagan Library

After the spectacular failure of "Reaganomics" in the Eighties it's pretty surprising to see it resurface so prominently in Bush's economic policies. Commonly called supply-side economics or trickle-down theory, this theory basically states that if you give rich people even more money; they will spend/invest that money, thus spurring the economy and creating additional jobs. This sounds really simple and even makes sense when applied to lower and middle class families who actually do use the money to buy goods and services but there's a big flaw when applied to the very wealthiest people as outlined below.

I am not an economist. I have taken a grand total of two economics classes. However, anyone with any familiarity of common investment techniques can quickly spot the flaw in Reaganomics. As anyone with a rich or die-hard Republican friend knows, one of their key motives is capital preservation, or plainly stated, keeping as much of the money they make as possible. In black and white terms upper income people do pay a larger percentage of tax for personal income. However, this only applies to salaries. As everyone knows, rich people commonly make money in many different ways besides a straight salary. Take stocks for example. If held for the right amount of time, they are taxed at 20%. This is significantly lower than the 39% rich people would pay on ordinary income and 8-10% lower than what middle class people pay for the majority of their income. In fact, it's only 5% higher than the lowest tax rate applied to people living on poverty wages.

Another reason rich people pay fewer taxes percentage wise than a middle class person is the myriad legal tax loopholes. There are several common tax shelters used to shield money from being taxed. A common method is investing in a REIT (real estate investment trust), which passes on deprecation costs to its investors. Basically this is a tax write-off you can apply to any earnings, making it look like you earned less than you did. This is just one example; there are a thousand more. So as we see, rich people, much like corporations that incorporate in Caribbean tax havens like Bermuda, actually pay less tax than the common folk yet lobby constantly to pay even less.

Still, none of this is the core flaw in Reaganomics. The core flaw is that, for the most part, rich people that invest money do not actually create wealth. They do not create jobs. There are a slew of complex financial investments commonly invested in by the rich (in fact you cannot partake without a sizable minimum) that actually have no underlying value. Things like hedge funds or arbitrage. Not to get into the inner workings of each but a small explanation of each will show you how there is actually zero value creation, zero job creation. A typical hedge fund invests in something called derivatives. These are basically hedged bets against something happening like interest rates going up. So one person bets they will go up and one person bets they will go down. The winner gets the money. If you look closely you will see that nothing actually was created. There was no factory producing the interest rate change. There was no scientist working on a formula to raise it. Actually, the only two people involved were the money managers.

Arbitrage is much the same. This is basically exploiting minute differences in currency or stocks in one location versus another. So if one company's stock is listed at $16.21 on the New York Stock Exchange and that same company's stock is worth the equivalent of $16.18 on the Tokyo Stock Exchange then that difference is exploited on a grand scale. It takes a lot of money to make it worthwhile but that's exactly what these people have. Once again, there was no value created. This exchange existed in a vacuum. Even investing in stocks produces no real value. After an initial public offering (IPO) where a company sells ownership shares to the public in exchange for cash, the stock no longer benefits the actual company. The stock is traded back and forth but the underlying value creation only happened at the moment of the IPO. Once again a common investment tool used by the rich fails to create value for the economy.

The only real way to promote growth is through spending and capital investment. People spend money on products and the companies that make these products reinvest that money in capital like factories, property, computers etc. It's a well known fact that lower and middle class families spend most of the money they earn. This keeps the economy going. This provides jobs. It's a well known fact that rich people exploit tax loopholes and complicated financial investments that do not provide jobs, that do not create value. Therefore, if you really want to stimulate the economy the only real way is through tax cuts to the segments that actually spend the money on goods and services not the uber-rich and their valueless money-generating machine. Sad to say, when the government is for the rich, by the rich, you can be sure that we will continue to see more and more tax cuts like Bush's latest. America, where the rich get richer and the poor get poorer.

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