Monday, September 5, 2011

Here's why Republicans and Democrats should raise taxes

...even during a soft patch in the economy
...even during a downturn in the economy
...even during a recession in the eocnomy
...even during a depression.

In a market economy, there are natural cycles of booms and busts. 

After the booms, individuals and businesses invest too much money.  There is a rush by the people who "missed out" to try to "get on the train" before the last one leaves the station.  This creates a "bubble" where prices and profits are seemingly endless.  It always happens.  (btw this happens in sports and other areas of life too, when teams and the public believe a certain team is so good, the old rules don't apply, and they won't lose. THEY CAN'T LOSE!!!)

After the busts.  People are excessively fearful, and rush to the sidelines to husband their money, and refuse to get back out into the investment world for fear of more falling prices and losses.

In the second case, this is where we are now.  This is why raising taxes on certain people would help the economy and not hurt it.  I'm talking about people who don't spend everything they have.  I'm talking about the savers, and the investors (who are investing).

The government should raise taxes on the wealthy and upper middle class.  People with disposable income that could be spending and investing, but instead are nervous.  They could put an exemption or a credit in the law for anyone who takes a risks with their money.  In terms of hiring, starting a business, or spending in the U.S. 

The end result would be a stimulus to the economy as long as the government takes the raised revenue and spends it.  The government could guarantee business loans, engage in public works projects, or many other things.

Paying off the debt would be a bad idea in the short term.  Good idea in the long term.


to show I'm not crazy:

It would be a bad idea to raise taxes on the wealthy or anyone in a building economy where people are taking risks and expanding opportunities.  Then the old rules would apply.  There would be a zero sum gain between government revenue and private sector loss.  If the government took an extra $30,000 from a person and it meant $30,000 less in investment or expenditure, then that would be bad.  The best case scenario there would be if the government had a better use for that $30,000 than the individual. 

In gerneral that's not true.  Millions of people under normal cricumstances make better decisions that central planners.  There are exceptions, but they serve to prove the rule.  Like, if a town raised taxes to clean up after a hurricane and fix the damage (who does that anymore? Everyone looks to the feds).  No one person would rationally clean up the whole city.  They might try their particular area.  The failure of everyone to look beyond their own personal space would harm everyone even more.  So in that case, central planners would do better than individuals acting in their best interest.   They could get the power back on, the streets clear, and business thriving.  So under normal circumstances as Americans we should go with the market and freedom.

The question is what to do under abnormal circumstances where people are spending too much and investing in bad ideas or when people are too nervous to do anything at all?

If the government can raise taxes on people during booms, it inhibits their ability to waste money on bad decisions and ideas.  If you'd have to pay higher taxes, you'd think twice before sinking your money into a dotcom company in the 1990's.  You'd have less money to speculate with.  You'd make sure what you did do was more solid.

This is how tax policy can and should work in support of a free market system.

If not, the system can destroy itself from getting too hot or too cold.

No comments: