House minority leader John Boehner appeared on Meet the Press on Sunday to hee-haw about the $825 billion stimulus plan.
“You can’t borrow and spend your way to prosperity,” he brayed, apparently unaware of what his own party has been trying to do for the past eight years.
Okay, if the stimulus will not work, what in his view will work?
We have to “allow Americans to keep more of what they earn.” We must give people an incentive to save and to reinvest in the economy.
Of course. That would be just what we need – more of the same tax cuts that reduced the savings rate to zero, brought lending to a standstill, doubled the national debt over the past eight years and, arguably, helped to propel and extend the present financial crisis.
“Give this man his bale of hay,” I mused. “He may not be as smart as a mule but he’s as stubborn as one.”
Einstein had a name for the practice of doing the same thing over and over again, and expecting different results. Rep. Boehner should look it up.
Still, the test of a good theory is whether it works in practice. That made me wonder: if our firm did receive a tax cut, what would we do with the extra money? Would it give us an incentive to create jobs and to “reinvest in the economy”?
My partner and I discussed this question on Monday. At length, we decided that if our business received a federal tax cut, we would spend the money according to these priorities:
1. Reserve for increased state taxes. Our state and local taxes will surely increase as their revenues from the federal government decline. Somebody has to pay for state and local operations and, unlike the feds, the state has to balance its budget. Guess how.
2. Reduce commercial debt. Most small businesses have some outstanding bank loans and, right now, we are lucky if we can maintain our existing credit lines. Paying down some debt may give us a little more borrowing power. We hope.
3. Reduce trade debt. The best way to maintain leverage, and credit, with suppliers is to pay their bills in full and on time. That gives us the most favorable service, pricing, and terms. It also ensures we will have trade credit when we need it.
4. Make infrastructure investments. Like every business, our systems, technologies, and equipment wear out or become obsolete over time. It costs money just to stay even in this area.
5. Increase marketing. No small business can reach the prosperity Mr. Boehner so earnestly wishes for us by merely cutting costs – even tax costs. Our prosperity depends on a steady influx of new business. Mr. Boehner can cut our taxes to zero and we will still go out of business in a year without new and repeat clients and projects. Getting that new business costs money.
6. Pay ourselves a dividend. With whatever is left of the “found money” from our tax cut, we would pay ourselves a dividend. After all, we have the risk capital in the business; we are the ones who met the payroll even when there was no money coming in. So we would pay the remainder to ourselves … and, of course, we would pay taxes on the amount we pay to ourselves.