How Raising Taxes (GASP!) Could Actually Help the Economy
- Aug 30, 2010
- admin
- Investing
GEORGE BUSH WAS 100% RIGHT TO LOWER TAXES BACK IN 2003.
At the time, almost every economist around was predicting surpluses “as far as the eye can see.” Even the objective Congressional Budget Office (C.B.O.) predicted surpluses for the next decade.
Why wouldn’t the government give our own money back to us? Especially when the alternative was just to let bureaucrats in Washington spend our money. That’s almost just a ridiculous proposition.
What I found particularly comforting about the tax act was that it was set to expire in ten years. In my view that was a tacit admission that the surpluses weren’t likely to be permanent. And while folks have long debated the distribution of the tax refunds, nobody could have reasonably argued at that time that the surpluses would be permanent.
Here we are almost ten years later with the tax bill set to expire, pushing taxes back to the level they were at during the Clinton years. But a lot has changed in almost the decade since that happened. And unfortunately much of it hasn’t been good.
Aside from the obvious changes during the past decade (9/11, two wars in the Middle East) we find ourselves in the toughest recession we’ve faced since the 1970’s. To make matters worse, there seem to be 50/50 odds that the growth we’ve experienced during the past two quarters is getting weaker, leading to a “double-dip” recession.
Given these facts, many reasonable folks have argued that we should extend the tax cuts so that they don’t expire for a few more years. This way, we don’t have what amounts to a “tax increase” in the middle of a tough economic climate.
It’s incredibly hard to argue with this logic, especially when you consider how much American families are hurting right now. Even worse, letting the tax cuts expire makes for awful politics. Who on earth wants to run for office as the person who raised taxes on his or her constituents at a time like this?
To cover their butts, the governing political party has suggested a familiar compromise – to let the tax cuts expire for the “rich” while keeping them in place for the “middle class” (don’t you just hate phrases like that?).
When you don’t know the facts the argument seems to make sense: since rich people are more likely to save money (as opposed to everyone else who spends it) taxing them won’t really impact the economy. (I always wonder if the people who say that have ever been given a job or a paycheck each week by a poor person).
And that seems to be now where the argument is headed. Just think about it – what politician in his right mind would argue against raising taxes on the rich while keeping them low for everyone else?
But there is another argument that needs to be discussed. And since so few people are willing to mention it (especially those in public office) I almost feel a moral obligation to present it to you as fellow citizens of this great Republic.
Trust me when I say if I didn’t feel our children’s future depends on this kind of candor I wouldn’t say this but it literally does, so I have to.
The Argument for Letting the Tax Cuts Expire – Across the Board.
Believe it or not, letting the tax cuts expire may actually be beneficial to our economy. In fact, I think it could be instrumental in helping our economy recover much quicker.
Why?
Because to finance the tax cuts the U.S. government has to issue debt. That means the U.S. government is borrowing money to pay for the tax cuts.
And how does our government borrow money? By selling billions of dollars of bonds to investors each and every week.
What’s happening now is that we’re experiencing something called the “crowding out” effect. What that basically means is that the U.S. government is sucking up all the money out there from private investors.
In other words, the government keeps hogging up all the money that investors have to invest in other things such as financing new companies, etc.
And when investors aren’t financing new companies two things happen (1) we lose our competitive edge, as money is pulled away from companies that can finance new technologies like “green technologies” and; (2) unemployment stays high due to the lack of private investment.
As a result, we stay in recession for far longer then in years past as unemployment stays stubbornly high due to lack of job creation, etc.
Some have argued that the “crowding out” theory doesn’t apply any longer because most of the debt we sell now is to foreigners. This argument isn’t valid for a two simple reasons: a look at China’s recent move to diversify heavily into Euros is just one example of the fact that foreigners are buying less of our debt then at any time in the past decade – while at the same time we happen to be issuing more debt then at any time since WWII.
‘Some Very Difficult Choices’
There’s a trend I’ve noticed lately that I’ve found very disturbing: whenever I see a foreign dignitary being interviewed, say, on Charlie Rose, he’s almost always asked how he (and his country) perceives the economic situation of the United States.
And almost to a person, they always say almost the same thing –
“The United States is still by far the largest, most dynamic economy in the world. But the U.S. faces some very difficult economic challenges. Americans have some very tough choices to make. From what I’m hearing, I think the international community is taking a ‘wait and see’ attitude to see if the United States still has the will to make those kinds of tough choices when it has to.”
Frankly, I couldn’t agree more. We do have some tough choices to make. And what’s so disturbing to me is that I’m not hearing anyone lay it out the way it needs to be said. Because let’s face it folks – up to this point everybody’s been afraid to tell us what we need to hear. They’ve been treating us like babies, no joke.
And I think it’s about time our elected representatives start talking to us like we’re frigid adults. Here’s what I think needs to be said by the people we HIRED to say these kinds of things to us:
“My fellow citizens, let no one doubt that this is a difficult and dangerous effort on which we have set out. Many months of sacrifice and self-discipline lie ahead — months in which both our patience and our will will be tested, months in which many threats and denunciations will keep us aware of our dangers. But the greatest danger of all would be to do nothing.
The path we have chosen for the present is full of hazards, as all paths are; but it is the one most consistent with our character and courage as a nation and our commitments around the world. The cost of freedom is always high, but Americans have always paid it. And one path we shall never choose, and that is the path of surrender or submission.
Our goal is not the victory of might, but the vindication of right; not peace at the expense of freedom, but both peace and freedom, here in this hemisphere, and, we hope, around the world. God willing, that goal will be achieved.
Thank you and good night.”
For those of you who’ve noticed, that is an excerpt from John F. Kennedy’s “Cuban Missile Crisis Address to the Nation.”
I take from Kennedy’s speech for three reasons:
(1) Because I think the dangers we face as a nation right now economically are ultimately dangers to our very way of life as a nation and;
(2) Because it reminds me of what greatness in our political leaders looks like (and, sadly, just how far we’ve fallen from it).
(3) Because it reminds me of what greatness in America looks like; as soon as Kennedy laid it out straight to the country, we responded with the kind of bravery that makes us special.
I know for a fact we haven’t fallen so far so fast as a nation. It’s just about time we start hearing the truth from our political leaders and start making some tough choices.
You are what you read.
Dylan Jovine