Tax cuts vs Tax Increases and why the latter is the better (when used wisely)

Tax cuts against tax raises is one of the oldest fights in politics. I am going to lay out for you why I believe wise tax increases will prove more fruitful.



I begin with tax cuts. Who doesn't want more money instantly? Everyone of course. Who benefits the most from them? The middle class, the rich and the poor. So why you may ask do I dislike them as sound government policy? Let me explain it to you. The biggest problem with tax cuts, especially in a recession, is that there is absolutely nothing that forces those who receive such cuts, to spend the extra money to grow the economy. The whole point of a business is to make as much money as possible with your product(s) while at the same time trying to minimize your risk as much as possible.

Now if a person is already wealthy (for reference let's say $350,000 of income a year) and owns a productive business, is he/she going to automatically jump up and spend more on the business if given a tax cut? In booming economic times, when his/her product(s) is in great demand, sure it will get spent on the business. The benefits in this case out-weigh the risks. The business is already profitable and by using the extra money from the cuts to expand into new markets the business can earn even more profit. This in turn allows the employees to potentially (key word) to earn more money, which allows more spending, and in turn fuels the economy. Now what happens if there is an economic recession?

Again, a business's goal is to make money as fast and as possible with minimal risk. Even if the business is still doing fairly well, in a down economy is the risk of spending the extra cash from tax cuts on expansion worth the gain? Maybe. Notice we have gone from the benefits far out-weighing the risks, to maybe. If you are successful can a person, in a down economy, take a chance and risk losing money on a "maybe"? From a sound business point of view the answer is no. As it stands your business is making money as is, but if you expand and the market can't support you then you risk losing everything. In a down economy the smart business move is to put the extra money into investments. You can spend it on cheap stocks, bonds, lock it away in CDs, put it in savings accounts, etc. By spending the extra cash in that sense the risk is lowered by diversifying, and most, if not all, of that invested money can be quickly accessed and moved around.

That is the safest bet to play in a down economy, which in fact is what we are seeing today. Businesses are scoring profits, and the wealthy have gained wealth but that hasn't led to a massive increase in the economy and jobs. This of course means that the economy becomes more and more stagnant, and in turn reduces the chances of businesses expanding causing the cycle to continue. Also, from the government side, tax cuts do in fact cost the government money. You are reducing the net income of the government which is in essence a cost. If you cut taxes and the economy doesn't grow then you are now out potentially trillions of dollars.

The other option is tax raises. A tax increase is a very toxic issue, especially in an economic recession, but it is a sure fire way to raise revenue. Unlike tax cuts, tax increases promise an influx of income because people ALWAYS earn money and people ALWAYS have to spend it in order to live in today's world. Now yes, a tax increase does reduce the amount of spendable income for both individuals and businesses, however, you can have an effective tax increase with only a small percentage (going from 36 to 39% on the wealthiest income taxes for example) which in turn limits the impact on that spending.

Going back to the goal of businesses, if their taxes go up they have two choices: cut (which will hurt you eventually), or take out a loan and try to expand your market to make up for the difference. The chance of losing income through the tax reduces the risks of expansion. If a business can see a reduction in profits either way it makes more sense to expand that business while you can and tap into new markets. By expansion you are forced to hire, which gives people more money, which they will likely spend in your business, which grows the economy as well as the business' bottom line. Eventually you find your profits at equal, or greater levels than it would have been had the business done nothing.

Now don't misunderstand me, I am not saying that taxes be raised a little every year. In fact tax raises have two faces. You can raise taxes on existing tax bases OR you go find a new tax base. By finding a new tax base you can raise your taxes by 3% without effecting profits or income. In addition if you find multiple new bases, you spread that 3% out and reduce it on each base (2 new tax bases set at 1.5% for example).



Now by no means is one a cure all answer because you have to analyze each month, each year, each day. But by keep to one of the other is a recipe for disaster. We have had the current tax rates since 2001, and they simply have not paid themselves off with economic growth. As much as people try to deny it and make excuses, that is the true fact. 10 years and only a certain part of the country has grown wealthier (and it isn't the biggest part of the country). If businesses and people aren't spending enough, then maybe its time to change policies and force the job creators to choose whether to stand pat and lose money in taxes, or to try and expand to make up the difference. Reagan and Bush senior raised taxes during troubled economic times (Savings and Loan crisis) and in the late 90s we had a booming economy with a multibillion dollar government surplus. If it was good enough for Reagan and Bush why isn't it good enough to try now?