Tax cuts would rev sluggish economy

The Kansas City Star ^ | May 13, 2003 | E. Thomas McClanahan

[RAT Patrol]

	Posted on Tue, May. 13, 2003
	Tax cuts would rev sluggish economy By E. THOMAS McCLANAHAN The Kansas City Star Right now, the economy is carrying an unusually large burden of risk and uncertainty. We face a continuing terrorist threat, flabby export markets and lagging business investment. More ominously, some recent trends in retail sales hint that even consumer spending may be decelerating; even Wal-Mart's most recent sales numbers were lower than expected. A sizable tax cut is precisely what the economy needs, but Congress has been debating how much President Bush's proposed cuts should be reduced. In other words, the debate in Washington has framed the issue exactly backward. Congress has been bogged down in the usual conflicts over budget deficits and whether Bush's proposals unduly benefit the wealthy. The spectacle of Democrats worrying about budget deficits is the most amusing wrinkle. On "Meet the Press" Sunday, Senate Minority Leader Tom Daschle sounded like a Republican circa 1975. He's working real hard to frighten himself about deficits. But you won't get deficits under control without two things: a growing economy and spending restraint in Washington. That implies two more things: Given the level of uncertainty hanging over the economy, you're not likely to get a vigorous recovery without tax cuts, and you won't get spending restraint by giving Congress more money. Bush offered a tax-cut package with several laudable features, the most notable being an end to double taxation on corporate dividends and a speed-up of tax cuts approved in 2001 but not yet phased in. Implementation of these cuts has been so slow that in the first year the top marginal rate dropped less than a full percentage point. For all the squawking about The Rich, the full benefits of the 2001 tax cuts aren't scheduled to appear until 2006. Now there's reason to cheer: It looks as if both houses of Congress will agree to speed up those rate cuts to the current year, a very good thing for the economy. The top marginal rate would be lowered to 35 percent, from more than 39 percent when Bush took office. Bush had proposed a wipeout of double taxation of dividends, another very good thing. But the inevitable horse-trading on Capitol Hill has made this prospect doubtful. The House version of the tax cut instead lowers the rate on dividends to 15 percent, while doing the same for capital gains. Getting rid of double taxation of dividends would have been a historic achievement, something to be matched with Ronald Reagan's success in ending the era of punishingly high top marginal rates. When Reagan took office, the top rate was around 70 percent. Today, no one would seriously propose raising taxes back to that level. The House tax cut is smaller than Bush's plan but it would still provide the economy with a real boost. A lower capital-gains rate would encourage more risk-taking, without which few jobs would ever exist. After all, every private-sector job existing today was based on the willingness of some gutsy entrepreneur to face economic risk. You want more jobs? Lower the tax on risk. Merely cutting the levy on dividends wouldn't be as helpful as eliminating double taxation entirely, but it would still reduce the distortions resulting from current policy. A lower dividend tax would provide a boost for the stock market, providing more support for the retirement, pension and college funds of tens of millions of Americans. It would also reduce the imbalance between debt and equity modes of corporate finance. Under current law debt is deductible, but dividends are taxed twice -- once as profits and again as personal income. And a lower dividend tax will boost the balance-sheet credibility of many companies. Dividends must be paid in real cash, not "pro forma" earnings. These are supply-side incentives that say to Americans, save more, invest more and work more, because you will keep more of the reward. The demand-side facets of the package -- such as a larger child credit and elimination of the marriage penalty -- deserve at least one cheer. They reduce the burden of government, but they don't directly encourage more risk-taking and investment. The economy has been wallowing for three years. It needs a tonic, and the more bracing the better. To reach E. Thomas McClanahan, call (816) 234-4480 or send e-mail to mcclanahan@kcstar.com.

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© 2003 Kansas City Star and wire service sources. All Rights Reserved.
http://www.kansascity.com

[Age of Reason]

I don't understand how tax cuts can help the economy.

Tax cuts might induce some people to buy more goods and services.

But then government would have less money to buy goods and services itself.

So where's the net gain to the sale of goods and services?

[Just mythoughts]

This in the KCStar, wow wonders never cease. There subscriptions must have taken a real hit after the "widow" lost.

[Age of Reason]

Also, if people have more money to spend--that might drive prices up; for some items that rise would be temporary--but for other items, like ocean-front property, the rise in cost might be permanent, thereby cancelling-out the benefit to the consumer.

[Just mythoughts]

This in the KCStar, wow wonders never cease. There subscriptions must have taken a real hit after the "widow" lost.

There = Their

[Just mythoughts]

If this "I don't understand how tax cuts can help the economy" is a for "real" question here are some points.

