[The following is an argument I made in email with a friend. It's about whether it is just to "redistribute the wealth"; whether capitalism eventually shakes out good outcomes through the invisible hand of the market; and whether we think that spending money on the poor will actually achieve anything.]
I'll try to explain where I think Bush's economics went wrong, and why we shouldn't trust our current political and economic system to correctly determine winners and losers in the economy.
Trickle-down economics really doesn't work. Bush blew the doors off upper class tax rates and said many times that those tax cuts would pay for themselves. I think it is by now universally acknowledged that after eight years of such policies, the middle class did not see the benefit of economic stimulus at the top. The tax cuts did not live up to the hype.
There are a lot of reasons this is true. One that I think explains a lot is the marginal value of income. When people are poor, their money goes to necessities. Losing a hundred dollars can have serious effects on their weekly budget. Their quality of life diminishes a lot if a bill has to be late, or they can't pay for medical care when they need it or a hundred other things. Being poor or even middle class in America is a constant balancing act. Gaining a hundred dollars can have a real positive impact on their budget for the same reasons.
On the other hand, when people are rich, like a two hundred fifty thousand dollars a year rich, for example, they're taking home on the extreme end of conservatively, ten thousand dollars a month in net income after taxes. Losing a hundred dollars is not a blip on the radar of these people. Their standard of living does not change in any meaningful way. Gaining a hundred dollars is the same.
What's going on here is that the millionaire's last dollar is worth much less to the millionaire than the poor person's last dollar. It is discounted by the fact that around dollar $500000, or earlier, money became no object. So when we say that rich people pay the vast majority of taxes in a dollar amount, we should realize that even though they are paying much more as a percentage of their income than poor people are, they are paying out of the cheap end of their cash. The widow's mite story in the Gospels is still true today. [Ed. see here]
In the United States, the situation is even further off the deep end than that. Warren Buffett, the world's richest man, has a smaller tax footprint than his janitor, because of the way we tax income, payroll, and capital gains. He said in an interview two months ago:
"In my office, I have 18 or so people there, and I ask them to compute line 63, which is their tax, and then add payroll taxes, and compare it to line 43, which is their taxable income. And these people who make anywhere from $50,000 to $750,000 a year ... and the lowest person in the office pays a higher rate than I do. I paid 17.7 percent last year, counting payroll taxes. ... The (employees) average was twice mine. ... Those fellows say they fix up companies and they get paid for doing that. On balance, they're paying a 15 percent tax rate on that and no payroll taxes, and somebody that fixes up the restroom is paying 15.3 percent in payroll taxes, just to start with. ... [The janitor] pays a higher tax rate than people who fix up companies (being paid) hundreds of millions of dollars annually in income."
This is totally upside down and unjust, and it's a direct result of our political/economic system being flawed.
Our system is set up so that rich, powerful special interests are overrepresented in legislation and tax policy. They pass their policies, like the bankruptcy bill a couple of years ago, that increase the tail end of their profits and incomes at the expense of poor and middle class consumers who can't pay their debts any more. They pass their upper-class tax cuts, they pass Medicare Part D with massive giveaways to drug companies, they pass their Wall Street bailouts and buy nonvoting shares of failing companies, they give no-bid defense contracts to wasteful companies.
And then they call people socialists for daring to suggest that their casino gambling on derivatives of derivatives of insurance on unsafe mortgages should be regulated, and that after the world economy collapses.
If our politics and capitalism were a just system, we could lie back and let the system work itself out. We could trust that the just rise and the unjust sink. But by almost any statistic you care to name, be it income gaps, wages, consumer buying power, bankruptcy and foreclosure rates, overall taxes as a percentage of income, or health care costs, and the list is pretty endless, our politics are lifting the rich on the backs of the poor.
So yes, measures that take from the discounted end of the wealth of rich people and pay it to the valuable end of the wealth of poor people, I see as corrective action pushing back against an unfortunately corrupt machine. I don't see the harm in taking an extra $5000 a year from someone who makes $250000 a year.
If you believe that we're supposed to sink or swim on our own, I can see why you would disagree. But I think the machine is out of control, the pendulum has swung way too far, and people who profit from imperfect systems should give back to those who don't.
As far as putting more cash into the hands of poor people (or spending it on services, like health care and education for the poor), I would rather give a few of the wrong people more money than deny it to all of them. It is the same kind of optimism that lies behind innocent until proven guilty: letting several guilty people go free lest one innocent should be punished. We should apply the same rigor to making sure that not one poor person should be disadvantaged by our systems, even if it means getting taken advantage of a little.