Monday, May 22, 2006

Would tax cuts stimulate the economy if they really brought cuts instead of deficit spending?

Bush claims tax cuts have actually increased the amount of revenue that the federal government "takes in" by stimulating the economy. They say more taxes are collected from a bigger economy, in spite of the lower tax rates.

Take a deep breath.

That is quite a complicated concept and it has some truth, but here is a question I ask.

Would this "economic stimulation effect" still happen if the tax cuts were accompanied with equal spending cuts on the part of the federal government?

In other words, of course the economy is stimulated as it's getting a double barreled influx of cash.

Lower taxes, but federal spending remains high.

The economy would really suffer if tax cuts were equaled with big cuts in federal spending. Cuts in entitlements, military spending, highways and infrastructure as well as hurricane relief, for instance. If the tax cuts caused these huge spending cuts, then the economy would not be doing so well.

Or, at least I don't think it would be doing well.

Basically the economy is doing well because low interest rates have allowed us to put things on the credit card.

We have low taxes while the federal government continues to dump money into the economy. The federal government can continue to spend money on keeping infrastructure running.

The best of both worlds. That is until the credit card comes due.

Still one might also have to ask, "what else would any president do?" Walk away from hurricane relief?

I never voted for Bush though.

Bringing the troops home from Iraq could save money.

Anyway, our government is spending lots and keeping taxes low. Some say "spending like a drunken sailor," but what other choices does it have?

Will this credit card ever come due?

That's a good question.

Sometimes I wonder. It seems like it's "easy money." Maybe the federal government will eventually declare some form of bankruptcy.

Then what will happen?

Could life just go on with little consequence to the economy?

Life goes on like this is just some sort of "paper shuffling" matter.

Then again maybe not. Who knows.

3 comments:

Ian Clifton said...

The two theories are that keeping taxes as they were would keep a consistant revenue coming in and lowering taxes will increase the amount that money is shifting hands so the government collects more in taxes anyway. Of course, giving the rich people the largest cuts always made me wonder. For instance, if you give a poor person a tax break, he/she will likely go out and spend that money on much needed food or clothes or a car, and thus the money goes directly back into the hands of the corporations which are largely controlled by the upper class. Why give the upper class better tax cuts when the middle and lower class could better benefit from them while simultaneously helping the upper class?

Robert said...

I was once in an economics class where they explained that tax cuts for the poor only boosted consumption of consummer goods while tax cuts for the rich would (theoretically) boost investment in "plant and equipment." "Give the poor a fish and that person eats for a day." "Give the rich a fish and they build a fish farm for life?" The theory pencils out on paper, but I fear that the rich have squandered most of their wealth.

Anonymous said...

The true fact about the tax cut is that it did indeed help the poor and middle class. According to the most recent survey by the IRS(2004), 40 million people paid no taxes at all, up from 27 million from before the tax cuts. For households of 100k or less in AGI,(the middle class)the minimum tax reduction was 18% and the maximum tax reduction was 54%. Now the rich also received a tax cut, but they also pay 87% of all the taxes that are collected by the IRS. If you look at the stock market since the tax cuts, we are in the 5th longest bull market since 1900. The economy is healthy and moving in the right direction. All classes are benefitting from the tax cuts as home ownership is at its all time high. The rich always owned homes, so the growth must be in the middle class. These are facts not theory's.