Yeah, I know credit and debt issues pretty well, but I’m no economist. With all the talk about a stimulus spending package or cutting taxes to help our the economy, I get very confused. Isn’t spending more money or giving people a tax cut the same thing? Each method essentially depletes the US Treasury. I don’t know about you, but it’s been the usual politics in Washington. Neither side can cite any facts when arguing about the best way to create jobs. I decided to investigate.
The Democrats want to pour more money into job creation via government-funded programs like infrastructure and green energy research. The Atlantic Monthlyl outlined several ideas last year that Obama is adapting. Yep, this will definitely put money into the pockets of both businesses and some workers. But it will increase the deficit which contributes to the weakening of the dollar. The number of jobs that will be created seems hard to predict.
Advocates of tax cuts say that while cutting taxes temporarily depletes the tax revenue, by putting more money is people’s hands, they spend right away. Businesses start hiring to meet the demand and they pay more taxes, making up the difference in more business taxes paid into the system. Is this true?
I did a search on tax cuts and came up with a most interesting article in Time Magazine, dated March 24, 1959.
The answer of tax-cutters is that a cut eventually generates new revenue by stimulating economic activity; for example, the Government lost some $5 billion yearly in revenue when it cut taxes in 1954, but within a year, as the tax cut helped push the boom forward once more, revenue was up $7.8 billion.
Know what the wild part about this tax cut was? It was advocated and passed by – drum roll – the Democrats.
But that was in 1959 – does the tax cut formula still hold water? I came across this Feb 2009 article in Forbes magazine which talked specifically about tax cuts and the economy. I found the information to be both easy to understand and fully backed by verifiable data.
Indeed, the top income tax rate was 91% in the 1950s, but the S&P 500 rose 245%. On the other hand, the combined federal tax on income and investment during the presidency of George W. Bush was lower than at any time post-World War II. Despite the relatively low tax burden, the S&P fell 36% on Bush’s watch.
Broad evidence suggests the greatest economic predictor is the strength of the dollar, and more importantly, the latter’s stability in terms of value. During the 1950s the dollar possessed a stable value definition thanks to the Bretton Woods agreement, which priced it at 1/35th of an ounce of gold.
In the 1980s the dollar was strong, and the S&P rose 121% on Ronald Reagan’s watch. During the 1990s, the dollar exhibited strength but, particularly from 1993 to 1997, it was also very stable. On Bill Clinton’s watch the S&P rose 208%.
The article goes on to say that while tax cuts are beneficial – they may not do much if Treasury Secretary Tim Geithner continues Bush’s weak-dollar policy, as evidenced by low interest rates and trade deficits. Focus should be placed on strengthening the dollar, then put a tax cut into place.
In other words, both the Republicans and Democrats are headed off in the wrong direction. Go Figure.
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