In other words, the raison d’être for tax cutting. I believe there are two primary reasons:
1) Freedom
2) Revenue
Obama has been campaigning on tax cuts, but has usurped the philosophy for tax cutting. In fact, his tax plan does the opposite. Now, if you are sick of hearing about this, I apologize, but I think reading this post will be worthwhile to you.
Obama’s tax plan gives welfare-like tax credits to people only paying payroll and social security taxes, while taxing small businesses and the upper tax brackets more. Therefore, a substantial number of people who aren’t paying taxes anyway (because most receive a rebate for payroll taxes anyway) receive a cut, while the rest of the tax payers pay more or are incentivized not to advance.
Thesis: In a time of economic crisis, tax cuts can stimulate the economy by increasing the disposable incomes of those who create jobs and those who purchase consumer goods. Using the phrase ‘tax cuts’ to woo voters is disingenuous when the tax plan will raise taxes for the individuals who create jobs and provide tax credits those not paying taxes.
In other words, if you’re not paying taxes now, a tax rebate will not incentivize you not act differently because it does not save you any money. To clarify further, the tax cut has not restored the opportunity cost that the tax removed. Keep in mind, that number not owing anything that will receive a tax credit is 44% of Americans.
Now, let’s get into those two reasons a little more.
1) Freedom:
Plain and simple, taxes not only distort markets and result in a dead weight loss, but they restrict individuals’ disposable incomes. Lastly, freedom provides the philosophical justification for limiting government.
A. Market Distortion:
Generally, taxes get passed on to consumers and change the position of the equilibrium between the supply and demand schedule. The taxes, I’m attacking here distort not a market for goods, but for a production factor, in particular labor. It would be fair for a concerned voter to be wary of tax increases across various parts of the economy because it all likelihood it will affect you, but I think income-related taxes hit home a lot closer for most people. The market is distorted because as I’ve blogged about before incentives are skewed to favor tax brackets with increased benefits. For instance, let us say for simplicity you are currently earning $10. Let’s say that a promotion would give you an increase of $1 to $11. The catch is that you lose $0.80 of benefits because you move to the $11-20 bracket from the $0-10. Therefore, you net $0.20 by advancing. This is a simple example, but it shows how the incentives to advance your career can be diminished.
B. Disposable Income
Your income minus taxes. All else equal, an increase in income will result in an increase in disposable income. All else equal, an increase in taxes will result in a decrease in disposable income. What do we do with disposable income. We save and we consume. Where does savings go? To banks and then out to businesses to invest. Beside productivity and technology what is a major factor in economic growth? Investment. Where does consumption spending go? To businesses. Where do business spend money? Paying workers and buying things from other businesses who pay their workers.
You can see how the economy is pretty complicated, but the relationships can be pretty simple.
C. Philosophy.
We live in a society where our government is empowered by the citizens. If we take the philosophical justification out of the equation, it would be a lot easier to argue that the government take everything and dole it back out equally (although, Hayek might have a few things to say about that).
The point is that taxes represent government control and involvement in citizen’s lives. There should be some level of taxation, the government does have a role in the world, but the more we expand this role, the more difficult it becomes to limit that power.
It is in the interest of all of our individual freedoms to consider philosophically how we want to interact with our government. I believe that the federal government should have a limited role and as such should leave people’s money to themselves. I believe that state and local governments can make meaningful differences in their communities, but it comes more difficult when they are in a power struggle with the federal government.
2) Revenue.
The Laffer curve.
Tax revenues can increase when taxes are lowered. In 2007, after the Bush tax cuts, the federal government had record tax receipts. Now of course, in our current economic situation, the deficit is looming larger and larger, but that does not mean tax cuts are not a suitable remedy for economic stimulus.
The real question is when will politicians stop blaming Bush for the current economic situation. Bush has not had the best presidency and I’m not sure what my own approval rating of him is, but I can say that the economy is a lot more complex than any involvement with it Bush has had. Furthermore, I think we have a few executives and quite a few Congresspeople to blame first. A bit of leadership from the White House and Republicans could have done some good though.
What worries me more than anything is that the disapproval of the Bush 43 years and our current economic crisis would justify an Obama presidency taking radical steps and never taking responsibility (look out for a responsibility in politics post). Therefore, this tax plan would go through and I think make our economic situation worse, but would Obama take responsibility or would he blame Bush?
I think the answer to that question is a no-brainer.
Share ThisRelated posts:
spencerb
Leave a reply