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Herman Cain’s Interview, Will tax cuts really help us now?

By: kyle8 (Diary)  |  June 9th, 2011 at 09:17 PM  | 

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I just saw an interview with Herman Cain on the O’Reilly program.  In this interview Cain touted the now traditional Republican mantra about economic recovery; Tax cuts.  When O’Reilly asked him about lowered government revenues while we are so deep in debt, he responded with the normal supply side response that the economy is not to be viewed with static, but rather dynamic analysis.

All that is standard, and it is historically true.  But the questions to ask now are these:  Will any further tax cuts right now actually spur economic growth? Or would other things be more effective? And, will tax cuts really increase revenues, or decrease them.

Unfortunately I am suspicious that many conservatives have a misunderstanding of supply side economics. Tax cuts, and supply side are not magic. They are not a cure all for whatever ails you.  I ask you to witness the current economic environment. Right now, due to various tax cuts in the last two years we are at the lowest rate of both income taxes, and capital gains taxes that we have seen in thirty years. Yet the economy shows no signs of recovery.

Here is the way that supply side equations work.  You have all, no doubt heard of the Laffer Curve, named for economist Art Laffer.  According to supply side theory, if the tax rates are north of the Laffer Curve then increasing rates will so depress economic activity that you get less income than you had before. And if you lower the rate, then you actually increase tax income.

This is all absolutely true and can be seen to have worked several times in the past.  However, What if your tax rates are already below the point of equilibrium on the Laffer curve?   What happens then is that lower in rates further will not noticeably increase economic activity and will result in less revenue for the government.

Right now we have to ask this question, Are we at or below that equilibrium point?  I think there is good reason to conclude that we are.  As much as I like Tax cuts for their own sake, is it responsible to advocate further cutting when such huge deficits loom.  DON’T GET ME WRONG! We can never lower our deficits with just tax increases, We must have real substantive spending cuts.  But the simple truth is that we will probably have to have both.  Just as a case of reality and political necessity.

Please do not take this the wrong way, I am a total believer in supply side economics and I have nothing against Herman Cain or any of the other candidates calling for tax cuts.  But we have to be sober and not rely upon wishful thinking.

Why exactly is the economy so bad, and not responding to tax cuts?  Well there are several likely reasons. A regime which is hostile to business, a huge increase in regulations, a spend thrift congress, huge deficits, and uncertainty about the future.  But probably the biggest reason is the Federal Reserve and their manipulation of the currency. This has caused the Dollar to take a hard fall. That drives up commodity prices and causes us to have what amounts to a huge hidden TAX INCREASE, in the form of fuel, food, and commodity prices.

COMMENTS

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  • traversecityconservative

    Let’s see…is it better that I keep my own money THAT I EARN or is it better that the government use it as their own private slush fund? Do I care if it decreases government “revenue”? Um…NO. I’m just really so worried about the government having less revenue. I stay up at night worrying about that. It’s on my top ten list as a Conservative giving a crap how much tax money the thieves in Washington D.C. get.

    • http://impudent.edublogs.org/ kyle8

      But you didn’t think it out very much, you just reacted.

      It makes a big big difference because if we continue with these record deficits then you will be really taxed in the future, or you might loose all your savings to inflation.

      SO we need to cut spending, but we also need to provide a recovery and a decent amount of tax revenues as well. How to do all of those things?

      If we get the formula wrong then we might screw up the future as much as we have screwed up the present.

  • belcatar

    However, I think that taxes and deficits are a symptom rather than the disease. The disease, of course, is a government so bloated and power-drunk that the Department of Education is sending SWAT teams to people’s houses.

    So, yeah, I think it would be good if there was a little less cash for them to mismanage.

  • akafroman

    That lowering taxes will eventually lead to lower revenue, but that we are so far away from that point that worrying about it is , “like a drowning man worrying about whether or not his canteen is filled for his trip to the desert next month.”

    • http://impudent.edublogs.org/ kyle8

      Taxes are, as I said before, historically low right now (in the post war period, and not doing much of a boost.

  • onemovoter

    Why is the government spending so much in the first place? Could it be a huge bloated military budget? Not really it’s stayed relatively low and has gotten lower as a percentage of the budget. There are ways to completely trim the military some more with reforms, but as a percentage of the yearly budget it wouldn’t amount to much.

    If you look at the big ticket items, it’s roughly SS – 20%, Medicare -20% , Medicaid – 20% which that last includes unemployment, welfare, ect. So our budget is way out of wack because of social programs. Take those away and we’d have a balanced budget. Not to mention the over $100Trillion in unfunded liabilities those programs have.

    We have been screwed since the beginning of SS and other social programs. If people had been able to keep all that money instead of having to funnel it through politicians, we’d been much better off economically. But I digress.

    The problem with either tax cuts, the economy, and revenues, isn’t how much to lower them, but by how fast. Do them immediately at the end of the year, make it as permanent as possible, and then announce the formation of a council on abolishing completely unneeded regulations and laws. In which no new regulations will be created until the council is done (which it never will be). Of course repeal Obamacare and FrankenDodd finance reform. Do all of these by the end of a year and you’ll see our economy take off like a rocket, in which revenues within a year after should equal what we have now.

    Reagan’s tax cuts didn’t all come in at once. They came in over a 2 year period that stretched out the 80′s recession until late 83. If spending was kept at 1981 levels, the budget would have been balanced by 1985, instead of coming close in 1989.

    So don’t get hung up too much on taxes. It’s always been about spending.

    • reddog53

      Taxes have moved around in various ways since WWII, and the historical record shows that it consistently ended up taking in about 18% of GDP.

      Spending, on the other hand has oscillated above and below that 18% average, creating the deficits each year and the accumulated national debt that we have today.

      Budgets are merely a financial expression of the actions we have decided to take through government. We need to review those decisions, change the actions and thus change the amount we spend. Demanding a 5% cut here, 10% there, etc misses the point.

      What do we want government to do? If we want the government to do it, what will it cost? Pretty basic questions, but it leads to ‘mission creep.’

      Instead, we need to focus on what we have established as core government functions by the Constitution, and begin to prune away everything that doesn’t match that list.

      The problem has always been that there are countless things that people want government to address, so groups, lobbyists and political parties searching for voters add a bit here and a bit there, and pretty soon, we end up back at ‘big government’ and ‘big budgets.’

      Government needs to say “No,” but elected leaders that say “No” are normally not re-elected…it’s a much harder thing to run on a platform that says you’re going to do less for the voters, until the voters themselves recognize that doing less is the right track for the country to be on.

      • http://impudent.edublogs.org/ kyle8

        What I am saying is that if a candidate focuses on tax cuts right now, they may not be targeted on the right thing which is spending.

        I don’t think tax cuts will spur the economy any further, and may make the deficit even worse.