Tax Cuts Do Not Stimulate Economic Growth

Time to divorce tax policy from economic policy. Fareed Zakaria wrote in the Washington Post "Romney wrong on tax cuts". While the headline specifically names Romney, this column applies equally well to Obama's failed stimulus efforts.

The issue is that taxes should be used to fund government operations, not tweaked to promote political agendas. Yes, I do have to acknowledge that there must be a degree of latitude in using some tax dollars for social issues and to encourage some social policy. But we should not lose focus of the fact that taxes are needed to fund government operations and that paying taxes are a cost of doing business.

Think of it this way, if someone gets a tax break, then that means that someone else has to pay a higher rate.

Essentially politicians like to assert that they can solve economic woes by tweaking the tax policy. That has tremendous populist appeal, but it both wrong and destructive. Mr. Zakaria concludes: "Tax cuts have been a central cause of America’s deficit problems. For four decades, Washington politicians have bought popularity by cutting taxes, always saying that spending cuts or growth will make up for lost revenue. That rarely happened, and the result is $11 trillion in federal debt held by the public. To perpetuate this pandering one more time is not just dishonest — it is dangerous."

Agreed. To me the line that holds the least amount of water goes something like: "By cutting taxes, job creators will be more willing to invest, thus creating jobs. Those jobs then pay taxes, and thus the tax cut actually increases revenue".

Until I see the evidence that proves a direct connection between the two, I am resigned to believe in the simple logic of tax cut = less revenue.

It is better to take a holistic approach to this issue - IMO

Review Govt Spending - reduce waste and unnecessary costs. ie Govt should be a low cost operation. What ever is agreed social policy, then that has to be paid but waste should be avoided as an ongoing issue.

Tax as fair as possible but Govt must have a balanced budget. Deficits should only exist when emergency issues arise and asap that deficit should be recovered.
Consider short term tax measures to recover such deficits.
When Govt increases tax, it then increases spending. Where as a short term tax has a time bomb and specific task.
People may well accept that for two years their tax will increase but from then on, it will be back to the normal level.
Have a small surplus every year - if possible.

Tax, as far as possible, to encourage saving. No tax on small to medium bank account interest.
Have a consumption tax but not a high one.
Have personal income tax and have it scaled so higher income earners pay more but not a staggering percentage increase.
Have a fair and simple company tax.

The act of Tax has a lot of expense built into it with volumes of complicated laws and resultant consultant cost. Simplify as much as possible and reduce business cost.

To say by reducing a companies tax burden by 1% will equate to more workers is just plain non sense.
Companies only pay tax on Net Profit. Wages are a deductible expense.
Simplify the tax laws and you reduce company costs and encourage more companies and growth.

Consultants will suffer but they can then get a job that builds the country rather then be paid to avoid something.

The great growth stage of the US was done mostly when there was no tax. I believe the issue here is not what level of tax is paid but the bureaucracy that tax carries with it.
If a person saw an opportunity in those days, they didn't need to jump through hurdles to exploit same.
oday, business is constrained by regulation.
Much of this has a good purpose but have we set it up to be user friendly ?? or does it mostly cause people to walk away from an opportunity ?

PNGBill said:

Review Govt Spending - reduce waste and unnecessary costs. ie Govt should be a low cost operation. What ever is agreed social policy, then that has to be paid but waste should be avoided as an ongoing issue.

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One way to accomplish this is to eliminate all programs, such as HUD and Education, that collect money at the local level, move the money up the bureaucracy and then distribute it back to the local level.

PNGBill said:

Tax, as far as possible, to encourage saving. No tax on small to medium bank account interest.

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Unfortunatly, to stimulate growth (consumption), savings have been discouraged. Not to mention flooding the economy with dollars. We get less than 1% on our bank savings. With interest rates this low, lots of available money, and economic growth faltering - the pundits fail to ask why this is not working. It is my belief that we over-consumed under blame Bush and that we are now in a "hangover" period.

PNGBill said:

The great growth stage of the US was done mostly when there was no tax.

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I think that has a lot to do with demographics and not tax policy. In the recent past, we had a lot of immigration, young households, and industrialization. There was a lot to consume then.

Now we have an aging population and we are in a post-industrial period so there is less need to consume. Instead of recognizing this shift in demographics and adjusting to it, our politicians continue to insist on "jump starting" the economy not realizing that it is a futile task. I would like to see how Europe resolves its economic issues since they are in the same post-industrial aging world.

The concept of Spending our way to a better future is just plain wrong.

I know it has worked for short periods but it just doesn't add up. 2 + 2 = 4 and will never = 5.

We have lived with the idea that if we all spend (consume) we will generate jobs and that will lead to more spending.

Developed worlds have mostly out lawed Pyramid Schemes yet Govt is operating one of the biggest such schemes in history.

Yes, build a Dam. It creates jobs and provides a worthwhile asset. "Bridges to no where" will never create a worthwhile asset.
Consumer spending with Debt is not sustainable and never will be.

