Thomas Sowell wrote a 20-page book called “Trickle Down Theory” and “Tax Cuts for the Rich” that he is selling on Amazon for $5, but you can download it for free on his website. In it, he argues in favor of tax cuts, particularly for the wealthy, using two basic arguments, 1) that lowering tax rates will bring in more government revenues (the so-called Laffer-curve argument) and 2) that tax cuts will increase GDP (mmutilitarianism).  Mmutilitarianism is the philosophy that inequality doesn’t matter because only the production of goods and services (as GDP attempts to measure) matters. Sowell hates the idea that a tax cut for the wealthy could be justified on the basis that some benefit might trickle down to non-wealthy people because he is a mmutilitarian who thinks it is immoral to consider issues of class (inequality). For example, he says:

Repeatedly, over the years, the arguments of the proponents and opponents of tax rate reductions have been arguments about two fundamentally different things. Proponents of tax rate cuts base their arguments on anticipated changes in behavior by investors in response to reduced income tax rates. Opponents of tax cuts attribute to the proponents a desire to see higher income taxpayers have more after-tax income, so that their prosperity will somehow “trickle down” to others… [Proponents of tax-cuts for the wealthy argue that they] can change the total output of the economy, while the other side is talking about changing the direction of existing after-tax income flows among people of differing income levels at existing levels of output.

In his National Review column, Sowell has repeatedly claimed that nobody is advocating for “trickle-down” economics and he issued a challenge several times, “to name any economist, outside of an insane asylum, who had ever said any such thing. Not one example has yet been received, whether from economists or anyone else.” I’ll give him one: me. I’m in favor of trickle-down economics if the trickle is big enough and in the case of modern-day Venezuela, there are probably policies to help the wealthy that would indeed trickle down enough to be well worth doing. Another famous example is philosopher John Rawls who wanted all policies to be judged on how well they benefitted the person who was the worst off. He recognized the need for policies that benefit the richest people in society because some inequality is necessary for providing trickle-down benefits that help the poorest people. He didn’t use the term “trickle down,” but the flow of resources to the poorest was the only reason he would support policies to boost the incomes of the richest members of society.

Everyone should support a trickle-down argument if the trickle is big enough. For example, suppose we give a dollar in tax breaks to Bill Gates and he somehow could invest that dollar that would indirectly cause the income of the poor to increase by $1,000. That would be an incredible investment and even a mmulitarian like Sowell would support it even though it decreases inequality because it is an increase in GDP in this case.  However, mmutilitarians like Sowell would probably think that this is a ridiculously impossible example because they tend to think that rising inequality is good for GDP because of their mistaken belief in a strong equity-efficiency tradeoff, but trickle-up is also possible.

Another recent example of a proponent of trickle-down economics is one of Trump’s top economic advisers, Gary Cohn who said ” When you take a corporate tax rate at 35 percent and move it to 20 percent … We create wage inflation, which means the workers get paid more; the workers have more disposable income, the workers spend more.  We see the whole trickle-down through the economy, and that’s good for the economy.”

The immediate beneficiaries of a corporate tax cut are the wealthy owners of corporations:

Trump’s chief economist, Kevin Hassett also used a trickle-down argument when he said that their proposed cut in corporate taxes would “increase average household income in the United States by, very conservatively, $4,000 annually.” Hassett says that this tax break for wealthy Americans can be justified because it would also benefit the middle class.

Although National Review writers like Thomas Sowell don’t like the term, “trickle down,” it is revealing how important trickle-down economics is at the National Review because they have used the phrase in hundreds of different articles. A Google search of the site reveals 1,110 pages using the terms “‘trickle-down’ and “tax”. For example, National Review author Ryan Bourne argues in favor of lower corporate-tax rates because they will hopefully “boost worker wages”. Similarly, Steven Horwitz wrote an article that is similar to Sowel’s which Horwitz titled, “There is No Such Thing as Trickle-Down Economics” in which he argued that “There’s no economic argument that claims that policies that themselves only benefit the wealthy directly will somehow “trickle down” to the poor.” Ironically, in the same article where he said that trickle-down isn’t a valid argument, he actually made a trickle-down argument himself because it is a good argument to justify policies whose immediate beneficiaries are the wealthy. Horwitz ended his argument by saying, “improving standard of living for everyone that results from more economic freedom [such as tax cuts] will be more of a flood than a trickle.”

And if he is right that the trickle is a flood, then everyone should support trickle-down economics. The real debate is whether there really is enough trickle-down to justify the tax cuts for the wealthy.

Even better, we should focus on trickle-up economics. Let’s help the rich get richer by strengthening the middle class (and poorer) who will then be able to pay higher rents to the rich.

