Top Marginal Tax Rates and Real Economic Growth, Part 1
by Mike Kimel
Top Marginal Tax Rates and Real Economic Growth, Part 1
This post looks at the relationship between the top marginal income tax bracket and growth in real GDP per capita (from NIPA table 7.1) in the subsequent year or years.
The first graph shows the top marginal income tax rate on a given year along the y axis, and the percent change in real GDP per capita from year that year to the next along the x axis. (Example: tax rate in 1980 v. change in real GDP per capita from 1980 to 1981.) The graph begins at the start of the Eisenhower administration:
Figure 1
Notice the very slight positive correlation between marginal income tax rates in a given year and growth the following year? Perhaps it doesn’t mean that higher marginal tax rates precede faster growth, but it does call into question the idea that lower tax rates are generally responsible for faster economic growth.
Figure 1 above goes back to 1953 because I felt it makes sense to avoid periods in our history where the economy was very, very different such as the Great Depression, WW II, and the immediate post-war recovery. But the first complaint from those who don’t like what the graph implies will be that I am cherry-picking. To deal with that, here’s Figure 1 going back to 1929, the first year for which reliable data is available (may all thanks be bestowed upon Simon Kuznets):
Figure 2
If anything, the correlation between tax rates and growth in the subsequent year seems stronger when we include the entire data set. In other words, we have less reason to believe that lower taxes lead to faster growth rates than when we started.
Before we go on, a few words about the mechanism which explains the result. I feel like I’ve covered this a million times, but here we go again. If you own a business, you can reduce your tax bill by minimizing the amount of money that gets recognized as taxable income. The easy and legal way to minimize taxable income is to reinvest those sums back into the business. You do that by buying more assets, or by doing more maintenance, or by hiring more people. In other words, you minimize your tax bill by growing your business. In general, the more businesses grow, the more the economy grows. Now ask yourself… are you more likely to avoid taking another dollar out of the business when the tax rate on that marginal dollar is 30%, or when it is 70%? The answer is obvious, except, apparently to most economists and those who listen to them, or else we wouldn’t have so many people who believe something so clearly at odds with the data.
Now… if higher tax rates –> more investing in business, and if investing in business takes a while to have an effect, then tax rates today should affect the economy for more than just the next year. For instance, here’s Figure 1 again, but this time looking at growth in real GDP per capita 3 years out, and not just one.
Figure 3
Notice how the correlation between tax rates in one year, and real growth rates in subsequent years jumps when we go from one year to three years out. I will have a few posts on this topic going forward showing how far out that effect actually goes. (Aargh – that makes three different series I am trying to juggle at the same time!) Let’s just say, as a placeholder, that the effect goes as far out as you’d expect if you really put some thought into it.
One more thing before I close. I want to briefly show why so many people who believe they have an understanding of economics are certain that lower tax rates lead to more rapid growth. (Even the Democrats seem to concede this. They tend to campaign on higher tax rates due to “fairness” and “fiscal responsibility” rather than growth.) Figure 4 is the same Figure 1, but years in which there was a tax hike are highlighted in orange and years in which there was a tax cut are highlighted in red.
Figure 4
So here’s what seems to happen. As all the graphs have shown, higher tax rates are correlated with faster growth rates in subsequent years. But… years immediately following tax cuts generally do outperform. Thus, it seems that in the very short run, a tax cut can be beneficial, but overall, the economy seems to grow faster when tax rates are higher. Or, as Keynes would put it, you use the tax cut when the economy needs to be goosed, but in normal times, keep the growth rate higher. How much higher, of course, is a question worth considering. Obviously there’s a limit to this – a 100% tax rate is not going to generate any growth at all.
