Supply-side economics dictates that if tax for the rich is reduced, the rich will create expand the economy by investing in new businesses. The expansion, in turn, increases the amount of people that can pay taxes to the extent that government deficits actually shrinks because the amount of people paying tax is higher, even though the tax is paid on a smaller rate.
This theory is based on Say’s Law, which said that additional production of goods requires additional spending, and this spending increases the money of other people that can be used to buy your goods. What are the fallacies of this theory?
1. People who make goods have an incentive to sell them in a profit, which means that the people getting money from the producer’s production spending isn’t guaranteed to always be able to buy his products.
2. Most of the time production of new goods is done under credit (you borrow money). This further enhances the logic from point 1 since the money producer spent on production has to be returned in higher rates.
3. In current day an age the biggest proportion of production cost is “fixed costs” (the cost you’ll have to pay regardless of how many goods you produce, ex: factory building rent, etc.) and not “marginal cost” (the cost paid higher with more goods produced, ex: raw material). This means that at best additional money you have isn’t going to increase production significantly.
If theoretical reasoning isn’t convincing enough, let’s take a look at simple logic: If supply-side economics is true, than massive amount of money will not sit around on corporations and rich people’s bank account doing nothing, but it did. This is further proven by the tax cuts done by Bush in 2001 and 2003 that was not used to create new jobs, but rather, used to increase the price of assets significantly that the majority of people can’t afford it.
In order for us to actually stimulate demand for goods, more money has to come to those that has the highest tendency to consume. And it is the middle and poor class who tends to spend a bigger *percentage* of their income than the rich.