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Post details: Tax Cuts and Bruises

Tax Cuts and Bruises

When judging presidents and wine, a little perspective can work miracles. With the benefit of hindsight, the variety that aspires to be a "decider" often ends up being merely "de Cider".

We inherited a treasure trove of head-splitting hangovers from the President Dubya. Two wars mired in sand, economy damaged by the wrecking ball of "ownership society", diminished respect and scattered allegiances of the developed world, greatly empowered oil cartels, and above all the controversial tax cuts. A cursory glance at any recent income distribution stats clearly reveals the direction of the prevailing windfall. Most of it landed at the high end of the earning spectrum.

As the midterm pre-election season kicks into high gear, the attempts to derail the gravy train for the affluent campaign donors promises to heat up a simmering hot sauce. While some in Washington are genuinely trying to find that delicate balance between not choking the ailing businesses and not snubbing out the remaining vestiges of fiscal sanity, others are pushing for the wall to wall extension so that recovery can fully recover from its deepening malaise. But are the top earners still the economic engine they once used to be? Do they really allocate capital in the best interest of the whole system?

From what I can see, the well-to-do have already all they need, so whatever extra chips are tossed their way will probably end up in bonds, gold, foreign currencies and whatever risky derivatives they will dare to tinker with. That won't create many jobs except maybe a few in the banking sector. Instead of waiting for that money to slowly trickle down into the real world, why not cut out the middleman and give it directly to the less opulent classes, who will spend the money almost immediately on actual goods and services, providing the necessary jolt to the manufacturing sector that had been balancing on the verge of cardiac arrest for the past two years. After all, a true organic expansion should be driven by an excess demand from below, rather by an excess supply from above. Henry Ford knew that.

And how does this fabled trickle-down mechanism work anyway? Has it been documented that $1,000 in the pocket of a Manhattan landlord produces more employment opportunities than $1,000 in the pocket of a Louisiana fisherman? What makes us believe that a hedge fund manager raking in billions a year will feel an irresistible urge to set up a hairdressing boutique in the basement of his McMansion in order to give work to a few soccer Moms? OK, that was a bit tongue in the cheek, but you get the point. The "trickle down" philosophy sounds noble on the surface, but in practice it is as iffy and untested as fighting the energy crisis with massive deployment of unicorn wagons.

Human folly knows no bounds. Whose idea was it that investment wizards who take insane risks (and get insane returns because should something go wrong, the American taxpayer has their back) need to be further encouraged in reckless behavior? What genius figured out that we can create more jobs by providing financial incentives to top managers who derive their profits primarily from outsourcing once vibrant industries to cheap Asian labor and then selling their products in lucrative western markets?

This whole "trickle down" idea sounds a lot like a schoolyard bully saying "give me your new toys, I'll play with them and only when I am done can you have them back". The bloated disciples of Mammon just want to knead your dough first. How selfless of them! And it gets even more perverse when you realize that our national piggy bank is virtually empty. In case you just came back from Pluto, the Treasury has been running record deficits for the past two years, sending the federal debt into stratosphere. But our plutocracy won't hear any of that. They want us to borrow left and right just so they can put an "I saved the economy" stern sticker on their third jumbo yacht.

There is one more thing which the tricklenomists won't probably tell you. Those who buy a product with their ill-conceived tax returns receive its full value. The goods are theirs, free and clear. On the other hand, the trickle recipients, the ones who make the product, only get to keep the margin - they still have to cover the production and labor costs. At the end, they are left with a meager profit and hard callouses on their hands. In effect, this political charade will result in a tax cut for the well connected elite and a tax bruise for the working Joe. As usual.


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