We used to buy our new Jeans when the old ones were worn out And we had spare cash.
Now we buy new jeans because we saw a great pair that look better then the ones our friend bought last week And we have a little bit left on our credit card level.

Yes, buying jeans when we really don't need them has provided temporary jobs for a shop assistant but in the end, the store will close down and many will lose their jobs.

We created a Tower of consumer need that many young people consider to be normal life. They have just never heard of paying cash for an item or waiting until you save enough to buy something.

I forget the expression which describes the modern trend of wanting an item and not being prepared to wait and save for it.
This is where we have gone wrong.

The finance sector has exploited this trend in society and 10 points to them for doing so. I for one, do not wish to be an ant in the finance sector ant farm and work all my life to pay off debt.

Our grand parents bought a house, they could afford, on credit. Paid it off over 20 years and maintained it well. Renovated from time to time and mostly, stayed in that house.
They retired with savings and no debt.

We bought a house we couldn't afford (expected inflation to cover this gamble). Sold it and bought a bigger house we couldn't afford. Repeated this a few times.
Retired in a "mansion" with a big mortgage. Have no savings and a consumer life style that can not be supported with our modest pension.

Yes, the house may be worth a lot of money and the net asset value may make us rich (on paper) but as we do not earn rent form our own house, it matters little what equity we have in it. A house is nothing more then a tent (in the summer).
Typically we have 5 bedrooms, two lounges and a swimming pool to keep clean and we will be 75 next year. (example only)
This all came about to give our teenage children a "good Life" but they are gone now. Moved overseas and rarely visit.

Our Grand Parents were not as stupid as we thought they were

For the record, we live in a beach side 2 bed Bach - no mansion
and our children do visit sometimes

Australia is a good example of the masses thinking about the consumer society we have built.

When GFC hit, the Govt sent out chq's (AUD900 odd) to every tax payer.
They were told to spend it.
Big companies advertised Specials related to the spending of same.

They didn't spend it all. many decided to pay down debt.

Recent statistics show Australia to have things going for it, except consumer confidence.

This indicates a lot of consumers have thought about their old misguided ways and have not rushed back to the shops.

If this trend continues, society will slowly change. What effect this will have ?? but the trend is positive, to me at least.

Many people I know have cut up their Credit Card and now use a Debit Card.
This means they are Cash Purchasers

Banks no longer make their money from earning interest.
They rely on fees and much of that is consumer spending generated.

Steve R. said:

For four decades, Washington politicians have bought popularity by cutting taxes, always saying that spending cuts or growth will make up for lost revenue. That rarely happened, and the result is $11 trillion in federal debt held by the public.

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The several trillions spent on wars surely made a substantial contribution to that figure.

Moreover, if that money had been invested in productive activities the revenue generated probably would have taken care of the rest of the 11 trillion.

Had the productive activity gone into replacing the country's reliance on oil, the middle east and the invasion of Iraq would not have been so important to the US.

Quote - "I forget the expression which describes the modern trend of wanting an item and not being prepared to wait and save for it.
This is where we have gone wrong."

I think Instant Gratification might be the expression you're thinking of.

Taxing individuals for re-distribution logically will work if the raised income is spent on items that increase wealth to a greater extent than if the money had been left with the individuals who originally created that wealth.

If you believe governments are more efficient at spending money than individuals you should believe in higher taxes if you believe that they are less efficient you should believe in lower taxes.

Individuals face some market factors that tend to reduce their ability to waste money.
They cannot start interncontinental wars
They are generally (but not always) held accountable for their debts (unlike countries domestic law being a more powerful guardian than international law)

The phrase

Quis custodiet ipsos custodes

"who guards the guards?"

Is as valid now as it was when Decimu Lunius Luvenalis wrote it in the 1st and 2nd century.

I personally believe that inequality however is a very devisive force and everyone should have access to free education, basic health care and the right to access of protection (policing) and taxation and governments are required for this.
But simple re-distribution of wealth in the long term stifles rather than increases wealth.

Galaxiom said:

The several trillions spent on wars surely made a substantial contribution to that figure.

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The US military industrial complex has lost sight of the fact that equipment, including ships and planes, needs to be expendable, cheap, and easily replaced. The Washington Post recently ran this article: Stealth destroyer, at over $3 billion apiece, is US Navy’s latest answer to rising China.

The article also notes: "They point to the problem-ridden F-22 stealth jet fighter, which was hailed as the most advanced fighter ever built but was cut short because of prohibitive costs. Its successor, the F-35 Joint Strike Fighter, has swelled up into the most expensive procurement program in Defense Department history."

Reagan, made a the assertion that we "won" the cold war by bankrupting the USSR, seems that we are now bankrupting ourselves by spending massively on exotic military equipment of dubious value. Not to mention attempting to foster a new "cold-war".

