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It is investment rather than spending which creates growth and employment


In that discussion on Daily Politics I at one point said, “When the rich get richer, the poor get richer, too.”  This was taken by one commenter to be a reference to ‘trickle down’ economics, but it was not really. ‘Trickle down’ theory supposes that tax cuts on the relatively well-off will boost the economy as a whole, benefitting those not so well-off.  I was instead alluding to the fact that the rich mainly get richer by selling goods and services that others want to buy.  They do this by investing in the production of goods and services, thereby creating jobs and demand for producer goods that creates other jobs.  Those jobs benefit poorer people.  This means that the rich, in the act of getting richer, also boost prospects and living standards for the poor.

Furthermore, as Thomas Sowell has pointed out, the investment comes first.  The entrepreneur hires employees and contractors, and buys materials before his or her product reaches the market and brings in returns.  It is investment, not spending, that boosts growth.  High taxes make investment less attractive by diminishing the returns that will accrue.  In 1990 Congress slapped a 10 percent tax on yachts priced above $100,000, but had to repeal it three years later because it cost thousands of jobs in Florida and Maine as people built boats in places like the Bahamas instead.  The best prospects for the poor come when society as a whole grows richer, rather than when governments concentrate instead on redistributing from rich to poor.


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