Tuesday, October 07, 2008

Capital Gains tax cuts can create the economic equivalent of run away generator

I hear that old power plants used to experience something called "run away generator" at times. When several generators were in a power grid, one might start functioning like a motor, rather than a generator. A motor without a governor to keep it from spinning too fast. The generator would go so fast that it would fall apart, basically. There may be more safeguards against this phenomenon happening now.

Our economy could be seen in the same way. Cuts in capital gains taxes that allow such things as huge profits from selling a home can fuel bubbles such as the recent real estate bubble that's now bursting.

Many Republicans and even a few Democrats will say tax cuts are good to speed up the economy. They even argue that total tax revenue collected can increase in spite of the tax cut because of increased economic activity that would be taxed by the remaining taxes.

Revving up the economy, but can the economy go too fast?

Economic bubbles create problems as we are now experiencing.

Also one must consider environmental problems created by increased consumption.

Quality of life issues come to bare as well. As we speed the rat race up, our lives can become little more than keeping up with the Jones' in that frantic chase for goods and services.

Taxes are not only used to fund the government, they can also be seen as a needed breaking mechanism on economic growth. Like run away generators, a run away economy can cause problems.

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