The Economics of Tax Cuts
How cutting taxes spurs the economy and growth
Taxes certainly have been in the news lately, as President Obama always talks about how the rich supposedly aren’t paying their fair share and how the government needs more revenue to pay down the debt.
President Obama, his Democrat followers and even the big-government Republicans who voted for the disastrous fiscal cliff deal in January are all economic illiterates. They don’t understand basic economics and capitalism.
Capitalism is the most humane economic system on the face of the earth. Time and time again, capitalism has proven to be the system that best lifts the poor out of the poverty and respects the individual.
Low taxes are key to capitalism. Keeping taxes low respects the individual, allowing you to keep more of your hard-earned money. Economically, it efficiently allocates resources by making the market more free, which results in economic growth and hence more government revenue.
Taxes being kept low on everyone allows for someone to have more money at his or her disposal so it is easier to start a business.
The individual who wants to start a business benefits from being able to keep more of his money so he can allocate more money into starting his or her business. Having a lower income tax or business tax (depending on how the business files) lowers the cost of starting a business. But in most cases, this is not enough. The individual will also need money from outside sources at first since it takes awhile for a newly born business to turn a profit.
This is where investors come in. Investment is the lifeblood of the economy. Without it, businesses can’t start. Investment also helps current business obtain more of a profit, which allows the business to be able to grow and create wealth that helps its employees and the rest of society.
Taxes that are too high stifle investment. The tax that’s key to investment is the capital gains tax, the tax paid when stock is sold. Right now it stands at 20% after the fiscal cliff deal and will soon be 23.8% due to the ObamaCare tax.
Naturally, a tax on stock will stifle investment when the tax is too high. The way to think about it is to view the capital gains tax as a wall between the investor and the business. The best thing to do is to break the wall altogether and zero out the capital gains tax. History shows that whenever the capital gains tax is lowered, economic growth occurs and government revenues rise. When the capital gains tax is raised, the opposite happens.
Those who peddle class warfare will argue that the capital gains tax already let’s people like Warren Buffet pay a lower tax than his secretary, which means that the rich aren’t paying their fair share.
This is false. Warren Buffet does not pay a lower rate than his secretary. He first pays the corporate income tax of 35% (the highest in the world among industrialized nations, and that’s not including the state corporate tax which makes it more like 40%) and then the government takes a second bite out his income through the capital gains tax, which makes his tax rate closer to 50%. And when you include deductions- for himself and for his secretary- the result is a lower tax rate for his secretary.
By lowering taxes on everybody, investment is increased in the economy. More businesses start up, existing businesses have more freed up money at their disposal to expand and grow which creates wealth and hence more jobs. The economic climate allows more foreign investment, more people to come to America, and more people to take money out of foreign tax havens and invest in America. People with more money at their disposal- thanks to lower taxes and jobs created from lower taxes- can spend money on goods and services they otherwise couldn’t afford that add to profits. Since the consumers are the ones who decide which products to buy, the good businesses are sorted out from the bad ones. Hence, resources are allocated more efficiently.
The class warfare types on the left snicker at this and call it “trickle-down economics”, and assert that we believe in cutting taxes for the rich and nobody else to try and stimulate the economy from the top-down. Therefore, we capitalists are for the rich and hate the poor and middle-class.
“Trickle-down economics” is nothing more than a straw-man argument used by the left to falsely characterize capitalism, and it’s also a derogatory term. Yes, there are some benefits on cutting taxes for the rich, since the rich have the money to invest and spend. Most employers fall under the category of rich. Has anyone ever gotten a job from a poor man? The answer of course would be no, as according to Forbes, 50% of job creators are millionaires.
But tax cuts capitalists like myself propose are not tax cuts just for the rich, they are across-the-board tax cuts for everyone. Even in the case of a flat tax or a fair tax, other taxes are eliminated in the process to make it a tax cut for everyone, not to mention the added simplicity to the tax code makes is an indirect tax cut for everyone.
Plus, wealth does not flow from the top down under tax cuts and capitalism. Employers do not profit first and then pay their employees. It is the expectation of lower costs in the future that stem from tax cuts that allow employers to be able to hire more employees and give wage and benefit raises to their employees that are worked out in a contract between the employee and the employer. The employees in a business are paid first, and then the leftover money is goes into the pockets of the CEO. If anything, this makes capitalism closer to trickle-up economics.
The results speak for themselves. Tax cuts have been proven to work. When Ronald Reagan was president, he slashed taxes across-the-board. Income taxes were cut across-the-board by thirty-percent that were marginally-adjusted for inflation, as well as massive reductions in corporate and capital gains taxes. And then in 1986, the tax system was simplified into a two-rate tax system of 15% and 28%.
Capitalism was free to work its magic, and according to Forbes, the Reagan recovery resulted in 20 million new jobs being created under Reagan. The Heritage Foundation says that revenues increased by 57%. All income groups were better off. The Reagan recovery was so massive that it lasted longer than Reagan’s presidency, to 43 million new jobs and $30 trillion in wealth created in 25 years. Similar results were seen in across-the-board tax cuts under former presidents Calvin Coolidge, John F. Kennedy, and George W. Bush.
The left will cry foul and claim that these tax cuts resulted in the money going to the wealthy and little to the poor, and point to a rise in the income and wealth gap between the rich and poor during the Reagan recovery.
These are inequality statistics are very misleading. Income inequality statistics for instance don’t take into account transfer payments. Transfer payments are money redistributed from the rich to the poor via government programs like food stamps. Government programs like food stamps breed dependency and a lazy mentality that encourage the poor to stay poor. Therefore, if the poor are staying poor thanks to a transfer payment and that transfer payment is not included in income, then of course it would look like there is a big gap between the rich and the poor! Wealth inequality statistics go farther than income inequality statistics since they also measure accumulated savings over time. Since wealth measured this way, a lawyer who makes a comfortable income would not have a lot of wealth if he or she is still in the process of paying off student debt.
More importantly, these inequality statistics focus on groups rather than individuals. The left would have you think that most people are stuck in these groups for most of their lives. But this is not the case. Capitalism is not static, people move up and down on the economic ladder throughout their lives.
A study conducted by the University of Michigan observed people over a ten-year period, and found that most people on the lower end of the ladder were better off by the end of ten years, while those at the higher end of the ladder moved down in income. Similar results were found in studies done by the IRS and a Joint Congressional Committee on taxation. The IRS determined that only 27% of people stayed in the same income bracket, and the Joint Committee concluded that 86% of lower income people over time made it to the middle class and above.
Overall, tax cuts do not cause income inequality or wealth inequality. Tax cuts leave money in the hands of those who have earned it, and they know how to spend their money the best. It encourages growth and investment, which brings more revenue to the government. And most important of all, tax cuts promote freedom. Any healthy economy and civil society need tax cuts to survive.