Suppose you own a house worth $240,000, but your job forces you to move to Chicago for two years where you will have to pay $12,000 ($1,000/month) to rent another house with nearly identical characteristics. Fortunately, you can rent out your house for $12,000, but this won’t completely cover your cost of housing because you will have to pay 25% income tax on the rent you earn ($3,000), so your gross housing bill goes up just because you are paying rent for the same kind of housing. As it turns out, your new landlord is Jane who happens to also be relocating to your town and she will be renting your house and paying you $12,000 too. Legally, she will also have to pay $3,000 income tax on the rent you are paying her, but if you can both just quietly agree to trade houses without any money being exchanged, you can both avoid paying these taxes. 

That is imputed rent and everyone who owns their home is getting the same kind of economic benefit stream (a.k.a. income) from owning their home whether they rent out the home or whether they live in it. If they rent it out, they get rent payments, and if they live in it themselves, then they are earning “imputed rent”. Imputed rent is the rental value that an owner would get from renting the home they occupy at market rates. A few countries including Iceland, Luxembourg, the Netherlands, Slovenia, and Switzerland do tax imputed rent, and where it is not taxed (like in the US) it is the biggest subsidy for home ownership. For example, suppose you were renting for $12,000 ($1,000/month), and earning $1,000/month on $240,000 in savings. If you used your savings to buy the house where you live for $240,000, you would still be getting the same amount of earnings from your savings ($1,000/month), but your taxes would drop under the American system which ignores imputed rent. It isn’t fair to levy a higher tax on people who have invested their savings in stocks or bonds rather than in housing.

In addition, there are a lot more tax breaks for homeowners like the mortgage-interest tax break that increase the government tax subsidies for home ownership. The mortgage-interest tax break would make sense in the above nations where imputed rent is taxed because in that case the interest would be just like any other business expense, but in the US, it is just an extra subsidy on top of the savings from avoiding taxes on imputed rent income.

Below is a graph from the Urban Institute via VOX that shows how much the OTHER kinds of subsidies benefit owner-occupied households in different income classes, but with interest rates so low right now, the tax savings of untaxed imputed rent is probably much bigger than the more explicit subsidies shown in the graph below, at least for families in high income tax brackets.

The rent that home owners pay themselves is a kind of tax-free income and combined with the other subsidies for homeowners, renting becomes a worse deal financially than buying for most Americans who are going to live in one place long enough to cover the higher transactions costs of buying a home.  

These subsidies are wasteful because they decrease labor mobility (because homeowners have higher transactions costs that impede them from moving closer to new jobs) and they encourage Americans to spend excessive amounts on McMansions.  These policies are also regressive because most people below the median income don’t get the subsidies because they rent whereas most Americans above the median do get them because home ownership rates rise with income and the subsides are higher for more expensive homes and even the plutocrats with numerous homes get the imputed rent subsidy for owning them.

It is unfair and inefficient to NOT tax income from imputed rent and although the simplest way to rectify this would be to just tax it, but an even more efficient way to rectify the subsidy for home ownership would be to implement a land-value tax (explained here).

Annual real parking cost

The Mortgage Bankers’ Association’s think tank, The Research Institute for Housing America investigated the value of parking spaces in five US cities which was neatly summarized by Richard Florida:

The costs they calculated for each household are the replacement costs of the parking spaces. It looks expensive for just a bunch of asphalt and concrete, but the land costs a lot, especially in New York City.

It is easy to convert this information into the imputed rent of parking per household. The simplest–and probably most accurate–way is to simply multiply the total cost by the discount rate. The discount rate in this case is the opportunity cost of funds that residents face which varies widely and the proper way to calculate that would be to find the weighted average cost of capital (WACC).

That is basically the average borrowing cost for households as weighted by the amount that they have borrowed. I don’t know what that is, but the Stern Business School compiled a database of the WACC for America’s corporations and the average WACC in January 2019 for non-financial firms was 8.22%.

So if America’s households were lucky enough to borrow money as cheaply as America’s big corporations, then their per-household imputed annual rent for parking comes out to:

If they hadn’t built all of that parking and decided to rely upon public transit, Uber, and other kinds of transportation that doesn’t require so much parking, then households would have approximately that much more money every year. New York City basically made that choice and only has a minimal amount of parking which is why New York’s average imputed parking rent is so low.

But because parking is a fixed cost, it is a hidden cost that we don’t have to think about every year and so most people ignore how much of a burden it really is every year.

Below is one of the satellite images the researchers used to measure the amount of pavement that is used for parking. This shows a neighborhood in Seattle.

The area of green space appears about as big as the area for parking but a lot of the green is tree tops that are just hiding some of the parking space below the canopy.