Saturday, December 31, 2005

Spending v. Tax Cuts

Analyzing the Economic and Budgetary Effects of a
10 Percent Cut in Income Tax Rates

An important Read for Economists, but the Daniel Altman article in the NYTimes points out a real need to regain reality in the argument. Government Spending has far greater effect upon the Economy, than any Tax Cut could; especially with Tax rates at an incredible Low, considering the size of the Federal deficit. Borrowing from Overseas will become harder, with only a higher attainable Interest rate, as the Federal Government borrows more from foreigners. This Argument has yet to bring up discussion of the effect on the Dollar of such borrowing; something the Author does not want to enter into here.

A serious ignored component in the discussion lay in the division of Government Spending. Social Welfare programs promote Economic performance, while Spending on High-Tech weaponry and Capital infrastructure does not produce as high an economic performance. Why?

Social Welfare programs attain higher economic performance because Consumers receive far higher after-Tax Income to spend on Consumption. This Spending generates Jobs, to supply the greater draft of Consumption Goods. The additional Labor, even if not paying a high or any rate of Income tax, pay basic Sales taxes, State Taxes, and Social Security Taxes; all generating greater Tax revenues, and expanding the Tax base paying those Taxes.

High-Tech and Capital Infrastructure Spending relies on a limited, high-Paid Labor force who enjoys the greatest set of Tax deferment advantages of any Tax-paying class. This is a very specialized Labor force, and celebrated for the minute percentage of the Labor force which they represent. Industry and Business concentrate in the High-Tech and Capital Infrastructure arena solely because of the limited Labor Costs and high Profits. This concentration is exhibited in the lobbying effort exerted to maintain this type of Government Spending.

The CBO estimates a 10% nominal reduction in Taxes would produce no more than a 1% increase in economic performance under Conventional evaluation, and less under a combination of Supply-Side and Demand-Side effects. Altman dreams up a $2.4 trillion increase in economic performance. This Author contends that an alteration in Government Spending patterns could effect up to a 8% change in economic performance, and for the better; if and only Government Spending patterns are rationalized. lgl

No comments: