Reply #25: Others have ably answered your questions in my absence [View All]

But I would like to address an assumption that underlies your questions as well. Part and parcel of right-wing efforts to sell supply-side economics, which this kind of tax "reform" is akin to, is the notion that saved/invested money creates jobs, grows the economy, etc., and therefore lowering taxes on the rich helps the poor indirectly.

However, this argument relies on some slippery usage of the concepts of money, savings, and investment. Most "investment" involves the buying and selling of pre-existing assets in a secondary market. This is not the same as investment in business production activities. Supply-siders would have you believe that whenever capital is accumulated, hearty entrepreneurs turn around and use that hard-earned capital to open businesses, create new technologies, and pay other hard-working Americans wages. In fact, money for such expenses in preexisting businesses is generally subtracted from revenues BEFORE taxable income is calculated, so tax rates are irrelevant and external funds are not involved unless revenues are lacking (in which case the business model might be presumed to have questionable merit, but that is a separate argument).

When external funds are needed, as for opening a new business, the money is borrowed from somewhere. Here the myth of the savings-investment identity comes into play. In neo-classical economics, all borrowing must be done against a counter-party who has saved those funds, and the interest rate is the premium paid to someone for the use of their savings (which presumably they would themselves invest otherwise). But this presumes a fixed money supply, whereas all modern economies operate on inflating money supplies. Through the magic of fractional reserve banking (and a thorough explanation of this process can be found in any introductory Macroeconomics textbook, as well as many places on the web -- try http://en.wikipedia.org/wiki/Fractional_reserve_banking">Wikipedia for starters), banks are able to lend out much more money than has been deposited by hard-working savers. In fact, through manipulation of reserve requirements, the Federal Reserve could theoretically allow banks to lend freely with NO depositors, although I can only imagine the chaos this would cause.

Lastly, because of the huge amounts of money circulating on the secondary markets, I would venture to argue that the vast holdings of the wealthy only retain their value as long as they stay on the secondary markets. If all the money currently "invested" in the stock market was to make its way back to the real economy, it would cause massive price inflation, as much more money chased after a relatively stable pool of goods. There is approximately $100 trillion invested in global stock and bond markets (again per http://en.wikipedia.org/wiki/Stock_market">Wikipedia), while global GDP is only about http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29">$66 trillion. This is a ticking time bomb overhanging the entire economy.

So, in summary:
1) Almost all increases in earnings by the very wealthy will be reinvested in securities and other secondary markets.
2) The money "invested" in such markets is not needed for conventional business activities.
3) If this money ever found its way back into the real economy, it would cause severe inflation and crowd out other activities that were previously productive.

I'm really not seeing any benefit to society from reducing tax burdens on the very wealthy...