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on October 1, 2012
Sowell outlines the evolution of "Trickle Down Theory."
His main points are that:

1. After World War I, Democrats and Republicans and even John Maynard Keynes, agreed that tax rates were too high. Because of the high rates of taxation, rich people tended to put their money into tax shelters, rather than investing in business ventures that employ people. This was not a politically divisive issue at the time.

2. No politician nor economist ever advocated anything called the "trickle-down theory." In fact, when tax rates are reduced, money is taken out of tax shelters and invested in business ventures that hire workers. The money goes directly to those workers, in hopes that the business will succeed and money will Trickle Up to the investors. FDR coined the phrase "trickle-down" as an epithet for his opponents.

3. The tax debate eventually became a political issue, with Democrats (but not JFK) advocating higher tax rates and Republicans advocating lower tax rates. At that point, Democrats started accusing Republicans of wanting to decrease tax rates because they only care about the rich. This is pure demagoguery; both parties previously admitted that when tax rates are too high, it diminishes revenues to the treasury and hurts the common working man who needs a job.

The pamphlet is short (main text 13 pages), to the point and very readable. It's replete with numerous little-known facts about the politics of our past and even a little criticism of popular history texts.
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on November 21, 2012
This is an excellent use of 30 minutes and for only a few bucks, you can't go wrong.

General impressions on this short piece:

Yes! Tax rates are symbolic, and nominal rates of tax have almost nothing to do with actual tax collection. Taxable income is different to gross income, and this is a distinction that is lost on much of the electorate.

He could have gone a bit further in his discussion of tax exempt securities and explained why the government is not going to make them taxable any time soon (i.e., they need money from somewhere to finance their schemes and they may be dishonest and incompetent-- but they aren't stupid/ self-destructive).

The net effect of higher taxes on the wealthy is to tax lower income of people MORE because the value of tax exempt securities is higher to high earners.

There are two very different visions with respect to earnings spillover of wealthy people vs. different decisions generating more wealth for EVERYONE, and people keep talking past each other because they don't realize the details of their vision.

Because this broadside is so short, it costs nothing to reread it a week or so later in order to pick up the last few bits of information out of it that you might not have been able to pick up on the first pass.

There are also MANY references, and so it is possible to look further into this topic if you care to. (I don't, as I'm prepared to take Sowell at his word.)

Verdict: Highly recommended. Worth the time. Worth the money.
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on October 3, 2012
13 pages of facts and meat. Non-partisan facts about tax revenue and how to create it. Lower taxes increase revenue. Sowell does a great job of distinguishing between the goals of redistribution of wealth and generating tax revenue. Distinguishing the two is essential in making a point. I have already given this book to my 20 year old son and am ordering more to give away.
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on November 5, 2012
Here is the essence of Sowell's argument:

The debate about "tax cuts for the rich" has been framed as a debate about giving the rich more to spend, so that some of that money would end up in the pockets of lower classes. This short booklet makes it clear that the real debate is about the economic choices the rich make to maximize the return on money they save-- Fundamentally, whether to invest in lower interest government issued tax free bonds that encourage government spending but weakly stimulate the economy as a whole, or whether to invest in private bonds that both pay higher interest and that enable businesses to make infrastructure investments resulting in immediate jobs and setting the stage for future growth.

In a high tax environment, tax free government issued bonds result in a higher net rate of return than do the higher interest rate private bonds-- because interest received from private bonds is generally taxed at the tax payer's marginal rate.

An implication of this explanation is that there should be a strong correlation between the interest rate spread of government and private issued bonds, and the marginal tax rates. There is also an agency related conflict of interest, where government reaps a benefit because by raising taxes the investor attractiveness of government bonds to investors is increased; government has no intrinsic motive to make private investment attractive.

I really enjoyed reading this in-depth explanation of a concept that is ridiculed by so many, mainly because of the inaccurate stereotype to which it has been reduced by the media. The material is not easy, but the explanation is clear and understandable.

Thank You, Mr. Sowell!
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VINE VOICEon October 30, 2013
One of the great things about Tom Sowell is his ability to explain something so clearly that it seems not only obvious, but baffling as to how or why other people do not understand it. In this short but very well written essay, Sowell clearly and carefully articulates the difference between tax rates, i.e. the percentage of taxes that someone pays, and tax revenues, the amount of money actually received by the government through taxation. As Sowell correctly notes, and backs up with data over several generations under four American presidencies, higher tax rates do not always lead to higher tax revenues.

The reason for this is simple: as rates increase, high income individuals shift their income from highly taxed but capital producing investments to lower taxed, non-capital producing investments. It is a lose-lose for everyone. Does not seem difficult, does it? But for many people, it is.

And Sowell is best here, as he often is, when he shifts gears and explains, again with precision, exactly what prevents a large number of people from understanding this difference. Put simply: because the concept is so antithetical to their larger, overarching worldview, their ideological suppositions, that the obvious just confuses them when the obvious is inconsistent with that vision.

