The Value of the Republican Tax Cuts

I swear, if you asked a Republican how to cure an Athlete’s Foot infection, they will respond, “Pass a tax cut!” They seem to think that it will cure every imaginable ill. With a tax cut we will have jobs, jobs and more jobs! Maybe …………… but maybe not.

Simply put, a tax cut allows an individual, business owner or corporation to keep more of their hard earned money, and pay less in taxes. Doesn’t everyone enjoy having a little more money! So if we don’t have to send it off to the government, the most likely thing we will do with that money is spend it. (We might also save it, invest it or pay down debt … reasonable things to do?) But does this tax cut stimulate the economy? The reality is, no it doesn’t … not by itself. The reason: If the government returns one dollar to you through a tax cut and you spend it, you have increased the GDP of this nation by one dollar. If the government chooses not to give you the tax cut and keeps that one dollar, it does what government does best … it spends it, thereby increasing the GDP of this nation by one dollar. You spend it … the government spends it … it makes no difference to the economy. It will only make a difference if that dollar is newly printed or borrowed. (Something we have been doing a lot of lately.) If you pair a government spending cut with a tax cut, which is what is at the very heart of Republican economic philosophy, it will make ZERO net effect on the economy. The economy does not care who spends the money.

The more recent issue to address is as to whether tax cuts create jobs. Yes … when the economy is stimulated, it does tend to create a few more jobs, but Republicans would have you believe that business owners are just sitting around, hoping for a little more cash so they can jump up and hire someone. This is generally false. Except for a brief period in 2007 – 2008, businesses have maintained pretty good profitability. They did it by trimming staff, pushing for more efficiency and lowering inventories. Most corporations these days have historically good price/earnings ratios. Hence, many of these companies are sitting on buckets of cash. They have everything they need to substantially grow their businesses … everything except customers. How do you expand a profitable business if you are short on customers? THAT is the nature of our current recession. People aren’t so willing to spend money like they once did.

So … what is the end result for business owners and corporations if you give them a tax cut? What do they do with that money? There is one clear answer to this question – whatever they darn well please! They can consolidate ownership by buying back stock. They can pay down their debt. They can sit on the cash and wait for an opportunity to come along. They can invest in technology, which often serves to eliminate more jobs. They can distribute the cash to their owners, so that each can buy their spouse a new car. Or, if they perceive that there are more customers coming in the door, they can hire new employees.

So when a politician says that businesses needs more capital, this is generally speaking false. Sometimes a business may need help with credit, but this problem is due to the tight credit markets, not lack of funds. What the economy is lacking is consumers. When this changes, we will be on the road to recovery.

Just a thought … DonC

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