Tax Cuts will not have any positive effects on the economy

The previous discussion of deficit spending leads nicely into this rant about my feelings on tax cuts.

Spending that is carried out by a government is funded by two things: 1) government revenue and 2) debt financing. Capitalist governments, such as that of the United States of America, raise revenue by taxing its citizens. In my previous post I addressed the ills of deficit spending by personifying the US Central Bank and economy. I asked you what you would think about a person (in this case, the US Central Bank) who keeps borrowing more and more money every year. Lets expand that analysis: What would you think about a person who continues to borrow more money and then asks their employer for a pay cut, hence decreasing their revenue? Now consider if, with all of these ill-advised financial decisions, this individual decides to spend/buy more things then they ever have before. Wow! Welcome to President Bush’s Tax Cut 101.

President Bush’s tax cut is a reduction in government revenue. Now that is fine with me. Let the government collect fewer taxes from me and decrease their revenues, as long as they decrease their spending also. That would be the logical thing to do, right? If you lose your job/lose your revenue, you have to decrease your spending. The Bush Administration has told the American public (and the public’s congressional representatives) that government revenue (i.e. taxes) can be reduced while government spending can be increased. They must have good reasons to assert such a thing, right? Well these are the two main reasons that I have heard: 1) The taxpayer needs this tax cut 2) We need the tax cut to help our struggling economy.

The Taxpayer needs this tax cut
Everyone wants something for free. If I were to offer you a Segway for free, you would take it. Do you need a Segway? Probably not. Would you buy a Segway? Probably not. But if it is offered to you for free, you will take it. I feel that a tax cut is similar. When a politician offers you a tax cut you say, “Sure”. It is your free Segway. Did you honestly need it? No. I have not seen the American public cry for it. There are constant demonstrations, protests, marches, and rallies for numerous causes, yet I have not seen a single one for a tax cut. This indicates, to me, that the American public didn’t/doesn’t need a tax cut. Let me also mention that tax rates in a lot of other industrial nations, especially Europe, have much higher tax rates than we do*.

Its good for the economy
This one is fun. First of all, refer to my previous post on deficit spending The Bush Administration’s tax cut has increased our national deficit so all the negatives from that post can be applied here. Here are some new points. Common sense will tell you that debt must always be repaid eventually. Common sense will also tell you that cutting taxes without cutting spending will only increase the debt burden. In other words, in a few years a politician will recognize our astronomical national deficit and they will do the fiscally responsible thing: Raise taxes to balance the budget. So a tax cut today will be followed by an increase of taxes in the future. Think about it. A tax cut gives you money in hand today, but (due to steady spending levels) the inevitable tax increase will take that same money out of your hand tomorrow. Sounds like a loan. In fact that’s exactly what it is; a short-term loan. So with the “perfect” credit markets in the US why does the government need to issue personal loans? (I call the US credit market “perfect” because of its ability to assess risk and supply endless amounts of money to worthy recipients and causes.) The backbone of President Bush’s argument for a tax cut is that this tax cut will increase consumer spending. Why would it? If consumers wanted to spend more they would just take out a loan (think “credit card”). In fact, the point of all points is this: Our taxes have been cut and yet the economy still struggles and consumer spending continues along normal (not accelerated) trends. The increase in deficit spending has hurt the economy (see “Deficit Spending”).

So in other words, I see no positive effects of a tax cut, only negatives. So why, WHY would a politician push for one? Are they just malcontent? No, I do not think so. The fact is, a tax cut is always a positive thing to talk about. It is a free Segway. Remember, politicians are always looking to please or gain constituents. The tax cut topic is also a distraction from other less pleasant political issues. One of President Bush’s main goals for his second term is making his tax cuts permanent. Trust me, President Bush would much rather talk about tax cuts then his secret plans for world domination J .

Be wary when someone offers you a free Segway.

If any economist is reading this post, I know a discussion on the IS-LM curves, and the US’s floating exchange rates interaction with monetary policy would strengthen my argument but this is not an econ textbook! (But I haven’t forgotten J ).

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