An economics lesson: Why tax cuts will never work to fix the economy

[jmowreader]

If you ask one of the people who call themselves conservatives what the best way to stimulate the economy is, they'll say tax cuts. Give tax cuts to businesses and the economy will just blossom. Sadly, that's not the case.

Let's take a nice round number: $100 billion. Everett Dirksen once said, "a billion here, a billion there, pretty soon it adds up to real money." One hundred billion is about as real as it gets. Certainly you could do a very nice tax cut with $100 billion, one that would just kick the economy into overdrive!

In July 2009 there were 307,006,550 citizens of the United States, according to the socialist Census Bureau. They claim 27.6 percent of them are under the age of 18, and 12.6 percent are 65 or older. Since we wouldn't want those slacker kids and deadbeat old people to get hold of any of that tax cut money, we'll restrict the tax cut largesse to the 183 million (and change) who are of working age. Divide $100 billion equally among all those taxpayers and you get a tax cut of $544.70 per person. Half the people who get this money will send it to the credit card company or use it to cover next month's rent check--halving the economic impact of the tax cut. The other fifty billion will go to retail purchases. It'll be a nice little uptick in sales, but our business community can absorb $50 billion in spending without needing any new employees or any new businesses.

Well then, if giving the money to consumers won't increase employment, let's give it to businesses! Certainly they can put it to good use! Not so. According to the socialist Small Business Administration, there are 29.6 million nonfarm businesses in the United States. (The numbers get real strange when you start throwing farms in there,) Dividing $100 billion evenly among all these businesses gives each a tax cut of $3378.38. It doesn't do much for you to restrict the tax cut to the beloved "small business"--an independent company with fewer than 500 workers--because 99.7 percent of all American businesses fall into that category. It's hard to add even one worker for three thousand dollars. Very few firms could add business capacity for that much money. A landscaper couldn't buy a lawnmower for that much money. A plumber couldn't afford to replace his truck--or to add a new one.

Now let's go to the other way the government could get rid of $100 billion--to spend it. If the government decided to walk into Alabama and spend $2 billion replacing school roofs, or whatever, the companies they hire to do it are going to have to add workers. The workers will spend their new paychecks at stores. The stores will buy merchandise. This is how you stimulate the economy: by going somewhere and spending so much money the people you spend it with have to add staff.

[Taitertots]

1. The MPC is less than 1

So giving tax cuts will only increase consumption by the tax cut times the marginal propensity to consume. Direct government spending increases consumption by the full value.

[NoNothing]

2. Tax cuts and gov't spending BOTH stimulate the economy

After all, what do you think the landlord does with that rent money, burn it? However you cannot do both indefinitely.

[Wapsie B]

3. And with direct government spending the money still filters upward.

Say you go into Alabama and do just that. Those with jobs at those companies will spend their paychecks on food, housing, cars and anything else they need to live. That personal spending will in turn go right back to the banks and corporations. It all funnels up. Those at the top will still be rewarded handsomely.

[Winterblues]

4. You miss the point entirely.

Trickle Down....You give the tax cuts to the very wealthy like Exxon, Haliburton, etc. and they will rush out and hire people so they can use up that extra money as quickly as possible. See how it works. Give the wealthy all the money and they will spend it quicker than I can write this sentence. Just like they always do.. You are talking about "spreading the wealth" which is "socialism" and "communism" and "tyranny" and "Hitler" and "Death Panels" and :shrug: well you get the picture..Republicans do not want regular Americans to get a fair shot..It goes against everything they stand for..Tax Cuts for the wealthy works extremely well for Republicans..just not for America but they have no real love for America anyway. They think America is just a bunch of land to be exploited and don't even really consider the people as a part of the country..

[ChoppinBroccoli]

5. I Like To Dumb It Down Way More Than That

Whenever I get some mouth-breather pontificating about how tax cuts are the solution to everything that's wrong with the economy, I break it down this way. These people don't understand overarching concepts and ideas, and more than anything else, they can't relate to an example where "someone else" is the person being considered (for example, when you talk to most people about drunk driving, most of the time you'll hear them spout some incredibly harsh solutions up to and including executing the drunk driver on the scene; but when you point out to them that just last weekend, they themselves drove home from your house after having a few drinks, all of a sudden, when it's THEM, it's a different story altogether--why, there are extenuating circumstances that need to be considered!) You have to demonstrate things to them using THEM as the example. And here's how I do it.

