To Be Perfectly Clear – Part 1

(Return to the Contents Topics page.) 

          Some friends tell me they turn off at the mention of the word “economics” and fear they are getting into something a bit too heavy.  Okay, I hear you:  It’s really not that bad, so I’m going to tell the entire story of the destructive beast right here, simply, and hopefully it will be very clear.  Please study the e-word above for a few moments until you’re comfortable with it, then read on.  You won’t see it again in this post!

Wealth rises to the top until the bottom is too weak to support it.

  1. There are buyers and sellers.  Sellers get to make a profit on what they sell, and buyers provide that profit.  The profit adds up and becomes wealth;
  2. Wealth tends to accumulate at the top over time;
  3. If too much wealth accumulates at the top, too much income accumulates up there too, the overall economy slows down, and over a long time period (like 30-40 years) you end up with poverty and disintegration at the bottom;
  4. Then, if the top and the bottom are connected enough, there is insufficient income and demand at the bottom, and the whole thing collapses in a heap (e.g., the Great Depression).

Taxes stabilize wealth, recirculating excessive wealth.

  1. Before 1980, America employed the only workable approach to keeping too much wealth from accumulating at the top, and that’s progressive taxation (i.e., higher incomes are taxed at higher rates);
  2. The top income tax rate applies to the highest incomes, so that’s the rate that controls the rate of recirculation back down; 
  3. It’s a bit more complicated, but this is essentially how it works: (a) First, you tax super huge incomes at a high enough marginal rate to return excessive profits (wealth) to the government; (b) Second, government then recirculates that wealth back through the balance of society.  This is a continuous cycle;
  4. There are always both rich people and poor people, that is inequality always exists, and beneficially, but there is a balance-point (equilibrium) [1] where just the right amount of wealth is sent back down to maintain a steady degree of inequality of incomes and wealth over time; [2]
  5. For 35 years before 1980 (from WWII to Reagan), while that equilibrium was generally preserved, the marginal federal income tax rate was 70%. [3] 

The marginal income tax rate needed for economic stability is 70%

          Okay, hopefully this is easy enough so far.  (No offense if you already understand.)  It gets a bit harder from now on, though, because we’re going trace how the purring machine got out of control and become a destructive beast! 

JMH – 4/19/11


[1] Hey, it’s not the e-word!

[2] Thus preventing much “wealth redistribution.” 

[3] Note that the effective rate is always somewhat lower, because people get to take deductions, and so forth.  It wouldn’t be American if it wasn’t complicated.

(Return to the Contents Topics page.)

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One Response to To Be Perfectly Clear – Part 1

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