Sunday, September 16, 2012

Tax Cuts Are Not The Issue

Yesterday's (September 15, 2012) New York Times contained an article titled "Do Tax Cuts Lead to Economic Growth?" that goes through the monotonous exercise of examining the various tax cuts and increases enacted by Presidential administrations since G.H.W. Bush and how, in the author's opinion, tax cuts have actually depressed growth, increases having had the opposite affect.  While it could be argued that tax increases and reductions have a lagged effect on the economy and maybe the author is just missing that point, in my opinion the whole tax increase/decrease debate is just a giant red herring. And that's because what really matters is the level of government spending. 

In a nutshell, this is how it works:  if government spending increases, the money is taken from the private economy either through taxes or borrowing, both of which reduce the money available to be spent or invested by individuals or corporations. Reducing taxes wIthout reducing spending just means that more has to be borrowed--any increase in private activity will just be offset by the increased cost to service the debt.  Increasing taxes will have the opposite effect. 

So, getting back to the NYT article, has the author considered how much G.W. Bush increased government spending and how, maybe, that has had something to do with lack of growth in the private sector?  As discussed in a previous post (Spending is THE Problem), Ronald Reagan, the patron saint of tax-cutters, believed that, by limiting its sustenance, tax cuts would actually reduce the amount of government spending.  What Reagan failed to understand was that Congress's penchant to live beyond its means could not be controlled so simply.  Today's tax-cutters don't even pretend that cutting the size of government is their goal, being instead content to redistribute the pie based on their own personal beliefs.

Is it any wonder that Republican tax cut proposals are met with so much skepticism?  Without corresponding spending cuts, they will most definitely increase the deficit. It's just math.  Any benefit that goes to one group will be equally offset by the increased liability of the rest. The sum of the two will always be zero.  And that goes for Democratic tax increases as well.  Both actions--without spending cuts--are zero sum games.  What both parties have embraced is simply class warfare.

Which, finally, leads us to the most important question, the one that really lies at the heart of the matter:  Why should we care whether the government promotes the private economy by reducing its own spending or whether it completely manages the economy?  Two words--Soviet Union, where the government planned everything and no one produced anything.

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