High Taxation takes real money out of the hands of individuals, and employeers.

Government determines where that tax dollars go not the individuals.

More money in my own pocket allows me to spend on whatever I choose, or save.

Government taking money out of the economy constricts the free flow of market goods, no one gets a job, cause no one is making anything cause no one is buying.

The government will spend no matter what amount of taxes they collect. The government/liberals consider tax cuts a spending program they can't afford, it is not their money in the first place, they did nothing to earn it.

[RAT Patrol]

E. Thomas McClanahan is one bright fiscal light in a very dark dungeon of liberal socialistic "thought." He's on their editorial board but you can never EVER see his influence. All we get is an occasional column -- better than nothing.

[RAT Patrol]

Numero Uno: Even if your theory were all there is to it, when government controls the funds two things happen. One, there is the additional cost of bureacracy and political fighting. Two, liberty is taken away from the individual and placed in the hands of government in the form of power and control. That is a dangerous trend even when the motives are good.

But, your statement focuses way too narrowly on the effects of tax cuts. You ignore some of what the article pointed out such as:

... every private-sector job existing today was based on the willingness of some gutsy entrepreneur to face economic risk. You want more jobs? Lower the tax on risk.

Merely cutting the levy on dividends wouldn't be as helpful as eliminating double taxation entirely, but it would still reduce the distortions resulting from current policy.

A lower dividend tax would provide a boost for the stock market, providing more support for the retirement, pension and college funds of tens of millions of Americans.

It would also reduce the imbalance between debt and equity modes of corporate finance.

Under current law debt is deductible, but dividends are taxed twice -- once as profits and again as personal income. And a lower dividend tax will boost the balance-sheet credibility of many companies. Dividends must be paid in real cash, not "pro forma" earnings.

These are supply-side incentives that say to Americans, save more, invest more and work more, because you will keep more of the reward. The demand-side facets of the package -- such as a larger child credit and elimination of the marriage penalty -- deserve at least one cheer. They reduce the burden of government, but they don't directly encourage more risk-taking and investment.

[RAT Patrol]

Also, if people have more money to spend--that might drive prices up; for some items that rise would be temporary--but for other items, like ocean-front property, the rise in cost might be permanent, thereby cancelling-out the benefit to the consumer.

Following your previous theory, wouldn't gov't spending do the same thing, just in potentially different areas? Better that prices reflect consumer demand than government tyranny.

Besides, a market driven rise in property values is not a bad thing for several reasons. First, it reflects earnings, not just consumption. It's profit to a seller, cost to a buyer. The increased transactions produce income for real estate firms, banks, home inspection companies, survey companies, title companies....on and on. Second, local gov'ts actually collect more revenue in the form of property taxes for things like schools (I have major issues, actually, with property taxes, but we are talking about the real effect rising property values have on the economy and gov't).

I am not an economist so my answer is not perfect, but the idea that allowing earners to keep more of what they earn will somehow be self-negating is crazy.

[Just mythoughts]

He picked a most timely topic.

Thanks for the info on him.

[Teacher317]

>>>Individuals allocate money efficiently and intelligently, rewarding excellence in the field of competition.
>>>Government allocates money inefficiently (like about 60% as well as you and I) and stupidly, rewarding lackeys, friends, connected individuals and lobbyists, few of whom know anything about growing wealth. (This does not even address the vast amounts that are simply "lost" through poor accounting and theft)

>>>The amount of money available in the nation is NOT a fixed number. Individuals can grow wealth, government can only take it away.

>>>Allowing citizens to keep the fruits of their labor increases freedom, confidence in the nation (and its government), and tends to stimulate longer-term investing and saving, including incesting in employees (thus creating jobs).
>>>Having government confiscate more and more of the fruits of our labor decreases freedom, decreases confidence, and forces people to live "paycheck-to-paycheck" even more than they already do. The few jobs that are created are typically only through projects, which are short-term, and typically employ non-productive fools rather than innovative entrepreneurs.

I hope that helps.

[Age of Reason]

Individuals allocate money efficiently and intelligently, rewarding excellence in the field of competition.

The excellence American consumers most frequently reward, is the skill needed to dupe Americans out of their money.

Government allocates money inefficiently (like about 60% as well as you and I) and stupidly, rewarding lackeys, friends, connected individuals and lobbyists, few of whom know anything about growing wealth.

Private industry has a better track record of late: CEO's who invest in shower curtains costing thousands of dollars, for example?

The problem is not lowering taxes.

The problem is to have smaller and more efficient government, which would require less revenue to run.

There are some here who will answer me by saying if government had less revenue from lower taxes, then the government will be forced to become more efficient.

