Why Tax Cuts Won’t Work
By
The concept of reducing taxes always seems to be a good idea, after all, paying taxes, as some people have suggested, is not really our patriotic duty. Taxes are always a burden; it’s just a question as to whether the burden is reasonable and a benefit to society as a whole.
Generally, it is always best to reduce taxes when times are difficult but that only makes sense if you have raised taxes when times were good to provide a cushion during lean times so that essential community services are not placed in jeopardy when they are needed the most.
One of the lessons we, hopefully, learn from the current recession is that critical community services should be supported by reliable tax revenue (expecting to pay for the education of a state’s children with lottery winnings is not what anyone should call a reliable revenue source). There is no question that all revenue collections by governments will be reduced by a recession but some income sources are more vulnerable than others.
Currently, there is a good deal of noise being made about using an individual tax cut as a tool for stimulating the economy. The argument is being made that consumers need to start spending again in order to invigorate the economy and get corporations hiring. Sorry, but I don’t think that’s going to happen this time.
We are in a recession unlike any that has gone before and the solutions crafted in the past are not going to work this time. The effort to save the structure of the financial system (even though there is much debate over the method) has proved to be the correct course of action. Becoming equity owners of financial institutions and major corporations is surly not a road either the past or present administrations wished to go down but sometimes when the ship is clearly sinking actions must be taken to save it, even if those actions are ideologically distasteful to a portion of the population.
It is undoubtedly true that consumer spending is what has fueled the U S economy over the past 25 years; however, it has also been blamed for getting us into the current mess we are experiencing. Easy credit, fueled by a complete disconnect between financial services marketers and the reality of the risks of credit extension – exacerbated by the over reliance on the FICO credit scoring system and paying “salespeople” commissions to bring in loans - has brought the country to its knees.
Will putting a few hundred dollars a month into someone’s paycheck (if they still have one) induce them to immediately spend it? Some in Congress say yes; others no. The real question is: Do we want to return to the irrational spending and credit spree we have been on for the past 25 years? Do we want the quick and seemingly easy fix or do we want to take the pain in the hope of a slower, sustainable recovery?
With their outrageously high interest rates and a punitive fee structure, the leading members of the giant, consumer, financial services industry would love to see the excessive spending binge start up again for their own benefit. From what can be seen thus far, they haven’t learned a thing from what has just happened to the economy other than the strategy of making themselves “too big to fail” has worked very well.
It would appear that, unlike with other recent recessions, we are not going to spend our way out on the backs of the consumer this time.
The recent stimulus package will produce some benefits but its focus needs to be realigned. Fixing roads and bridges and upgrading the country’s infrastructure is certainly necessary but these are things that government should have been spending taxpayer money on anyway over the past 25 years instead of a bloated defense budget and tax cuts that should never have been approved. So, because they are absolutely necessary for future generations, it is a good thing that the money is finally being spent.
If there is a key to recovery this time it is in the
country’s industrial and technology base (and yes, we do still have one). If there are tax breaks (and especially
grants) to be given they should be directed to small and medium sized American
companies in the forefront of new and innovative technologies that would
maintain existing and create new jobs in the
Individual tax cuts won’t do it this time (no matter how many votes they may garner or be ideologically appealing) but taking all those billions being repaid by the financial service giants and re-lending it to companies that will actually increase tax revenue and create jobs, which then increase tax revenues, is the only way out. It will be a long slow road and will need some serious safety nets put in place for the American public (yes, that means getting a better health care system and unemployment and retirement benefit protections), but a road that needs some serious attention – finally.
© 2009 Timothy Holland First
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