We seem to ignore that every technology, no matter how advanced, is subject to a counter-measure; some of which are very low-tech.

Advanced technology also requires an "army" of highly skilled technicians to keep the equipment operational. If we were really in a "hot" war with a technological equal, I would question our ability to even keep the equipment operational.

Very true Steve but the drone technology seems to be a bit of counter development and is showing wide scale deployment. Quite a few of them are prop driven.

Someone is waking up to the fact that stealth fighters are totally useless for the kind of protracted gorilla warfare prevalent these days.

Lightwave said:

Very true Steve but the drone technology seems to be a bit of counter development and is showing wide scale deployment. Quite a few of them are prop driven.

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Implementing drone technology is the appropriate approach. But it is not without its own issues. Domestic Surveillance.

Coming soon: Bigger drones Salon (May 15, 2012) wrote: "Public safety agencies can now get expedited permission to fly drones weighing up to 25 pounds in U.S. airspace, according to new rules approved Monday by the Federal Aviation Administration." Smile for the camera.

Lightwave said:

I personally believe that inequality however is a very devisive force and everyone should have access to free education, basic health care and the right to access of protection (policing) and taxation and governments are required for this.

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I agree, and I think more people in the US are starting to believe this as well. We can be very proud as Americans, love our country, etc., and still see that we are behind the curve of other modern nations.

Our healthcare is failing the average American while being amazing for those who can afford it. Our nation is spending billions and billions on military might to protect oil supply, great for oil companies & their shareholders, bad for the average American.

How many weeks of vacation does the average European enjoy? 5? Government-mandated vacations even. Here in the USA, we are attacking our labor unions for daring to ask for a good wage & benefits for their job. Rich people getting richer, middle class disappearing, and the numbers of the poor bloating.

And yet, somehow, many people just scrapping by are being convinced that its not the fault of the rich at all. In fact, those rich people need MORE tax breaks in order for the economy to get started.

In order for a government of the people and for the people to work, it requires educated people. To this day one of our political parties continues to attack public education funds and make educators out to be lazy and greedy.

Its all part of the game, and the name of the game is control.

Megacitizen said:

Quote - "I forget the expression which describes the modern trend of wanting an item and not being prepared to wait and save for it.
This is where we have gone wrong."

I think Instant Gratification might be the expression you're thinking of.

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Yes. This is one of societies biggest problems

Taxing wealth is wrong because this often results in taxing those who save.

Taxing income is the best way and also, taxing spending.

Govt's role should be limited, as much as possible, to providing basic social services, as covered in most posts. Health, Education and Security.
Plus, safety nets for the unfortunate.

They should do this at the lowest cost possible and balance the budget every 3 years. This will allow overspending in emergency but then two years to recoup before the three year balance is required.
This may require short term time bomb taxes.

Low taxes means no tax breaks for anyone. Low income people, of course pay lower tax or no tax for very low income but to give tax breaks to jump start the economy is stupid and will not work.

High income earners employ very few people - servants mostly.

Business employs people and they already get tax breaks because they can deduct the cost of wages.

What is the biggest stumbling block to starting a new business - regulation. Not Tax. No business worried about paying tax on a profit and because of this decided not to start a new business.

Personally I think consumption tax has a lot going for it and think it would be ideal if we could get rid of all of the other taxes and concentrate on consumption tax. You might be able to have a system whereby luxury/nicer goods are heavily taxed and others aren't.

That way subsistance items could avoid tax and therefore the poor could as well. Plus those that are efficient in their daily lives would have lower tax burdens. This would encourage things like shorter commutes and I hope more reasonable choices in terms of products while rewarding those that save.

I have no idea whether this is practical though and considering we have goods and services tax in addition to all of the other taxes we'd probably have to really heavily tax some products.

When I am king.

Only consumption tax would too high a burdon on the tax rate.
This forces some products to have different tax rates as poor can not afford 40% tax on bread and milk.
The next logical step is suppliers put effort into their product having a lower tax then a competitor product and of course, law makers lobby for product exemption etc.

Also, why shouldn't there be some level of Payroll Tax and Business Profit Tax ?
Both of these activities take full advantage of services provided by tax payers.

Fair Tax....

Well "Tax Cuts" is really just a political talking point on one end, and then on the policy end it's used to give them to those who are most connected.

The wealthy have the sentiment of balking at having to pay millions of "their" dollars out to those ewww poor people, and stuff for them.

Most Americans have a sort of nasty feeling about taxes. Starting out in working life you really don't see what tax money buys you. It's just money coming out of your paycheck, and you're poor. You could really use that other 15-20% to pay for rent or food. So people just hate taxes, because they don't understand them.

Then if you do understand them, you still end up hating them, because you see most of it is being spent in horrible places. All the while a politician is saying they need to cut your services to fix a debt they're creating. >_<

XD

But these are things only alleviated by a well informed and engaged population. Something we haven't quite accomplished.