Economics -101

July 7, 2003

I've been thinking Bush's tax cut lately. Never mind that a cut in government spending didn't accompany the tax cut, thus launching us back into the world of Budget Deficit, this tax cut was simply implemented wrong.

The idea of Bush's cut was to be more-or-less across the board. This would give almost everybody more money and, so the theory goes, increase spending. This would have the two-fold effect of both stimulating the economy and, thanks to jobs created to meet the demand of more consumers, counteracting the loss of incoming taxes.

Unfortunately, it doesn't work that way. When you give a rich person a tax cut, that person doesn't spend the money -- he invests it. The only other person who benefits is the guy's broker, who's probably pretty wealthy himself. In other words, the money gets "hidden" from the economy at large almost as effectively as if the tax cut hadn't happened. Net result: No economic stimulus, large budget deficit.

Who, then, could we call upon to be the uber-consumer? The poor. If you give a poor person a tax cut, even just a couple hundred dollars a year, that money will in all likelihood be spent. Maybe it's a car repair that should've been taken care of in 2001. Or some fix-ups around the house. Either way, the money gets pumped right back into the economy.

Ditto for the middle class. They're more likely to buy luxury items with their money (replacing the car instead of repairing it, or maybe renting a nicer apartment). Some of the money will be "lost" to investments in the upper levels of the middle class, but I think the extra taxes brought in on big-ticket items (like luxury taxes) would make up for that from the government's point of view.

In other words, a tax cut is a good idea (although I really would've liked to see some government cutbacks to go with it) but it's backwards -- cut taxes more the farther down the economic ladder you are, maybe even bump up the no-taxes-at-all line. Unfortunately that'll never happen no matter which party is in charge in DC -- even after the lower- and middle-class buy a few more necessities they still wouldn't be able to afford much along the lines of political contributions.

July 4, 2003July 8, 2003