Press Release September 1, 2004
Why Bush's Tax Cuts are Bad for the Economy:
I am no economist but I've been thinking about the Republican ideology about tax being used to boost the economy. I have several problems with this thought process. The basic idea is that by reducing taxation, tax-payers will have more expendable income to invest in the economy and thus will strengthen the economy.
After considering this argument long and hard I have noticed what I see as some problems with it. My traditional complaint against it is the almost certain deficit and subsequent national debt that it generates. This means that the government will be paying interest on the debt and future tax dollars will need to go to pay the interest on the debt instead of funding valuable services. This will have to be made up by the supposed boost in the economy after the recovery.
This is still a valid concern and primary to my dislike for tax-cuts but I think I have discovered a near fatal flaw in their counter to this argument. As I understand it, basically economists are concerned with observing the transfer of wealth. Now basically this wealth can be transferred inside the country or outside the country. One of the nice things about government programs is that in most cases they spend money on US workers, products or companies. This basically ensures that this tax money when recirculated through government programs will stay in the US economy for minimally two exchanges, and probably three exchanges. When the money is returned to tax-payers it is very likely that the money will be spent on some sort of goods produced in a foreign country. This is good for only one exchange (i.e. the supplier such as Sears, Kmart, Walmart, etc.) unless the item is purchased online in which case it leaves the US economy immediately.
Using this line of reasoning it will always be better to avoid cutting taxes unless either:
1) The government favors foreign workers and goods over domestic ones (which would be a whole new policy issue to be debated)
2) All tax-payers spend their tax cut on domestic goods and services.
I have never heard this argument used before and I am curious if there is some fatal flaw in my logic regarding this. If so I would love to hear it, please email me at the address below and if convinced I will amend this posting.
Thanks!