There’s a lot more to cover, including how tax policy goes a long way toward explaining why our economic growth has essentially died. I will have more posts on the topic, but in the meantime, if you want my Excel spreadsheet, drop me a line at my first name dot my last name (that’s mike period kimel – kimel has only one m, thank you very much) and all that is at gmail dot com. I’ve made the spreadsheet interactive. It has a primitive menu allowing you to change the years which are included in the analyses, how many years ahead it looks (in terms of real GDP per capita growth), whether to highlight tax hikes or tax decreases, and how big tax changes have to be in order to be highlighted. The menus are definitely not idiot-proofed but you won’t require much Excel knowledge to play with the data yourself. At least through the next few weeks I’ll be happy to share the spreadsheet. Beyond that, no guarantees.
Yeah, cause you know that one year is more than enough time for any kind of tax change to take effect and be meaningful.
Further, as societies get more developed and civilized, GDP growth rates will slow.
Sandwichman can come along and explain that further.
EMichael,
You’re on firmer ground when you stand around with your finger up your nose yelling “racism” at everything that moves. People with actual reading comprehension would have noodled out that the sentence (under Figure 1) that reads “Notice the very slight positive correlation between marginal income tax rates in a given year and growth the following year?” followed Figure 3 would have assumed your comment “one year yadda yadda yadda whatever” was pretty much just repeating a minor point of the post.
As to this: “Further, as societies get more developed and civilized, GDP growth rates will slow.” Yeah? Most countries tend to start growing much faster once they reach a certain level of development. We don’t have reliable figures for economic growth in the geographical region that we call the US, but I imagine that economic development was much faster from 1901 to 2000 than in the fifteen or twenty centuries before it, at least if you measure it in, say, tradeable output. And if you leave out the last century, than the years 1801 – 1900 seems to have generated much larger increases in tradeable output than the fifteen ceturies before it as well. And my bet is that is true of most countries.
But really, assuming that “societies get more developed and civilized” assumes that previous customs and cultures are less civilized. Are you of all people really going to go there? Won’t that require you to yell racism whenever you see yourself in the mirror? Of course ripping people’s hearts out of their chest and cliteroctomies are civilized. Only someone you would call racist would say otherwise.
Now, we have certainly seen a slow down in the last fifty years or so – a period of time, incidentally, where the idea of low taxes won the day in the US and then was exported to other countries. In other words, the current period is the anomaly, not the rule. This post is part 1 of several explaining why. I hope it gives some people something to think about you. I have no illusions, however, about you.
There is not even a wisp of evidence that increasing the top marginal rate will increase growth. Very, very few people paid that 91% income tax.
Warren,
I think we can agree that the four graphs indicate, at least, that lower marginal tax rates do not generate faster economic growth.
As to whether higher top marginal rates actually lead to faster economic growth, well, let’s just say that over a few posts, I intend to show something interesting. While I will not be able to prove that higher marginal tax rates increase growth, I think I can provide enough data for us to agree that higher marginal tax rates are correlated with exactly the same outcomes they would be if they did increase growth. We will, of course, never be able to rule out “tremendously unlikely combination of coincidences” as an explanation.
As to the fact that very, very few people paid the income tax rate – that is the mechanism which explains how this works, after all. High enough tax rates beg to be avoided, and the easiest way to avoid them is to reinvest in the business, thereby driving up future growth rates.
As I said, I have a lot more coming, but I have other series I am working on, and a day job and a life, so it will not be coming fast. But in the meantime, drop me a line if you want to play with the spreadsheet that produced the four graphs in the post. It actually generates a lot of other interesting, well, I’m OK with calling them coincidences for now.
I agree. I think you said in your book the best tax rate on corporations was 74%. And that’s proven to be true when there wasn’t such a political divide.
But, about Congress…
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” – Upton Sinclair
I’m now half-way through Bull Bears and the Ballot Box.
Dump war spending and you will get taxes don’t matter that much. Economic growth has not died, it is just supply is readily available.
“High enough tax rates beg to be avoided, and the easiest way to avoid them is to reinvest in the business, thereby driving up future growth rates.”
