Obama Believes in Trickle-Down?

I know the Obama Administration is scrambling to do something about lackluster employment and growth figures to lessen gigantic Democratic losses in the mid-term election.  But I am completely puzzled about why their latest stimulus proposal involves granting large corporations tax breaks for new capital investment.  Does the Democratic Party now believe that the best way to stimulate the economy is to give big corporations tax breaks in the hopes that this will trickle-down to help the middle and lower classes?

I know that this is a targeted tax break, but they way in which it is targeted makes it all the less likely to spur job growth.  Most job growth comes come from small businesses.  Small businesses tend not to be capital intensive, so a tax break for capital investments should make little difference for them.  In addition, most of our economy is in the service sector, which also has relatively little capital investment.  A tax break for new capital investment shouldn’t make much of a difference there either.

The main beneficiary of a capital investment tax break would be large corporations in the manufacturing sector.  That’s a relatively small and shrinking sector of our economy, regardless of tax policy.  And fueling capital investment in the manufacturing sector may well reduce the number of jobs — rather than create more jobs — since the trend in that sector has been to substitute capital for labor.  As companies build new and improved manufacturing facilities they tend to need fewer people to operate those machines and build things.

If the Obama Administration thinks tax breaks lead to trickle-down benefits, how about if they focus on reducing capital gains and dividend taxes, which would broadly encourage investment in the service and manufacturing sectors?  This would also benefit small as well as large businesses and would reward the investment in people as much as machines.  Instead the Obama Administration seems determined to raise capital gains and dividend taxes.  Things that make you go hmmmm.

3 Responses to Obama Believes in Trickle-Down?

  1. Hal says:

    As you might expect, Robert Reich is not too happy with the supply-side proposals recently announced by Obama … and he addresses these ideas from the other direction on his blog http://robertreich.org/

  2. Hey Hal,

    Reich makes some sense. It may be that we have insufficient demand, in which case you might favor broad-based tax cuts to put more money in people’s pockets. But given the theory apparently embraced by the Obama Administration that there is insufficient investment in job-creation, you would think they would target capital gains tax cut.

    • Hal says:

      Yes, broad-based tax cuts were the largest portion of the stimulus passed last year … and there could be additional measures as noted in Reich’s post today. It seems clear that Obama does not embrace a trickle-down theory of recovery — refer to his speech yesterday in Milwaukee. Your post points out the inconsistency presented by extending the capital investment tax break. I am puzzled as well.

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