A foolish complaint about capitalism

This is one of those mistakes about the world, the economics of the world, that causes us physical pain. It's like fingernails down the blackboard, something that causes a wince at the least. The idea that money paid out of a company somehow disappears:  

Gary Cohn, Trump’s chief economic adviser, told CNBC on Friday that tax cuts will usher in a long period of wage growth. The White House Council of Economic Advisers has said the proposed corporate rate cut to 20 percent from 35 percent, combined with full expensing for capital investments, would increase average household incomes by at least $4,000 a year after a decade.

Try telling that to the C suite. Many executives view repaying investors as a higher priority than increasing wages or hiring. Honeywell, Coca-Cola, Amgen and others have said they will use any tax windfall in part to boost dividends, share buybacks and debt repayment. Hilton’s chief executive echoed those comments on Thursday.

Well, yes, OK, but what happens next? 

There are only two things that can be done with money, it can be spent or it can be invested. No one does stick it in vault. So, what will happen with this money sent to shareholders is that it will be spent or invested. For nothing else can or will be done with it.

The error here, and it is both a common one and one that makes us cringe, is to believe that money which is paid in tax, or which remains within extant companies, is productive while that held by individuals is not. For that is what is being said here.

If the money stays inside the company, is not paid to shareholders, or it is paid to the government in tax, then it will be either spent or invested in a manner which grows the economy. But if it is in the hands of individuals, in their guise as shareholders having sold stock into a buyback, or received dividends, then somehow, magically, it becomes unproductive. This is nonsense.

Those individuals can only either spend or invest this money. Even if they just buy some other extant asset then the person who sold that has the same and only the same choice, spend or invest. And let's be frank about this, the money to invest in companies not yet extant does indeed have to come from somewhere, doesn't it? Extant companies not being greatly known for investing in those who would disrupt them to our but not their benefit.

The money-go-round doesn't stop, whoever has it can only spend or invest it, there are no other choices. Thus complaining that a tax cut might lead to shareholders gaining more is ludicrous, for the money isn't destroyed nor does it leave the economy. It can only be, and it only will be, either spent or invested. If it's spent then there's an increase in demand, if it's invested then there's an increase in investment. Which is rather the point, this is what we want. Less to be going into the maw of government and more in demand or investment.

Oh, and by taxing the results of investment less we're increasing the incentives for investment which is why we're cutting taxes on the results of investment in the first place.

That shareholders get sent money if we tax investment returns less isn't therefore a problem, however common the wailing about it is, it's the damn point.