Taxes and Recovery

It is counter-intuitive, but has been proven time and time again: If the United States federal government has a revenue problem, it can increase its income (over time) by lowering tax rates. This is acknowledged by honest politicos on the left and the right—including Democratic idol, President John F. Kennedy (D) who lobbied during his presidency for lowering taxes to fund government programs and improve the economy. “Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income,” Kennedy said, “as to yield within a few years an increased—not a reduced—flow of revenues to the federal government.”

This works because lowering the tax burden leads people to do one of two things: Some put more money into savings; some spend. Whichever people do, they are helping the economy with that money. Money spent on goods and services enriches businesses, which then can pay their employees more, hire more employees, or buy more products and services from others. As this propagates through the economy, it reduces unemployment and increases incomes, which increases tax revenue for the government. Even money put in savings accounts provides more investment dollars for the banks that fund capital improvements and investment spending across the economy, leading to similar results in a different way.

Raising taxes, of course, does the opposite. It reduces the flow of money through the economy, which can be mitigated somewhat with government spending but government spending always fails to actually improve anything for any length of time. It’s a band-aid, not a solution. Government has never once managed to spend its way out of a recession or depression and, in fact, recessions are historically shortened when government reduces its spending and reduces the tax burden on its people.

This is, in large part, why our economy still isn’t doing so great. President Barack Obama (D), instead of following in Kennedy’s footsteps, has chosen to follow in President Franklin Roosevelt’s (D) and ‘prolong and deepen’ our recession with mindless government spending. Worse, his administration intends to allow some of the tax cuts put in place during President George W. Bush’s (R) first term, to expire.

Thankfully, Obama and his allies in Congress don’t intend to completely repeal the Bush tax cuts—which would lead to an unmitigated economic calamity. They intend to leave the cuts in place for people who make less than $250,000/year while allowing them to expire for anybody who makes more than that. While this will not lead to the same kind of catastrophic economic collapse that a broader repeal would lead to, it will still have negative effects.

Those who will see their taxes go up—the same ‘rich’ people who already pay disproportionately high taxes and carry the bulk of the federal budget on their shoulders—also do a disproportionate amount of spending and/or saving in our economy. Increasing their effective tax rate will reduce their saving and reduce their spending, the same as increasing anybody else’s effective tax rate will. This will further depress the economy and, ultimately, further reduce available tax revenues for the federal government’s wasteful spending.

In other words, while increasing the effective tax rate for the ‘rich’ might sound good to some, and might increase tax revenues for one or two years, the broader, longer-term effect on the economy and on tax revenues will be negative. It will prolong our relatively-high unemployment rates and depress consumer spending. I am glad that Obama and the Democrats have the good sense not to increase effective tax rates across the board, but increasing them for the ‘rich’ is still a really, really bad idea.

So what should our government do? First and foremost, the federal government must immediately reduce spending. It simply cannot spend its way out of this recession and, on the contrary, these bloated Bush/Obama bailout-bonanza deficits are undermining consumer and investor confidence. America elected Obama, in part, on a promise of fiscal responsibility; we’d like to see him fulfill that promise now. Secondly, the government should reduce taxes even beyond the Bush cuts for all Americans—poor, middle-class, and rich alike. This will have a short-term negative impact on federal revenue (which will be mitigated by the reduced spending) which will recover in two years or less as the economy picks back up.

Macroeconomics 101, folks.

Scott Bradford has been putting his opinions on his website since 1995—before most people knew what a website was. He has been a professional web developer in the public- and private-sector for over twenty years. He is an independent constitutional conservative who believes in human rights and limited government, and a Catholic Christian whose beliefs are summarized in the Nicene Creed. He holds a bachelor’s degree in Public Administration from George Mason University. He loves Pink Floyd and can play the bass guitar . . . sort-of. He’s a husband, pet lover, amateur radio operator, and classic AMC/Jeep enthusiast.