I haven’t heard any good reasons not to cut taxes. Some folks suggest we need to pay for the war and homeland security, so now isn’t a good time to cut taxes because we will have to run up the deficit. This is not a valid argument. Tax cuts, if implemented properly – with the right timing, correctly distributed across income levels, of sufficient size, clearly communicated and of adequate longevity – have a sterling chance of increasing government tax revenue since the economic tax base will be expanded with tax cuts. But even if the tax elasticity of demand turns out to be less than one, meaning a tax cut will generate a bit less total government revenue, Congress knows what to do: balance the budget by reducing the billions of dollars allocated frivolously to special-interest, low-priority expenditure categories. It is shameful how our government plays loose with and wastes citizens’ hard-earned paychecks.
There are many good reasons to cut taxes, however. Tax rate cuts shift power to the people. You have a bigger say in how to spend your dollars. You, not the government, decide how you will consume. You get more freedom and independence. It is more democratic. Your competence as a decision-maker in the marketplace is more fully recognized. The responsibility for consumption is shifted to where it should be: on the shoulders of each and every citizen.
A flat percentage of reduction in tax rates “across the board” decreases the disgraceful discrimination wrought by our tax system. Our tax system blatantly singles out the minority rich for unfair treatment. Our tax system “charges” them more per dollar earned than others have to pay, and they pay comparatively high amounts on money for basically the same government services that the rest of us get. In any other context this is illegal price discrimination. You don’t charge the rich $10 per bar of soap simply because they can afford it. You don’t and you shouldn’t. It’s illegal and immoral.
One of the biggest reasons to reduce taxes now is to spur consumption. Tax reduction has the same effect as a price reduction on a product. Do you buy more when the price is cut? Sure. Tax reduction increases the value of your dollars – their purchasing power. Higher purchasing power means a higher standard of living.
Tax reduction will increase savings. Savings rates are atrociously low in this country. But baby boomers are finally realizing they had better save more. A significant portion of any tax reduction for this generation will be channeled to much needed pre-retirement savings and thereby preserve their purchasing power in subsequent years.
Because lower taxes increase consumption, or product demand, business output will be ratcheted up. This leads to increases in jobs, or unemployment reduction. To produce more “stuff” takes more people.
Increased business output means less unused capacity in the economy and, therefore, greater efficiency. Greater efficiency means businesses can keep the lid on prices. Keeping the lid on prices translates to continued denial of inflation.
Lower tax rates mean a higher marginal return for labor’s services, which means higher employee and entrepreneur motivation. It means you are willing to work harder and longer or to engage in more entrepreneurial ventures, because the expected return for your effort is greater. Your risks and sacrifices are better covered. With enhanced motivation per employee you see heightened productivity that further dampens prices and “ups” the standard of living.
Since lower taxes will expand business output, most businesses will enjoy a profit advance. Business profit increase will turn the stock market back to bull.
Having people keep more of their money means less money will lose its economic clout because of being funneled through government bureaucracy. When the government collects your dollar, one-third of its value is lost supporting the bureaucratic maze, and one-third of it goes to nationally irrelevant special interests, as well as to notoriously high-priced government buying. Only one-third is left to provide you with some sort of improved wellbeing. Dollars going to government are dollars inefficiently and ineffectively used.
Lower taxes will stimulate vital investment expenditures. Nobody invests when there is only enough money for present survival. Individuals and companies will have more funds to put into long-term payoffs such as training, expansion of facilities and equipment, and upgrading of technologies.
Sen. Olympia Snowe can’t bring herself to support a tax cut of adequate size because she thinks it will negatively impact Medicare and Social Security. But whether or not Social Security and Medicare are negatively impacted is mainly a function of Congress’s decision-making – its budget allocation and spending priorities. A tax cut in no way necessitates a reduction in Medicare and Social Security. I have not heard a single soul say they will accept diminished funding for either of these two programs.
Of course, Sen. Snowe has been listening to Alan Greenspan rhetoric as well. Greenspan said in February that he didn’t think a $726 billion tax cut was necessary to boost the economy. What will boost it? Will coming home from war do the trick? I don’t think so. His interest rate cuts have helped prevent serious recession but they have not been enough to turn things around. This is exactly when fiscal tax cut policy makes sense – to supplement monetary policy when monetary policy alone is insufficient.
Rep. Mike Michaud can’t seem to get behind a meaningful tax cut either because, in his own words, “Studies show a tax cut will not stimulate the economy.” I don’t know what studies he is referring to, but if he would look at past tax cuts he would see that without exception they have stimulated the economy. There are cases where the positive effects of a tax cut have been camouflaged by other opposing forces, but that doesn’t mean the cuts didn’t help. When demand drops off, you cut your prices to dampen the volume decline and salvage revenue. Taxes are the government’s price on a dollar bill. Whether it be your business or your government, this is a must response.
Dr. Phil Grant is a management consultant and chair of the Business Administration Department at Husson College.
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