Friday, October 17, 2008

Investing in the Economy

In their endorsement of Obama, the LA Times writes:
On paper, McCain presents the type of economic program The Times has repeatedly backed: One that would ease the tax burden on business and other high earners most likely to invest in the economy and hire new workers.
I never understand this. Why is it that only rich people's money creates jobs and investment? Money is fungible. If you're middle-class -- or, frankly, any-class -- and you get a tax break, you're going to either (1) spend the money on, say, soap, which will increase soap demand and create jobs in the soap industry, (2) put it in savings, which will funnel though your bank into investment firms that invest in small and large businesses, or (3) pay off debt, which again puts more money in the hands of banks and credit bureaus, enabling them to either invest the money or loan it back out again to people starting companies, etc.

Am I missing something?

1 comment:

David said...

Two things that could have an effect

1) Under ideal assumptions, deadweight loss from excise taxation on goods is proportional to the square of tax.

Income taxes are a little different, but since rich people pay higher taxes, you can sometimes eliminate more deadweight loss from cutting taxes on rich people then poor people. (Sometimes... the math gets complicated)

2) From a neo-keynsian point of view, aggregate demand occasionally falls below social optimum because of stuff like menu costs.

From that point of view, you would want to give money to poor people, where money given has a much larger effect on aggregate demand then otherwise. (Because the poor are "liquidity-constrained", a nice way of seeing they desperately need every dollar they can get.)

There are some other complications, but those are the big ones that I can think of.