Why would buying stuff through one’s business promote GDP growth any more than buying stuff for yourself?
Bert,
With all due respect, I’d like to see something more than assertion in order to believe it.
I am assuming your comment means you feel that the growth is being sucked into the wars our country has gotten enmeshed in. As a simple counterexample, in 1941, 1942 and 1943, real GDP per capita increased by 17%, 18%, and 15% respectively. By comparison, the growth of real GDP per capita from 1995 to 2000 (ie., for the five years in total, not annualized) was 17%. The latter was considered a period of relatively rapid growth in recent memory (i.e., the dot com and telecom booms), and was for practical purposes, a period in which the country was not at war. (Yes, I know, the Balkans, but that sure as heck wasn’t the Empire of Japan plus Nazi Germany.) So growth during one year of WWII = growth during 5 years of relatively recent relatively prosperous relative peace.
Mike:
A little comment on Defense/War spending as opposed to spending on the Domestic Economy. Paul Kennedy wrote a book on the topic and it was well received although extremely detailed in content and at times hard to follow. “The Rise and Fall of the Great Powers” talked about countries which continuously spent on War or Defense at the expense of the Domestic economy. Every country which did so found themselves soon becoming tier 2 or 3 countries. Your example talking about your wife investing in hot water heaters to maintain the house/capital makes sense making that point rather well. WWII was an expansion of Domestic manufacturing over a 5 year period and not to be confused with what we are doing today. I am confident this is what Bert is referring to.
There are times when one should not increase interest rates. The Fed Rate increase in 1928, 29 and in an attempt to limit speculation in securities markets slowed economic activity in the United States. Because the international gold standard linked interest rates and monetary policies among participating nations, the Fed’s actions triggered recessions in nations around the globe. I believe we saw similar in the late nineties when Greenspan did the same and then reversed course in late 2000 with a race to the bottom which triggered a recession and the start of a decrease in jobs as detailed in PR which never recovered. Bush’s tax decreases which was heavily skewed to the 1% of the population at 31 percent did not impact economic growth and indeed could be one of the reasons for income stagnant for much of the Labor Force.
Warren,
That is the really important question on which I did not touch. To be honest, it makes sense in my head, but I struggle to verbalize it. But you asked, so let me give it try.
My wife and I have a small business. (True.) We buy and refurbish dilapidated properties in Northeast Ohio. (Really, these days its almost all my wife and her business partner, but I’m still along for the ride.) Most of those properties are then rented out, but a small number of them get sold.
My wife is really good at it. She has an enviable vacancy rate – usually its precisely zero. Friends of her tenants call her and ask if we anything coming up. This happens regularly. More regularly, in fact, than we are able to find new properties on which we are willing to bid. This business model leads us to double digit returns every year. Of course, we are talking about a modest number of holdings, not a vast empire, but it should fund our retirement when the time comes.
Now, at the end of each year there is usually some money lying around. That gives us two choices: reinvest (say, by buying another unit or moving up the replacement of a roof) or consuming conspicuously / living large. The latter might take the form of going to Europe (my wife has told me its her dream since we were dating). Perhaps we’d buy a Mercedes. Or maybe it would go to my head, and I’d need some bling. Serious bling. Flava flav type bling. I’ve never wanted chains and a grill, but if the cash was just there. OK, it would never happen, but let’s pretend anyway.
Now, if we went to Paris, the money would go to… Paris. The multiplier to the US GDP would be near zero. If we bought a Mercedes, most of the money would go abroad. Again, a near zero multiplier to the US economy. Now, the chains and the grill, on the other hand, well, some of the money might stay here. How much would depend on where the stuff was put together.
On the other hand, say we replace a water heater. Even if it was made abroad, a big part of the expense is the installation. Read that as multiplier to the US economy. If we refurbish a whole house, that’s keeping a crew busy for two weeks to six weeks, depending on the state of the house. That’s a big multiplier.
