Why Tax Cuts Work

A balanced budget is something to strive for, but not at the risk of the economy and ultimately your pocket book. When balancing the budget, we should not seek an increase in taxes, but rather an elimination of wasteful spending.

The fact that cutting taxes boosts the economy, or conversely the fact that increasing taxes (and thus wasteful spending) is quite apparent during a period of recession. I will try to illustrate this point below:

When Total Income (Y) decreases in a recession, Tax Revenue (TR) also decreases. Government Expenditures (E) will increase during a recession (i.e. unemployment benefits). As E>TR there is a defecit.

Given:

Y=$10 tril.

TR=$2 tril. (assuming a 20% tax rate)

E=$2 tril. (assuming a balanced budget)

Note: There would be $8 tril. left in the people's pockets to consume, save, or invest. (Y-TR=$8 tril.)

~~~~~~ENTER A RECESSION~~~~~~

Y=$9.9 tril.

TR=$1.98 tril.

If E=$2 tril., there now would exist a defecit of $20 bil., given E-TR (of course the actual number would be even higher as E would increase due to higher unemployment benefits, etc.)

Note: There is now only $7.92 tril. (a reduction of $80 bil.) in the people's pockets for consumption, investmets, and savings.

To resolve this the government only has a few options: 1) Increase Taxes, 2) Cut Expenditures, 3) Decrease Taxes, or 4) Decrease Taxes and Expenditures.

Lets look at these options individually using the same example from above.

1) Increase Taxes

Given:

Y=$9.9 tril.

TR=$2 tril. (assuming an increase in taxes by .2%, or an increase of $20 bil.)

E=$2 tril.

Note: Again there is only $7.9 tril. (a further reduction of $20 bil.) for consuming, investing, and saving. Fewer dollars in the pockets of the people means the economy falls deeper into recession. Increases taxes further until there is a surplus would only exacerbate the problem.

Results: Increasing taxes is a terrible idea.

2) Cut Expenditures

Given:

Y=$9.9 tril.

TR=$1.98 tril.

E=$1.98 tril. (assuming a cut in expenditures to balance the budget, without any change to taxes)

Note: Great now the budget is balanced, no defecit. However, there is still only $7.92 tril. ($80 bil. less than before the recession) for consuming, investing, and savings. There is no economic stimulus from just cutting expenditures. In fact less spending by the government would actually deepen a recession, due to less money in the pipelines. Also, the people must rely on the government to make the right choices in what to cut and what to keep (i.e. a cut in defense spending might not be a prudent decision right now).

Results: Cutting expenditures alone, doesn't help the economy.

3) Decrease Taxes

Given:

Y=$9.9 tril.

TR=$1.9 tril. (assuming a decrease in taxes by .8%, or a decrease of $80 bil.)

E=$1.98 tril. (there is now defecit spending of $20 bil.)

Note: There is now, once again $8 tril. for consuming, investing, and savings (back to the pre-recession ammount). More money back in the pockets of the people would allow for increases in consumption and investments, which would lead to an economic recovery.

Results: Cutting taxes is a great idea. It provides an economic stimulus.

4) Cutting Taxes and Expenditures

If it is important to people that the budget be balanced, then the government can cut both taxes and expenditures (a combination of options 2 and 3.)

CONCLUSION

Large tax cuts and elimination of wasteful spending puts money back into the pockets of the people and thus stimulates the economy. Not all spending is bad by any means. Wise goverment spending can help the economy as well. For example. when the government buys a military fighter from Boeing or Lockheed, they pay tax dollars to private companies, who in turn pay their employyees, who then put money back into the economy as they consume and invest, not to mention the security boost due to strong defense. Defecit spending, in moderate ammounts is not necessarily a bad thing. As mentioned above a surplus, however, is very damaging to the economy, as the government takes more money than is necessary; and that money will often be earmarked for pork barrel projects that no one needs. To keep the economy healthy, which will lead to increased employment and standards of living, Congress must back the President in keeping taxes low, if not decreasing the tax burden further. Make expenditure cuts that reduce waste, but fully fund that which benefits us such as the military and border security projects. Finally, schools should have both Macro and Micro Economics as required courses, so that the populace can be brought out of the depths of ignorance, and then break free from the chains that some politicians use to pull them around. It is key to remember that the tax dollars are your money, not the government's; so we should make sure our taxes are low and used wisely.