Saturday, May 13, 2006
Do Low Taxes Stimulate the Economy?
In my previous post I questioned the Republican assumption or claim that reducing taxes stimulates the economy and produces prosperity and jobs for all. The public argument that Republican tax-cutters make is that by reducing taxes, the government leaves more money in the hands of private consumers and investors. There is thus more money to finance new businesses and expansions of existing firms. There is more money to spend on consumer goods, thereby encouraging increased production and creation of new businesses.
I’ll leave aside the real or private argument, which I stated in my previous post. I challenge the assertion that simply reducing taxes has any effect on the availability of money to fund purchases or investment in new or improved businesses. Let’s follow the money. Government spends money. The money is used to buy materials, to build and improve infrastructure, and to pay salaries. In estimating the stimulative effect of spending on the economy, we must take into account spending and investment by government as well as by taxpayers. If the effect is the same, then the argument that reducing taxes stimulates the economy is not valid. The only way that such an argument can be validated is to show that government spending and investment stimulates the economy less than the spending and investment by private persons and institutions.
I’ve never seen a study that addresses that problem. I have read somewhere, some time long ago that government spending stimulates the economy about 1.6 times as much as private spending, on a per dollar basis. I can’t verify that ratio. It may have applied to the economy under different conditions than those that we have now.
Continuing to follow the money, we find another flaw in the argument that low taxes stimulate the economy. Certainly at present, our government continues to spend at a rate that bears little relation to the revenue from taxes. The difference is made up by borrowing. That is, instead of increasing taxes to match the outgo, government sells bonds to wealthy individuals and foreign governments. The sale to foreign governments is bound to be temporary, for eventually they will decide that the United States is a poor credit risk. Our government will continue to sell bonds to the wealthy individuals, who otherwise would have to pay taxes at a higher rate. So, a large part of the Bush tax cut goes to wealthy persons who send the money to the government as payments for bonds rather than in the form of taxes. Thus, in reality, the tax cut does not put more money into the hands of consumers. It puts more money into acquiring government bonds.
The Bush argument that tax cuts also benefit middle and lower income taxpayers, and that these taxpayers are the spenders that stimulate the economy, seems rather hollow. Some recent estimates of tax savings indicate that individual having incomes below twenty thousand dollars a year don’t get any reduction in their taxes. Individuals or families in the range of around fifty or sixty thousand may get reductions of less than a hundred dollars. The big advantage goes to the very wealthy who reap a benefit of tens or hundreds of thousands of dollars. But these are people who are not going to run out and buy a lot more stuff. They’re multi-millionaires and they already buy all the stuff they want. They’ll want to sock the money away in a safe investment, such as T-bills.
I’ve said enough. The real reason for the Republican tax policy is to repay the Party’s backers. Any intelligent person can figure for himself or herself that tax rates, at least in the range that exists in this country, can not have much effect on the economy. In order to show that reducing taxes stimulates the economy by putting more money into circulation, you have to show that government does not spend the money it collects in taxes, but rather salts it away in Swiss banks for the rascals to spend after they are voted out of office. I know a few people who actually believe that’s what happens to their tax dollars.
I’ll leave aside the real or private argument, which I stated in my previous post. I challenge the assertion that simply reducing taxes has any effect on the availability of money to fund purchases or investment in new or improved businesses. Let’s follow the money. Government spends money. The money is used to buy materials, to build and improve infrastructure, and to pay salaries. In estimating the stimulative effect of spending on the economy, we must take into account spending and investment by government as well as by taxpayers. If the effect is the same, then the argument that reducing taxes stimulates the economy is not valid. The only way that such an argument can be validated is to show that government spending and investment stimulates the economy less than the spending and investment by private persons and institutions.
I’ve never seen a study that addresses that problem. I have read somewhere, some time long ago that government spending stimulates the economy about 1.6 times as much as private spending, on a per dollar basis. I can’t verify that ratio. It may have applied to the economy under different conditions than those that we have now.
Continuing to follow the money, we find another flaw in the argument that low taxes stimulate the economy. Certainly at present, our government continues to spend at a rate that bears little relation to the revenue from taxes. The difference is made up by borrowing. That is, instead of increasing taxes to match the outgo, government sells bonds to wealthy individuals and foreign governments. The sale to foreign governments is bound to be temporary, for eventually they will decide that the United States is a poor credit risk. Our government will continue to sell bonds to the wealthy individuals, who otherwise would have to pay taxes at a higher rate. So, a large part of the Bush tax cut goes to wealthy persons who send the money to the government as payments for bonds rather than in the form of taxes. Thus, in reality, the tax cut does not put more money into the hands of consumers. It puts more money into acquiring government bonds.
The Bush argument that tax cuts also benefit middle and lower income taxpayers, and that these taxpayers are the spenders that stimulate the economy, seems rather hollow. Some recent estimates of tax savings indicate that individual having incomes below twenty thousand dollars a year don’t get any reduction in their taxes. Individuals or families in the range of around fifty or sixty thousand may get reductions of less than a hundred dollars. The big advantage goes to the very wealthy who reap a benefit of tens or hundreds of thousands of dollars. But these are people who are not going to run out and buy a lot more stuff. They’re multi-millionaires and they already buy all the stuff they want. They’ll want to sock the money away in a safe investment, such as T-bills.
I’ve said enough. The real reason for the Republican tax policy is to repay the Party’s backers. Any intelligent person can figure for himself or herself that tax rates, at least in the range that exists in this country, can not have much effect on the economy. In order to show that reducing taxes stimulates the economy by putting more money into circulation, you have to show that government does not spend the money it collects in taxes, but rather salts it away in Swiss banks for the rascals to spend after they are voted out of office. I know a few people who actually believe that’s what happens to their tax dollars.