Besides that, as I said, my wife is really good at what she does. Its good for the economy for her to be here, rebuilding a destroyed house from the ground up, instead of eating cheese in Paris or shopping around for a golden hubcap for me to wear to work. She isn’t any good at shopping for hubcaps.
So the long and short of it… reinvestment usually means more spending says in country. There may be other effects as well, but that’s what I have right now.
Note though – even if I didn’t have a story, it doesn’t change the graphs.
Alex,
Thanks for reading the book. I don’t quite remember what we concluded at the time about corporate taxes, but I do think a higher tax rate would be good for growth. Again, the mechanism, as explained to Warren above is not the paying of the taxes, but the avoidance of the taxes through the process of reinvesting the income.
run,
I definitely phrased that comment poorly. War spending is a drain, especially if most of it gets spent abroad. But Bert’s comment, at least as I interpreted it, implied that without the war spending we have now, is the reason current growth is mediocre. I pointed out that we have had far more drastic periods of war in which there was growth. We’re always better off spending the resources in the US when it comes to generating more growth. But war alone isn’t enough of a determinant to make taxes irrelevant.
Mike:
I just wanted to explain it more fully and I thought your example on the hot water heater was spot on.
Your example of the water heater vs. buying a foreign car or going to Paris is very narrow. If the owner of the house you buy uses the money to go to Paris or buy a Mercedes, we’re at the same point.
There is no evidence that corporations are more likely to buy American than individuals are. Furthermore, the Trade Deficit is nothing but the difference between our Gross Domestic Consumption and our Gross Domestic Product. The only way we can buy more than we produce is to go into debt.
Warren,
Every step along the way is a decision between money flows abroad and money stays here. That includes the seller of the house. (As I noted, the houses are usually dilapidated when we get them, and therefore of limited value. With a few exceptions, only with work that they have value. Often the house is a foreclosure owned by the bank.)
But let’s work with this. If the tax rate is high enough to prevent the bank that owns the house from taking profits, they reinvest. If the tax rate is high enough to prevent my wife from deciding its time to see Paris or for me to get a classy new gold hubcap to wear around my neck, we reinvest. If the tax rate is high enough to prevent the roofer from deciding its time to buy a new Samsung phone, he reinvests. And so on. Each of these steps has a multiplier.
Warren,
I do note, you have seen the graphs on this post. Trust me, there are more coming that make the case (i.e., higher tax rates correlate positively with faster growth) more forcefully. Again, we can go with coincidence with an explanation, but I can keep doing this, making coincidence less and less likely.
Now, I know you don’t believe that higher taxes generate faster growth. So how do you explain the graphs?
Seems like we are being back doored with MMT. I could be wrong, but it is a feeling….
“4—Prof. G. Warren Nutter has pointed out that there is “a long-run tendency . . . for the industrial growth rates to slow down, or retard, as the level of production gets higher.” There are several basic explanations of this. One has to do with a trick of percentage figures. Another has to do with a physical satiety point in human needs. If only one family in a country has a bathtub, and the next year 50 families get one, the rate of growth is 5,000 percent. But when everybody has a bathtub net growth stops. This principle applies to houses, automobiles, radios, television sets, and so on.”
http://econospeak.blogspot.com/2015/04/lets-stop-making-fetish-of-national.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+espeak+%28EconoSpeak%29
BTW,
My shouting racism is based on facts. That girl from Manhattan is a RW clown. Has been for a long time and continues to be.
