Tuesday, September 2, 2008

Idle Observations on Election Year Tax Rhetoric

Tonight on Kudlow's Money Politic$ Larry had on his show Jason Furman and Steve Forbes. Jason was representing Obama’s proposed tax plan and Steve was representing McKain’s proposed tax plan. Both Jason and Steve Forbes claimed that their proposed tax cuts would help the economy.

Missing from the discussion is the obvious question, how will we balance our National budget? Both parties seem to avoid discussing the “hard” decisions that politicians are supposed to be making to balance the budget. Seems that both Obama and McKain are offering us free circus acts in the hopes that we won't notice that we are spending ourselves into bankruptcy. Fiscal responsibility is an "inconvenient truth".

Another issue discussed, who should pay the taxes? Needless to say Larry and Steve demanded with much empty rhetoric that corporate tax rates be reduced to “foster economic growth”. While this line of reasoning has emotional appeal, this point of view fails the smell test. Assuming a balanced budget, a low corporate tax rate will not foster economic growth as explained below.

Supply side supporters such as Larry and Steve promote the concept that if corporations don’t pay taxes it will foster economic growth since corporations will be able to sell their products at a lower price thereby generating consumer demand. But wait! The supply side supporters are overlooking the critical concept that the consumer would now be forced to pay more in taxes since the corporations aren’t. Logically, if you as a consumer must pay more in taxes you will have less money to spend on products. Therefore the consumer would have less incentive to buy. In reality, with a balanced budget, it does not matter who actually pays the taxes.

Nevertheless, I would advocate that taxes should be paid by the corporation and not by the consumer. Why? Under the capitalistic system corporations are, in theory, competing for your dollars when selling their products. If the consumer is “freed” of the tax burden, the consumer may more appropriately allocate their scarce resource (money) for the products they want.

As a follow-up to the concept of “the products consumers want”, tax policy should not be made on “fostering business” since corporations may be distorting the free market by making products that are profitable for tax reasons rather than economic reasons. (Of course this assumes that corporations will be paying a fair tax and not playing accounting tricks with taxes.) If business can’t compete without a tax crutch (corporate welfare), they have no business being in business.

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