You tell them that a country's economy works pretty much the same way a PERSON or a FAMILY'S economy does. You have income (from work or whatever other sources), and you have spending (bills, necessaries, luxuries, etc.) The government is the same way, except the government's income is taxes, while the outgo is spent for programs to help people in myriad different ways. Now, consider your OWN little economy. When YOU are in economic trouble, what is the first thing you do? Do you quit your job? Of course not! That would be probably the stupidest thing you could do. So if YOU can't help out your economic situation by reducing YOUR income, why do you think the government CAN?

Now, flip it around on them (more likely than not, they'll try to flip it around on YOU, but you're prepared for this, right?) They'll probably point out that when you're in economic trouble, it's equally foolish to buy more things (i.e. increase spending). And, in a very narrow viewpoint, they're right. But consider this. If you spend some money on a new car that gets double the fuel efficiency your old one had. If you spend some money on advertising for your home-based business. If you spend money to fix up your home and makes it more energy-efficient. If you spend some money on some education so you can get a BETTER job or a big raise............

So, you see, even when we use YOU as an example, decreasing YOUR income (i.e. cutting taxes) results in the WORST possible outcome, whereas in many situations, increasing your spending (when spending is increased in the right areas) often helps pull you out of a financial hole.

And then you end with the tagline: "So if this is the way it works for YOU and YOUR little economy, why do you think the government's would be any different?" And then, while they're still scratching their temples and staring confusedly at the ground, you just recede into the night, confident that you just blew their whole little "Trickle-Down" worldview to bits.

[W_HAMILTON]

6. Just check the figures.

Ireland, which was pointed to during the presidential debates as a poster child for what our corporate tax system should be, is at almost 14% unemployment. The USA's unemployment rate is ~10%. Japan's unemployment rate is ~6%. USA and Japan, the two countries with the "highest corporate tax rates" in the world, are also the two biggest economies in the world.

Cutting taxes are a joke. They are at the lowest levels in half a century, and it did nothing to stop us from almost falling a second Great Depression. Corporate tax cuts do not stimulate spending, at least not in today's profit-hungry world. If a corporation has all the staff it needs, cutting its taxes will not cause them to hire more workers. Corporations are determined to run as lean as possible, and if they get a tax cut, they will just use it to boost their EPS so they can give the higher-ups more bonuses or maybe expedite the outsourcing of higher-paying American jobs to cheap labor countries.

[backscatter712]

7. How about cutting taxes for poor & middle class, then raising taxes for corporations & rich folks.

Y'know, the whole idea that the Rethugs hate of making the tax system more progressive?

I'm not for net tax cuts, just reworking how the the tax burden is distributed, so it's like, fair or something.

[thecrow]

8. Might the roofers spend it on rent or credit cards?

[Dreamer Tatum]

9. I think maybe you could use an econ lesson yourself

You're assuming the multiplier from government spending is greater than the multiplier from consumption. That is an empirical question.

[jmowreader]

10. Government spending improves the economy through CONCENTRATION of spending

You remember Shrub's $600 per person stimulus checks. They were nice and all, but consider the impact of going to ohh...say Fayetteville, giving $600 to 25,000 people, and expecting them to spend it. Half the people would pay down some bills--credit card debt or whatever. The other half would spend it on school stuff for the kids, maybe a new monitor for their computer. (A lot of stores in town had a deal: put the whole check on a gift card, and we'll give you 10 percent off anything you buy with it.) But the thing is, this area's economy can absorb $7.5 million in extra short-term spending without increasing employment--which is exactly what happened. I'm betting a lot of that money left the area--amazon has some nice stuff you can't buy in Fayetteville.

But if Shrub would have taken that $7.5 million--the part that isn't going to pay off Citibank--and called a paving company or whatever, you'd have job creation.

I have long loathed the neat little statistics that talk about how many dollars the tax cut is. Okay, how's it being allocated? Are we going to cut one guy's taxes completely out? Or are we going to give a million people enough to get one KFC Double Down? Also, eliminating taxes would ONLY create jobs if we also created more business for the company. John's Frammises has ten frammis makers each building eight frammises a day, and he sells 390 frammises a week--meaning every week, one of the workers gets a three-day weekend If John can't figure out how to move 440 frammises a week, he is NOT going to hire anyone. He can't even sell through his current capacity!

[Dreamer Tatum]

11. Oh man. Where to even begin? Nevermind. Not worth it. nt