I think it more likely the government will either print more money or borrow more money to keep growing.

Look at New York City, for example.

Taxes paid to NYC are way down.

Sure, the city cut 3000 people from their payroll (who will now be added to the city's welfare rolls and still cost money--but this time produce nothing in return).

But most of what NYC is doing is raising taxes left and right.

[Age of Reason]

Besides, a market driven rise in property values is not a bad thing for several reasons. First, it reflects earnings, not just consumption. It's profit to a seller, cost to a buyer. The increased transactions produce income for real estate firms, banks, home inspection companies, survey companies, title companies....on and on.

But That's just money going around in circles: nothing has been produced.

You're still left with the same land that was here when the indians lived on it, but a whole bunch of people have made money and there's nothing to show for it.

Just like government.

[Age of Reason]

Following your previous theory, wouldn't gov't spending do the same thing, just in potentially different areas?

Well, yeah, I guess, pretty much.

That was my point: How does reducing government spending by giving money back to the people help the economy?

Especially when government spends all it has and then some, whereas some people may put the extra money gained under their matresses for a rainy day.

[Age of Reason]

If this "I don't understand how tax cuts can help the economy" is a for "real" question

It's for real. I am seriously wondering how tax cuts can help the economy.

High Taxation takes real money out of the hands of individuals, and employeers.

But government spends that money, which puts it right back in the hands of individuals and employers--as for example, in the pockets of defense workers, who then go out and spend the money in non-defense businesses.

Government taking money out of the economy constricts the free flow of market goods, no one gets a job, cause no one is making anything cause no one is buying.

Isn't the government buying things?

Where does it get its vehicles from, its building material from, its paper from, its computers from, to name a few?

The government will spend no matter what amount of taxes they collect.

That might result in inflation--which lowers the value of the money you have, which is a form of indirect taxation, which puts you pretty much back where you started.

it is not their money in the first place

Whose name is on the money we spend?

This whole economics and money thing seems to me much more complex than it appears at first glance.

I confess, whenever I think on economic things, it makes my brain hurt.

[The Scorpion King]

"I don't understand how tax cuts can help the economy. Tax cuts might induce some people to buy more goods and services.But then government would have less money to buy goods and services itself. So where's the net gain to the sale of goods and services?"

So, what is your explanation for the Reagan economy of the 80's?

[CoolPapaBoze]

It helps the economy by putting money back in the hands of the private sector, which will use it more efficiently than the government. For example, tax receipts are spent by the government on various programs. The money comes in, it's spent, and it's gone. A private individual can take that same money and invest it in a business, the stock market, whatever, producing a multiplier effect through the economy that government spending cannot. The private individual can create an ongoing concern with that money that grows in value, producing revenue in the future for himself, employees, other businesses, etc, which can in turn be spent/invested again and again, etc.

The government can do this also, but only to a lesser extent and not as quickly or efficiently. Most revenue taken in by the government is simply spent or given away via various entitlement programs which do not produce the multiplier effect.

[RAT Patrol]

The more government controls our income the more it controls us. Liberty is the biggest reason for tax cuts. If the gov't took all of your income and gave you what it thought you needed, would you be free? When it takes half of your income how free are you? Government control eliminates individual liberty, kills motivation, ruins productivity, increases unnecessary demands by separating provider from purchaser, politicizes every transaction thus increasing cost of services, changes and lowers the meaning of charity for both givers and receivers, etc....I could go on and on. Here's an article you might enjoy.

July 30, 2002

While Markets Sputter, Government Grows

The recent surge in government growth threatens to undermine the advances in liberty made in the last century.

By:  Wayne T. Brough, Ph.D.

The twentieth century represented an important epoch in one of the world’s greatest struggles—the fight between freedom and totalitarianism. The collapse of centrally planned economies and the dissolution of the largest totalitarian state signaled a clear victory for the alternative of freedom. Yet, when taking stock of the world, it’s clear that totalitarianism is alive and well. Brutal regimes continue to debilitate nations and squander resources in ways that destroy the creative spark that generates wealth and prosperity. Here in the United States, government continues to levy ever-larger taxes, regulate more aspects of our lives and interactions with others, and lay claim to greater amounts of property. Has economic liberalism won the battle but lost the war?

Clearly, government continues to grow at a substantial pace in the United States. President Bush is in the process of creating a new federal agency and expanding federal oversight of corporate accounting practices, Congress is finalizing appropriations bills that mark a return to deficit spending, and state governments are scrambling to identify new revenue sources to pay for the spending binge of the 1990s. At all levels of government, and in both political parties, the push is for larger government. This increase in the size and scope of government ignores important lessons from the past.

