Supply Side Economics & Tax Cuts
I had a conversation with a good friend of mine the other day regarding thoughts on the economy and specifically what appears to be an impasse regarding the so-called Bush Era Tax Cuts. Knowing my own stance on the issue is a little bit torn, I found it ironic that his stance was as well. Fundamentally, during the conversation, it occurred that we both are largely believers in the idea of supply side economics. We both, however feel that in the current continued stagnant economy that it is not working. Interestingly though, we found a compromise that should make everyone happy.
A little background for those that may be unsure. Supply side economics basically hold that you tax roughly equally to all levels of income. The extra money that those who are more wealthy have will typically be reinvesting back into the economy for the great good of the overall economy. By reinvesting they are typically creating, increasing, or sustaining jobs and thus in theory, the money will turnover in several people’s hands as a result and the economy will move forward. The “jobs” by the way, could come directly or indirectly through investment in capital equipment, that still has to be built and installed by someone. The part of this money moving through and generally downward from the wealthier to the lower-income laborers is sometimes called the trickle down effect.
When you get right down to it though, it is broken right now. Money that the wealthy are saving on taxes is not leading to new or reinvestment. Instead, they, being just as fearful as the rest of us are holding on to the money for the just in case situations. Especially since a number of them have felt the squeeze in the last roughly two and half years.
So, moving back to the debate regarding taxes, the problem is currently the taxes cuts are all set to expire at the end of the year. This, pretty much everyone agrees, will cause the economy to be much slower in recovering and few even thing the very slow progress being made currently could stall. The debate is republicans want the cuts for everyone while the democrats only want it to apply to the middle class and below (suggesting 250K should be the limit it applies too). I do take a little bit of issue with republicans pushing this for everyone given at the same time they are pushing to limit the federal debt – but that is another story.
The obvious solution is of course to eliminate the current tax system completely and instead replace it with a straight down the line tax of say 15% of any income, from either a person or entity (such as a corporation) is taxed. There are no deductions. End of story. Reality however is that this will not happen anytime soon, if ever.
An alternative solution and compromise idea would be this instead. Enact the tax cuts for everyone. However to get the tax cuts beyond the amount of the $250k, you must show a clear investment into something, be it capital project or hiring folks to receive the tax cut. In other words, everyone gets the tax cut up to the first $250k. If your income is over that, you only get it if you can show an investment in something that will drive the economy forward, otherwise you still have to pay.
This should satisfy everyone. Democrats are helping the middle class without giving it all up the upper class. Republicans are clearly given those wealthy folks an option to avoid the tax, but a the same time putting the “money” where they say they believe and requiring it to trickle down through the economy to get it. And everyone wins, as the tax cuts stay in place and the economy should see some immediate growth in 2011.
** – Image from Creative Commons Licencing **
