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The Tax Deception - Do reducing taxes help the economy?

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Quote Oliver Wendell Holmes: "A good catchword can obscure analysis for fifty years." Without proof, the media has pushed catchy expressions into our lexicon, casually and with absolute conviction. Â Three of the most prominent are:

1. Raising taxes during a recession will harm the economy.

2. Lowering taxes during a recession is a necessity.

3. Small businesses are the lifeblood of the economy and are hampered by tax increases.

In the world of probability, all types of statements might prove correct at certain times. As one example, supporters of lowering taxes during recessions mention Herbert Hoover's tax increase during incipient years of the Great Depression, and Franklin Roosevelt's 1936 tax increase to the top brackets as examples of destructive tax measures. In both cases, economic downturns followed the tax increases. Â Sounds logical, that if A occurred before B, then A must be responsible for B. However, simple relationships don't automatically constitute logical arguments. In both cases, the presidents raised taxes to balance the budgets and stop runs on the U.S. dollar. By forcing budget revenues to follow budget expenses, those administrations refused to pump the economy with deficit spending and limited the budgets from reacting to the wants of fragile economies. Besides, in 1932, the economy was already falling rapidly, and in 1936, substantial increases in union wages added to corporate uncertainties. Capital rebellion followed the labor rebellion.

No damage done when policy makers treat expressions as extravagant words from agenda pushers; major harm occurs if they are used as a guide to regulate the economy. Â Many oft-quoted phrases are shibboleths; "a saying by adherents of a party, sect, or belief and usually empty of real meaning." Challenging the lack of inquiry formulating these shibboleths contributes to preventing them being considered as drivers of economic policies.

Obama's deficit spending halted the bleeding. What must the administration do to create jobs and diminish unemployment? Debatable. Add to the debate an analysis that unproven shibboleths, such as maintaining low taxes, confuse the issue and are counterproductive. Preferred guides to renovating an egregious economy are:

Taxes respond directly to the budget and not directly to the economy.
Ever since the demands of the United States Civil War, social and economic circumstances have forced American governments to tax its citizens according to budget needs. Massive industrial growth, population expansion and rapid change in all sectors of society prompted government intervention to keep the national ship on even keel and prevent calamities. Budgets have adapted to sharply changing and disparate conditions, forcing immediate responses to wartime, peacetime and distressed times.

A responsible budget solicits taxes to obtain national benefits that exceed the benefits obtained from leaving an equal amount of tax revenue with the wage earners. The budget expense often promoted wage increases that far exceeded the added tax assessments. One example is the interstate highway system, which escalated the automobile industry to become America's prominent revenue maker and employer.

Opposition to specific taxes and tax rates deserve debate, but general assumptions, which only transfer public spending to private spending, and don't increase total spending, skew the economy. Optimizing tax programs is a challenge, and proceeds from not disturbing a suitable quality of life for wage earners, and allowing sufficient profit margins for capital reinvestment. Â Taxes respond directly to the budget, and not in accord with the shibboleth that taxes can regulate the economy. If that were true, then the Federal Reserve market operations would be superfluous. Corporations, small business, and the public have operated well in all types of tax situations. Domestic and government spending enter the economy, start from different allocations, and eventually circulate at similar rates.


In the present U.S. economic situation, well-directed government spending can create more jobs, obtain a lower unemployment and raise the GDP to higher levels than randomly directed spending.

Several investigators have compared the effectiveness of tax cuts and government disbursements. The conclusions are contradictory, and the methodologies are questionable: Â

"The Romers' (College professors Paula and Christina) conclusion, which is at odds with most traditional Keynesian analysis, was that the tax multiplier was 3 -- in other words, that every dollar spent on tax cuts would boost GDP by $3. Valerie Ramey of the University of California, San Diego, finds a government-spending multiplier of about 1.4 -- a figure close to what the Obama administration assumed, but much smaller than the tax multiplier identified by the Romers. Similarly, in recent research, Andrew Mountford (University of London) and Harald Uhlig (University of Chicago) conclude that a "deficit-financed tax cut is the best fiscal policy to stimulate the economy." In particular, they report that tax cuts are about four times as potent as increases in government spending."

"we also examined years of large fiscal expansions, defined as increases in the cyclically adjusted deficit by at least 1.5% of GDP. Over 91 such cases, we found that tax cuts were much more expansionary than spending increases."

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Dan Lieberman is the editor of Alternative Insight, a monthly web based newsletter. His website articles have been read in more than 150 nations, while articles written for other websites have appeared in online journals throughout the world(B 92, (more...)
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