I agree with both of the posts that came before this one; they are both correct each in their unique way…I would like to suggest another approach to the question;
What factors in the economy should be manipulated and in what way to get the biggest “bang” for the buck in improving the economy?
The case for tax reduction as a means to improve the economy in the USA is compelling, but as the two posts before this one pointed out clearly, not all tax cuts are equal in this respect…Anything that allows people to keep more of their money for investment will spur that activity and grow the economy by expanding business and providing jobs for the consumer who is, as one of the posts pointed out correctly, the driving force behind the whole system…But that depends upon whether other factors are conducive to investment; for example, an income tax reduction will help little if the recipient still has barely enough left to live and so does not invest; or the tax on dividends and capital gains are exempted from the reduction.
It is clear from the study of human nature that people will typically continue to do those activities for which they get rewarded and discontinue the ones for which they are punished in some way…The government found long ago that it could influence the taxpayers to behave in a certain way through the manipulation of the tax code…A sort of “joy stick” for the economy, if you will…The problem is that typically the people making the laws for the government are not business people, they are lawyers and social worker types who have a myopic view of business at best; they tend to think in the abstract in terms of what people “should” do rather than the realistic world of what people “will” do…So they push the “joystick” towards social engineering when manipulating the tax code, often causing a negative impact on the economy.
For an example of the above; When the income taxes for the less wealthy is reduced (a tax cut) and the government is not reduced (or, indeed, is increased), then taxes are increased on the top wage earners because “they can afford it” and the government needs money to operate, the wealthy stop investing because the government will just take more of their money if they make more…The lack of investment shrinks the business instead of expanding it and jobs are lost…Job loss causes reductions in consumer confidence and thus less spending causes further reductions in business and the cycle grinds into the ground…On the other hand, if taxes are cut across the board and government is maintained at current levels or reduced in proportion, the less wealthy have more to spend so consumer spending goes up, the wealthier folks invest, business expands to meet demand, and jobs are added which keeps the spiral going up.
There is another way to look at the whole tax cut question, however…If it is accepted that people will do what they are rewarded for doing and will stop doing what they are punished for doing, then maybe our whole tax system should be examined with a critical eye…Instead of trying to engineer social change with the tax code (it can be argued that this is not within the scope of government responsibility according to the Constitution anyway), maybe it would be better to reward activities that positively influence the economy rather than those that tend to affect it negatively…The present income tax does what it says; it taxes income or productivity because the more you make, the more you pay…In other words, it punishes productivity…Suppose instead of an income tax, we had a consumption tax; we tax the purchase of new goods and services.
At first glance it would appear that this would punish consumption thus providing a negative influence on the economy, but look at it further…By removing all of the income taxes from the manufacture of a product (from all the salaries of people who brought the product to market as well as the company that caused it all to happen), the price of the product at the retail level would be reduced…If we then tax the sale of the product at the same rate as the reduction of price, the new price including the consumption tax would be equal to the old price under the income tax system!...But the consumer would tend to spend more because he would be getting his entire salary, not a net after withholding because there would be no withholding for income tax…The businesses would not be paying income tax, so the incentive to manufacture in this country would be greatly increased and businesses that have gone overseas with their operations would come back at the first opportunity to take advantage of the tax free environment…Add to all of this are the taxes gained through taxing the purchases of people engaged in illegal activities such as drugs, under the table payments, and illegal alien salaries…These folks do not report their income today and thus do not pay taxes, but they do and will buy things and will pay their taxes then…All of this because we do not tax behavior that tends to improve the economy; things that we want to increase.
Check out WWW.FAIRTAX.ORG for a better explanation.
Sorry this is so long, but it is, after all, a very complex subject.
Peace.
