In order to cut the deficit, President Obama has supported the idea of raising taxes to generate much needed revenue. This proposal has drawn the ire of lawmakers on the other side of the aisle who claim that tax increases will cripple an already ailing economy. Republicans claim that tax cuts are needed to grow the economy, but is this really true? Do tax cuts really stimulate economic growth? The long standing argument for tax cuts is that they put more money back in the pockets of Americans, who in turn can spend that money on goods and services. The more that people spend, the better businesses will do, and therefore will need to hire more employees to keep up with the new demand. I don't dispute this particular theory of economic growth, but I do believe it is somewhat flawed. This theory doesn't take into account those individuals who don't take their tax refund and invest it right back into the economy. What about those individuals who take their refund and put it into a savings account or a money market account? By saving or investing, these individuals are not contributing to the growth of the economy, at least not in the short term. I know that if times were tough, like they are now, and the government gave me a tax refund, I wouldn't immediately go out and spend it. I would set that money aside so that I could put myself and my family in a better financial situation down the road. By saving or investing, the money given to me by the government in the form of a tax break would be making money in the form of interest. This makes the most sense to me. Tax cuts will only stimulate the economy IF people spend that money. To say that tax cuts will promote economic growth is not a completely accurate statement. In the end, it is up to those who receive tax cuts to decide whether or not those tax cuts will improve the economy based upon what they decide to do with that money.
Exactly right. Many middle class Americans increase their saving and investing as a result of the small tax breaks they often receive. This is exactly what stimulates the economy. Banks loan the money we give them when they save. They used to wisely loan it to people who would pay them back but that's another blog entry. Thus the small tax break many Americans get leads to the new home loan that is built by other middle-class, skilled workers or the new business that employs additional American workers all of which generate commerce in the form of supplies and materials thus increasing demand in those related fields.
ReplyDeleteThis is exactly why tax cuts stimulate the economy whether granted to the rich or the poor. Money saved and invested is not stored in a vault at Gringotts. Spent money, especially by the middle class probably stimulates the Chinese economy more than ours.
Still, debt and its friend interest are as big an anchor holding the economy back as high taxes would be. If the government would remember when spending that entitlements do NOT stimulate the economy and that all redistribution of wealth requires confiscating the earnings of citizens then it would be less likely to create programs that create perpetual weight on the budget and lead to deficits.
Our government spends money like my neighbor who, after finding out he was losing his job, went out and financed a new car while he was still employed (and it has for quite some time). Alas, now we must tighten our belts and generate revenue the hard way by raising taxes (hopefully in the short term). Next time there is a surplus there should be no debate. You don't go looking for ways to spend other people's money for them. You let them keep it. For now, it needs to be a slow economy and gazelle intensity towards paying off our public debts.