Big Picture Thinking

[kandrathe]

Well, generally I would say that the government only has the power to impact economies by their policies.

The tax cut theory is based on the notion that it is high taxes that are draining capital from investments and growth. Investments in the end need to be made to construct new businesses, or enhance existing businesses. So, by freeing up more money to devote toward growth, eventually the momentum of capital generation will more than make up for the sacrifice of a few percentage points of tax revenue. IMHO, in order for this to work you must also create entrepeneur incentives for businesses to take risks to spend those tax cuts, rather than sock them away, or distribute them to share holders as ficticious profits. This theory was considered "wild" before Reagan, but the "Reagan Tax Cuts For The Rich" and "trickle down" economics was the precursor to the economic boon of the late 80's and 90's. Now supply side ("voodoo") economics is the nom de jeur.

Actually, I agree with the more conservative (which is strangely backed by democrats) approach of either reducing taxes for a finite period (non-permanent tax cuts scaled to some economic indicator), or creating a package of entrepeneur incentives to encourage small and startup business growth. Tax cuts have become so appealing as a campaign plank that it has been adopted by both parties, with the differentiator now being that the "Republicans" press for permanent tax relief. Personally, I think we should do something even more radical; eliminate business taxes altogether and slowly transform our individual taxes to be based on consumption rather than income.

The best formula based on income taxes, IMHO, would be a permanent system that would increase taxes when the economy was growing and getting over heated, and would decrease as the economy slows down. The problem is that quite the opposite, in revenue terms, is what is needed. When times are hard, the most people need social services. So, in order for that "best formula" to work according to "voodoo economics" is that when times are good you pay off the debt, and when times are lean you borrow to pay for services.

The breakdown in this plan happened mostly during Clinton's reign, as we never actually paid down the debt, but started to divert the money into new government programs. Many politicos thought it was sufficient to get to a "balanced" budget, thinking it would be maintained in perptuity. Foolish. The other traditional way that America has jumped started its economy it through spending (and war it the fastest way to spend). Hmmmm.

I guess it shows why politicians should not be in charge of economies.