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The Fallacy Of The Romney Tax Plan As A Way To Stimulate The Economy

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Message Dave Corbin

During the first debate Romney claimed that his tax reform plan is deficit neutral. It cuts all rates by 20% but, at the same time it prevents an increase in the deficit by closing loopholes and eliminating tax credits. OK well, assuming that this is possible, how exactly does this provide economic stimulation?

To get the economy to grow at a faster rate, money needs to be put into the hands of investors and consumers. If, as Romney has promised, his plan will not increase the deficit, he must continue to collect the same amount of revenue as now so there is no extra money for consumers to spend or investors to invest.  

He also says that the growth in the economy will add revenue and bring down the deficit. Unfortunately you have to, at least initially, give people more money to spend, either on consumption or investment. Otherwise, where does the growth come from? It's a classic chicken and egg situation and, unfortunately the egg, in the form of more money to spend or invest, has to come first.

Most growth comes from increased demand. Some growth can come from innovation and reduced cost but mostly it comes from increased demand. As demand increases, prices for the goods and services that are in demand rise. A good example is gasoline. If people have very little discretionary income, they will spend as little as possible on gasoline and as the aggregate demand goes down, so do the prices because the oil companies need to get rid of their inventories so they lower the price in an attempt to entice customers to buy more gasoline. This is the main reason that gas prices were so low in late 2008 and 2009.

Jobs are not created by companies unless they have more demand for their products or services. Some demand can be generated by innovative or lower cost products but usually, demand comes from consumers having more money to spend. Since 2010, banks and corporations have been sitting on piles of cash but hiring has been slow. Why? The spending power of the consumer has come way down since the housing bubble burst. Everyone has been concentrating on lowering their debt, not charging up the credits cards or home equity lines of credit. 

If consumers and investors are not given extra money to spend and invest, the rate of growth will not change. If we give Romney the benefit of the doubt and take him at his word, his tax reform plan is revenue neutral and does not increase the deficit. So where are the extra funds needed to increase the growth rate going to come from?

If what Romney says is true, his plan is not a trickle down plan or a trickle up, out, or any other direction plan because it does not provide any extra revenue for growth!


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