Another Taxing Discussion

In the classic Marx Brothers movie Duck Soup, Groucho (as Rufus T. Firefly, the leader of Freedonia) is chairing a meeting of his advisors to deal with Freedonia's wretched economic situation. The Minister of Finance urges him to take up the tax. Groucho says he'd rather take up the carpet. The Finance Minister still insists they must take up the tax. To which Groucho replies, "You're right...we have to take up the tax before we can take up the carpet!"

I worship Groucho Marx.

And we need to take up the tax.

I got into an all-day three-way e-mail discussion earlier this week with two of my friends on the subject of how to stimulate the economy. My friends, both of whom are a bit to the political right of Atilla the Hun, spent the day trying to convince me that the silver bullet that will save the economy is tax cuts. I spent the day strongly disagreeing, and we ended up agreeing to disagree.

As you know if you've been reading this blog for long, I don't like paying taxes any more than you do, but I accept that they're a necessary evil. After all, how does the government raise the money to pay to bail out the greedy bastards who got us into this mess?

To die-hard economic conservatives who believe in supply-side economics, the economy booms when taxes are low because people have more money to spend, while businesses have more money to invest in expansion, production, and hiring. Central to this belief is the so-called Laffer Curve, a bell curve which purports to show that increases in tax rates do not actually increase tax revenue. According to this economic theory, lower tax rates actually increase tax revenue because people are more willing to work when they can keep more of their money from the tax collector's clutches...the higher the rate of taxation, the lower the individual's motivation to work hard and make more, because he'll just end up paying it to the tax man. The top of the Laffer Curve is the point at which the individual taxpayer's willingness to work hard is balanced by the government's need to generate tax revenue. This is what the curve looks like...

Okay, I can see where the Laffer Curve makes sense. But what doesn't make sense to me is how lower tax rates can work across the board as the Conservative Silver Bullet answer to all economic problems.

Here is what I wrote in the e-mail exchange I described above:

“…as of December 5th, the economy this year has lost about 1.9 million jobs. These are people who have no work and are paying no taxes. A tax cut isn't going to do them much good if they have no earnings to tax. While tax cuts may, in your view, 'mean more money for businesses to expand and hire new people,' I think that the expansion and hiring aren't likely to happen until those businesses are sure they will have customers for their products and services. How big a tax cut do you suppose it will take to convince businesses to hire back the 1.9 million people they laid off this year, plus all the new ones entering the work force?

“It may be true that government actually takes in more money when it cuts taxes, although I suspect there may be some creative accounting to make those numbers work in all but the most booming of economic times. Whether it does or not depends on whether the money that businesses and individuals save in reduced taxes is plowed back into the economy. I can tell you in my own case, that we are saving every extra dime we can in an attempt to make up for the massive losses we sustained in the current Wall Street meltdown...that's money that isn't being spent in those stores you expect will be hiring and expanding because of the money I'm supposed to be spending. And I don't think I'm alone in what I'm doing.

“… You are correct in that money collected in taxes is money that is not available for businesses to invest, that the essence of government is to set spending priorities which balance income (taxes) with outgo, and that a line needs to be drawn to bound those priorities. The problem is that we have allowed rigid political viewpoints to limit discussion of and experimentation with potential solutions. Rock-ribbed conservatives believe the government should stay back and let the marketplace police itself...well, we can all see how well that works. Die-hard liberals believe the government has a responsibility to ensure that everyone shares equally in the economic benefits (sounds like Marx's "from each according to his abilities, to each according to his needs," doesn't it?). Each one has his head up his butt. Government shouldn't "dictate," but really needs to regulate the marketplace enough to prevent the sort of disaster we're coping with now ... likewise, government shouldn't be implementing foolish policies which may be socially praiseworthy but are in reality economically ludicrous (mortgage loans to unqualified people, for instance).”

Okay, I've beaten the tax horse long enough. What's your view? How should we stimulate the economy? I accept that lower (or, at least, not higher) taxes should be considered as one part of a larger stimulus package, but beyond that I don't know. What I do know is that throwing money at banks, finance companies, auto makers, and everybody else that's whining for help isn't likely to work in the absence of a coordinated plan that actually puts people to work and prevents the economic shenanigans that wrecked the economy in the first place.

Where do we go in 2009? Inquiring minds want to know.

Because inquiring bodies need to eat.

Have a good day. More thoughts tomorrow.

Bilbo