Indeed, Sowell provides example after example of proponents of higher tax rates misrepresenting not only ideas (such as the concept of trickle down economics, which Sowell correctly notes is not an actual theory proposed by any supported of easing tax rates to increase revenue) but individuals as well. Andrew Mellon, Secretary of the Treasury in the 1920s, is a particular focal point.

Mellon argued strenuously, over and over, across a wide landscape of taxation, to lower tax rates to increase tax revenues, and specifically and explicitly made such arguments to ease the tax burden of the poorer and middle classes of society. Yet Sowell points to numerous public school textbooks that portray Mellon in the most defamatory light imaginable, stating with confidence that he tried to lower tax rates to help the rich, a group to which he belonged. Not only is this not true, it is literally the exact opposite of what Mellon argued, and the exact opposite of why.

As Sowell points out, it is one thing for tenured eggheads to make patently ignorant statement about history. They are in no danger of being directly affected by the loss of revenue to capital-creating ventures. The story is quite different, however, for those little people that they claim to care about so much. Those little people do pay the price when money goes to friendlier economic climates, an endeavor that gets easier and easier with instant communication and international trade. As is often the case, it is the working men and women who pay the price for the misguided vision of the elite.
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on January 22, 2014
I have not yet read this book but my own personal experience squares precisely with what others have said.

I was a Wall Street Analyst from 1957 to 1987 and was studying for a PhD in Economics (switched to a JD later). During this time corporate tax rates were at least 50 percent and the highest marginal personal income tax rates were reduced in steps from around 90 percent to around 72 percent. Even at the 72 percent rate I was awestruck by the extent that corporations went in an effort to convert earnings into capital gains which enjoyed a 40 percent exclusion from taxable income. Common stocks were divided into widows and orphans stock - suitable only for those in lower income tax brackets - and growth stocks - suitable for those in higher tax brackets. To achieve growth corporations invested abroad, made acquisitions for cash, made greater use of debt (debt leverage), stock repurchases, etc. The period roughly 1964 to 1980 was known as the Great Inflation featuring hyper inflation and stagnant productivity. Reagan's genius is that he stepped aside while Fed Chairman Paul Volcker drove the federal funds rate to near 20 percent, taking the wind out of inflation. Reagan also reduced tax rates and businesses responded by beginning a process of disinvestment of under performing assets and placing greater emphasis on productive investment. This process received a further boost by the favorable tax treatment on dividends that were part of the Bush tax reform, giving a further push to productive investment. Unfortunately, much of this has been squandered by the uncertainty created by Washington during the current economic recovery. Almost every investment article speaks of "headwinds" which is simply another phrase for uncertainty as to the direction of policies out of Washington.

Dr. Sowell is a solid writer and any book of his should be at the top of any serious person's reading list. I plan to get to it shortly.
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on October 31, 2012
Dr. Sowell has presented a clear and cogent explanation of the straw man argument that is "Trickle Down Theory" and the harm done to the middle class in the name of combating "Tax Cuts for the Rich". This is a point I wish had been made more clearly during the presidential debates where a large audience could absorb the concept without the filter of the media to obfuscate facts they did not want shared with the general public.

Proponents of tax increases for the "rich" ( their definition of this status is questionable) imagine a static enviroment. If you raise taxes on the wealthier tax payers federal revenue will increase because these taxpayers will just sit there and take it. Of course, they do not because the "rich" did not get that way by being stupid punching bags. They will move their money to tax shelters and/or out of the country. Laws passed by the proponents of progressive tax increases will result only in reduced economic activity and therefore lowered revenue. The more you tax something, the less of that something you get.

Thomas Sowell gives historical examples of how this theory works in real life. Treasury Secretary Andrew Mellon's efforts to reduce tax rates resulted in increased federal revenue with the wealthier taxpayers paying a greater share of the tax burden. This is a situation they are content with since they are getting a reasonable return on their investments due to the lower tax rates. It's a win/win proposition.

The irrationality of the "tax the rich" faction was illustrated clearly when then Senator Barrack Obama was asked by ABC's Charlie Gibson during the 2008 debates if he would raise tax rates for wealthier Americans even if he knew it would reduce federal revenue. Senator Obama replied without hesitation that he would because he considered it a question of "fairness". So, in other words, he supported a lose/lose solution just to punish wealthier Americans. This is hardly a sound economic policy that helps the middle class.
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on March 28, 2014
The ultimate exposure of one of the most popular political lies. When you actually understand how the economy works, you realize that anybody who uses these political slogans is either insincere or utterly ignorant. At least the insincere ones won't enact the policies they promise, because the ignorant ones who really think they need to "do something" about this "problem" can kill the economy for everyone.
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on January 24, 2014
A short little treatise that demonstrates how tax cuts not only help the taxpayers, but also increase gov't. revenues as well. It explains why low tax states are outperforming high tax states and the federal gov't. as a whole. Too bad Obama won't read it. Liberals need to read it and get educated.
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on January 8, 2014
Mr. Sowell provides a concise presentation to the often heard phrases "trickle down" and "tax cuts for the rich."

Everyone should read this treatment, regardless of your political viewpoint. It is short and provides 56 citations in the 11 printed pages. Argue then from the facts, rather than from one's emotion. Well done!
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