Saturday, January 28, 2006

The Tax-Policy Dilema

There was dramatic slowdown of the Economy last Quarter, basically coming from Auto Sales slumping by almost half with the removal of the Car companies' discounts, and an over 13% reduction of Government military spending. Other Commentators are reflecting on this data, as this Author did yesterday. Today, I want to discuss other aspects of the economic situation.

Conservatives face the consistent Deficits of the Federal Budget with huge borrowing from foreign sources, while Imports continue to increase. There exists an artificial structure to the economic growth of the later Bush's administrations. The Federal Government pushes a Deficit-financed economic fuel into the Economy which has a potentially huge Inflationary impact. Deficit-spending is economic fuel because it allows Taxpayers to continue their Expenditure patterns without curtailment as Federal expenditures grant added economic activity; the problem being this leads to overconsumption of Resources at artifical pricing. Such Deficits could still be acceptable, when Employment levels are low, and when Business Profits actually paid for the Deficits through absorption of the deficit bonds. Cyclical flow patterns simply utilized a Wrap formula where Government spending simply curtailed unprofitable business operations.

The selling of the Deficit Overseas changes the pattern of Capital flow. Employment incentive moves Overseas, as foreign business operations have additional investment opportunity for additional Profits, Federal spending directs native Business investment to Capital-intensive industries, and artificially-high Wages make marginal-Profit industries less attractive for business investment. Marginal industries start to fail as foreign competition has heightened potential for Importation--with lower Wage schedules, lower Production Costs, and expandable markets. Native employment starts to decline, while heavy purchase patterns keep Wages high in the remaining Labor force.

The answer is higher Taxes, but Conservatives believe Government already possess too large a magnitude of funds to spend. The trouble is higher Taxes may be the only means to reverse the explained Trend. It has an additional cavet: if Taxes are raised to place Government Budgets in surplus, Politicians must be foretalled from spending the additional revenues. lgl

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