Emerging from the industrial revolution, a new class of intellectuals began to challenge our understandings of society and markets. The new methods of production were viewed as dehumanizing and alienating, fundamentally altering societal relationships in terms of power and money. Capitalism was viewed as philosophy that was no longer applicable; something that would be replaced by a more organized society better representing the interests of workers. At the same time, a growing confidence in science and man’s understanding of the world introduced the technocratic state, with an implausible assessment of government’s ability to order society’s intricate interactions. The very visible jackboot of government was fast replacing Adam Smith’s invisible hand.

As collectivists gained ground, new theories of economics and politics emerged, asserting that governments had the ability to calculate and allocate resources in a manner that surpassed the ability of a chaotic, ungoverned market. A few scholars, such as Ludwig von Mises, recognized the impossibility of a government coordinating the millions upon millions of transactions that comprise society. And Friedrich Hayek similarly suggested that the government could not match the ability of a market to process the decentralized decisions of consumers and producers. Such scholars championed economic liberty, allowing individuals the freedom to make their own choices as long as they did not violate the rights of other individuals.

Yet, by and large, government control and central planning were fashionable and came to dominate political discussions. Bolstered by the Great Depression, technocrats saw their stars rising. Rather than assess the institutional failures that prompted the massive deflation, economists and technocrats began to tinker, calling for more government policies to manage the economy. Keynesian economics took center stage as governments turned to economists for fiscal management. Importantly, this represents an significant departure from classical liberalism, as analysts worried more about “society” rather than the individuals it represented.

This was most clearly seen in the totalitarian states, where planned economies directed the flow of resources. Capital and labor flowed according to government edict. Put in more human terms, the wealth and property created by individuals were confiscated by the state, and the individuals themselves had little say in choosing a livelihood to provide for their family. It is no wonder the entrepreneurial spirit—and all the wealth and jobs it creates—died or went underground in these planned economies.

Although not quite as stark, the mixed economies of the West underwent a similar transformation as governments contrived to make economies grow. Tax policy, government spending, and monetary policy became the new tools of economic management. The entrepreneurial efforts of individuals freely interacting were subsumed into highly stylized and technical models of behavior that distinguished little between spending by an individual or spending by the government. Institutions, and the powerful effect they have on behavior, were ignored in favor of fiscal and monetary policies that became levers for government control of the economy. Economic liberty and individual freedom as virtues in and of themselves became lost in the new policy world.

Towards the end of the century, the costs of these policies became quite evident. Collectivists an increasingly difficult challenge of explaining away the fact that totalitarian societies could not feed themselves. At the same time, interventionist policies throughout the West began to take their toll as inflation eroded the wealth and economic growth of these nations. Unemployment pushed upwards, businesses were wary to invest, and consumers faced double-digit interest rates. Under the weight of this economic burden, nations once again turned toward markets for economic growth. The Reagan Revolution in the United States and the Thatcher Revolution in Britain sought to unleash market forces and eliminate the bureaucratic sclerosis that had stifled growth. These ideas spread to other nations that began experimenting with privatization and free markets. Ultimately, the century ended with the collapse of the largest totalitarian state, the Soviet Union.

Throughout history, free societies have been the exception, not the rule. But where they exist, people flourish. However, without vigilance, governments grow and politics overtakes markets in controlling society’s resources. In the United States, government is expanding once again, in response first to a foreign threat and then in response to a weak domestic economy. And while the threats and scandals will diminish, the government and its newly found activities will remain. Washington cannot ignore the lessons of history and the importance of markets in a free society. As markets struggle to correct themselves, policymakers should adopt policies that promote rather than replace markets. Policies such as tax cuts, avoiding unnecessary regulatory burdens, and maintaining a firm grasp on federal spending.



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[Age of Reason]

So, what is your explanation for the Reagan economy of the 80's?

Not a sound experiment.

For all we know, the economy might have been even better without Reagan's influence.

[Age of Reason]

The more government controls our income the more it controls us. Liberty is the biggest reason for tax cuts. If the gov't took all of your income and gave you what it thought you needed, would you be free? When it takes half of your income how free are you? Government control eliminates individual liberty, kills motivation, ruins productivity, increases unnecessary demands by separating provider from purchaser, politicizes every transaction thus increasing cost of services, changes and lowers the meaning of charity for both givers and receivers, etc.

If you want the smallest possible government, you must not increase population density.

Therefore, immigration to this country must be reduced to a trickle.

Not that that will ever happen.

Whatever tax relief you may achieve now, the increasing population of the US--which is nearly all due to immigration--will ensure you'll be taxed even more heavily in the future.