The Tea Party is the John Birch Society renamed. Same platform, same supporters. And Trump won the nomination because of them. Also:
Abstract:
The 2016 US presidential nominee Donald Trump has broken with the policies of previous Republican Party presidents on trade, immigration, and war, in favor of a more nationalist and populist platform. Using detailed Gallup survey data for a large number of American adults, I analyze the individual and geographic factors that predict a higher probability of viewing Trump favorably and contrast the results with those found for other candidates. The results show mixed evidence that economic distress has motivated Trump support. His supporters are less educated and more likely to work in blue collar occupations, but they earn relative high household incomes, and living in areas more exposed to trade or immigration does not increase Trump support. There is stronger evidence that racial isolation and less strictly economic measures of social status, namely health and intergenerational mobility, are robustly predictive of more favorable views toward Trump, and these factors predict support for him but not other Republican presidential candidates.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2822059
EMichael,
1. I suspect I have not spent more than a couple hours thinking about MMT in my entire life, and that two hour period was quite a while ago. But to the best of ability to think it through, the explanation I provided for why the graphs look the way they are agnostic about MMT in precisely the same way as it is agnostic about other schools of thought about the effects of monetary policy. Monetary policy simply isn’t a part of the explanation, just like Elvis, Bigfoot or whatever species of alien. My explanation also does not rely on government spending. If the government credibly committed not to spend another dime it collected on taxes on the economy for the next 50 years (say the goal was to pay down the debt, or even to make a bonfire with the tax revenues collected), my explanation would make predictions about which of those next 50 years would grow faster and which would grow slower based on the tax rate in effect at the time. Of course, should the government actually spend the money it collects in taxes on activities that result in economic activity, my explanation says that growth will be faster than the bonfire approach since that then puts more people in the position of trying to avoid being taxed. Anyway, that’s what I got at 3:17 AM.
To the extent that I remember any MMT at all, the two mechanisms that explain everything in MMT are not a part of my explanation as far as I can see.
2. Nutter’s explanation makes a good point, but requires that bathtubs, radios, and tvs be the pinnacle of technology. These days, most of the population prefers a smartphone to a bathtub, or a radio, or a tv, but most of the process of production and installation of a smarttphone takes place abroad. In a few decades, there will be tweaks made possible by CRISPR that the public will view as more important to have than a smartphone, but regulations on the research that will generate that technology in the west almost guarantee that said technology will come from non-western countries.
Mike,
Do a complementary post to this one on the correlation between tax cuts (subsidies, etc) and the size of the national debt; my guess is the more tax cuts, the higher the national debt.
I estimated since 2001, there has been $38.65 trillion in war-related spending and $38.86 trillion in tax cut related spending for a total of $77.51 trillion. No wonder the Middle Class is disappearing.
Conservatives ain’t “conservative”, where money is concerned.
Alex,
It’s on the to-do list, but the list is long.
Berle & Means, back in the 30s, pointed out that high tax rates are important if the government is going to charter collectives with limited liability, general purpose and effective immortality. Traditionally, the value of a business was in its ability to pay dividends. High personal tax rates discourage the actual payment of dividends in favor of reinvestment which would increase the value of the business when it was sold in whole or part. High corporate tax rates further encouraged reinvestment in productive assets since that would lower the tax bill. Their report was the basis for legislation which led to a massive growth into the 70s.
We have tried an alternate strategy with lower tax rates since then, and reinvestment has suffered. Low personal tax rates encourage high executive salaries often disguised as share options and buybacks. Low corporate tax rates make reinvestment less attractive. The money is better spent on acquisitions which are effectively liquidations or distributed to executives, the board and shareholders. This has led to slower growth in the economy and even slower growth in living standards.
Personally, I think we should go back to the tried and true. We already know what works.
“If the tax rate is high enough to prevent the bank that owns the house from taking profits, they reinvest. If the tax rate is high enough to prevent my wife from deciding its time to see Paris or for me to get a classy new gold hubcap to wear around my neck, we reinvest. If the tax rate is high enough to prevent the roofer from deciding its time to buy a new Samsung phone, he reinvests. And so on. Each of these steps has a multiplier.”
So they reinvest. So what? How do they do that? They buy stuff with it.
Well, if they did not reinvest, but distributed the money as dividends, would those who receive the dividends not either reinvest it themselves, or buy something else with it?
