Shrewd Investor and Nasty Man
Given the massive Federal deficit, it’s a sure bet that taxes are going up sooner rather than later. Before the Teabaggaz start posting, I think we can all agree that cutting taxes while starting a war is a bad idea. Stuff costs money, whether we’re talking about body armor for our warfighters in Afghanistan or Under Armour shirts. But the problem is what to do about it, because we have to fund our deficit somehow. However, we also have a really fragile economy. If the government raises taxes, will it crowd out the investment and spending needed to create jobs?
The idea behind cutting taxes in the Reagan era was that if less money went to taxes, more would be used for private sector investing, and that the private-sector investing would generate so much economic growth that the loss in revenue from the tax cut would be short-lived. Eventually the economy would expand so much that more taxes would come in at the lower rate because of the larger base. Private-sector investing did increase; the U.S. remains the strongest capital market in the world. It didn’t increase by enough to offset the tax cuts, and part of Reagan’s economic legacy was an increased Federal deficit.
Money can be spent on taxes, consumption, savings, and investment. (Paying down debt is a form of savings.) Money that goes to one purpose cannot be used for another. Â Money that the government takes in from taxes can also be used for consumption, savings, or investment. War and Medicare are examples of government consumption spending (which may be on behalf of citizens). Paying down debt is a form of savings, and goodness knows that the government at all levels has plenty of debt to pay off. The government invests when it spends money on bridges, schools, airports, and the like. For accounting purposes, this is handled like consumption. (more…)