If stuff is being purchased, whether by the company or by the recipients of the dividends, will that not spur growth just the same? No matter who buys the stuff, someone has to build it. Growth.
When talking about WW II the GDP data can be misleading.
In 1943 and 1944 real civilian GDP ( GDP less military spending) fell 18% and 15% respectively. Many consumer durables like cars were just not made during the WW II and many other nondurables like gasoline were tightly rationed. The two year plunge in civilian GDP was similar in magnitude to the 1930-33 depression.
But people did earn the strong income gains, they just could not spend it until after the war.
War spending does explain a lot. Nor has 38 trillion in defense spending happened since 2001. Sorry, you take away WWII,Korea and Nam periods, the post-war boom doesn’t look so hot. People can deny all they want.
The US hit is actually peak in 1919. After that, the industrial revolution ended and we eventually went splat as the did the western world.
Warren,
Say I start with 1000 bucks. Consider two scenarios.
Scenario 1. I refurbish a bathroom. The guy I pay to do it uses it to pay his doctor’s bills. The doctor uses to hire an additional assistant. The assistant uses the 1000 bucks to pay her tuition at the local college. The college pays the groundskeeper., etc., etc.
Scenario 2. I buy a an ASUS computer, designed and made in Taiwan.
At any point in the chain, spending can go abroad. But the more links in the chain there are here in the US, the better for our economy. And the more investment there is, the less likely a given step is to take place abroad.
Spencer,
Correct. That’s why I mostly focus on the post-war period.
Bert,
Of course war spending does explain a lot. But it doesn’t make taxes irrelevant.
You have patience, I do not.
I get all that, Mike. So why is it any different if you buy something through your business, or buy something with dividends from the business?
But whether or not somewhere down the road someone buys something from another country is entirely irrelevant. Let’s look at $10T. If we produce $10T in goods and services, and buy $10T in goods and services, then it does not matter how much of that we buy from other countries, because an equivalent amount will have to be sold to other countries to keep that balance.
Of course, that is not happening. We produce $10T in goods and services, and buy $11T. How do we do that? Where do we get the extra money to buy more than we produce? We borrow it. We go into debt. Without going into debt, we cannot have a trade deficit.
Warren,
For dividends to exist, Person A must have given money to Person B to invest on Person A’s behalf. The assumption is that it happens because Person B has some productive use for that money that Person A is unable or unwilling to do him or herself. If dividends are generated, it is because Person B is, in fact, able to generate positive returns (as opposed to blowing the money).
So the payment of dividends means taking money that is currently in the hands of someone who has managed to generate positive returns and returning it to someone who is unable to unwilling to do it him or herself, and thus is less likely to invest it in a way that makes the economy grow. It is the equivalent, in my story above, to taking my wife out of her business and putting in charge of eating cheese in Paris or buying a classy hubcap for me to wear to work, except that with dividends the cheese-eating or hubcap buying is done by a different person than the income generation.
First, your scenario is flawed, in that in the vast majority of cases (the exception being an IPO), Mr. A does NOT give his money to Mr. B, but to Mr. C, who previously owned part of the company for which Mr. B works. Mr. B has no knowledge of the transaction between Mr. A and Mr. C, and the transaction does not benefit his business at all.
But let us say it IS an IPO, and the investor IS getting dividends. Does he not have the option of re-investing those dividends?
And where did those returns come from? How were they generated? By a third person’s purchasing the goods and services produced by Mr. B. Just expanding the business without being able to sell the products produced is not going to last very long. But aside from that, HOW does he expand the business — by hiring more people and buying more equipment.
How does it matter to aggregate national growth whether the business itself hires more people and buys more equipment, or whether that company pays dividends to its owners and they buy other goods and services, enabling the providers of those who provide those other goods and services to expand their businesses to accommodate the increased demand?
The answer is, it does not. What matters is not that a particular bit of money is spent by one entity rather than another, but how often such transactions occur. (That “M2 Velocity” someone else wrote about here recently.) So the question for growth is whether the company will spend the money faster, or whether the individual getting the dividends will.
That is why people are griping about businesses sitting on nearly two trillion dollars in cash.
http://www.nytimes.com/2016/01/24/magazine/why-are-corporations-hoarding-trillions.html?_r=0
Warren,
People griping about something doesn’t make it a problem. You don’t happen to agree with the BLM, but they do a lot of griping.
I’m short on time now, so I’m going to have let you work out the problem with your IPO comment yourself. More importantly is something you note: the person receiving the dividend has the option of investing it. The company was investing it. Say 99% of all dividends are reinvested in enterprises that are as efficient as the enterprises that paid the dividends, which is an overestimate. In that case, you still have a 1% leak. Aggregate that out throughout the economy and it adds up. But of course, what are the odds that 99% of all dividends are reinvested in enterprises that are as efficient as the one that paid the dividends?
I’m a fan of your work, Mike, but let me probe a little about the “mechanism” that you reference. My questions are not rhetorical, at least to me. Thinking about conditions today versus the past, isn’t this mechanism affected at the macro level by assumptions about (customer) demand and, perhaps related, labor/wage laws? Also, for big business, by the influence of anti-trust laws/enforcement on corporate growth strategies?
In addition, is there any way to dig into macroeconomic data to examine this mechanism, or is that not really feasible given data limitations?
PJR,
Apologies for the short response but you are right about differences in time –> differences in conditions. I have been thinking about how to deal with that and may have a solution. Perhaps this weekend I will get a chance to try it. No guarantees it works but it may result in an interesting post.
Mike, you still have not provided any evidence that spending by a corporation is any better for aggregate growth than is spending by individuals.
Mike,
You are now “Waist deep in the Big Muddy”.
You have no chance in this conversation with him.
Warren,
I take you for a guy who would accept Milton Friedman as an authority on this topic. As per the title of this piece, Friedman felt that the purpose of a corporation was to make profits. Period. I think we can agree that his view of the corporation largely describes how companies behave, not to say it wasn’t true before Mr. Friedman penned the his opinion. On the other hand, the individual has other responsibilities – to him/herself, to society, to charity, etc. None of these, I believe we can agree, is as conducive toward generating returns.
So… on the one hand, we have an organization dedicated to making money, and which has already shown its ability to generate returns by paying dividends. (As per your question.) On the other hand, we have an individual who is dedicated to living, and has already shown that he/she felt that the corporation was the optimal vehicle for investing a certain set of marginal dollars, which we know because they already invested those marginal dollars in the company.
The individual regularly beats the company as a place in which to put money doesn’t fit the story.
I’m really not explaining this well.
A company’s spending money does not affect the overall economy than does an individual’s spending that money. If the company does not spend the money to produce more product, then some other company has to produce the equivalent amount so that the dividend earner can buy it. The difference to the growth of the economy is ZERO.
Think about it — how would a company reinvest the earnings to expand? Buy more raw material, hire more employees, and buy more equipment.
If instead, they send the money to shareholders as dividends, and they spend it, those from whom they buy can use those earnings to expand. They will buy more raw materials, hire more employees, and buy more equipment to meet the increased demand.
The key, again, is in the VELOCITY of the money. Will companies’ spending to expand turn over that money more frequently than individuals will?
Warren,
Just a thought.
Exactly how many people that you know receive dividends and then increase their spending due to those dividends?
I know exactly none.
Every retiree with substantial investments in utility stocks.
Warren,
That is nonsense. There are not many of them. Take a look at stock ownership.
This is not hard.
So what do they do with the money they get in dividends?
They put it in the bank as they are already spending all of the money they are going to spend before they receive those dividends.
So these savvy investors, with so much money that they don’t spend their dividends, invest those dividends in BANK ACCOUNTS?
I don’t think so.