The Tax Cut Myth

I know this is going to be a hard sell.

Since time immemorial the tax collector has been universally despised. No one likes to see their hard earned money confiscated by the government for the common good. I know I take every deduction I am eligible for when I file. But we have been sold a bill of goods when it comes to lowering taxes.

We tried it in the 1920's. There was a boom, a bubble, and a bust. We tried it in the 1980's; another boom, bubble, and bust We have been trying it the last eight years, and you guessed it: boom, bubble, bust. Those who don't remember history are forever doomed to repeat it.

The theory is that if the rich can keep their money, they will invest in businesses that create jobs, more businesses, more tax revenue and greater wealth for the nation. It sounds like logic and common sense. But what really happens? Exactly the opposite!

Higher taxes create an incentive to reinvest profits into long-term growth.When taxes are relatively high, the only way to retain the bulk of the wealth created by a business is by reinvesting it in the business: factories, equipment, staff, research and development, new products.

During the Eisenhower administration, arguably one of our most productive periods, the corporate tax rate was in the 70% range. This meant that every dollar corporations posted as profit instantly turned into 30 cents. (Assuming they actually paid taxes on it)

Unless you really need the money for another yacht or mansion, you invest it the business and find ways to spend it that take it out of the taxable profit column but increase the value of the company.

When you plan for the long term; you need a happy, stable work force. It becomes worthwhile to pay good wages and offer decent benefits. Your employees, community and society prosper along with you.

The problem with low taxes is they change the business culture. Instead of responsible, sustainable investment, they encourage profit taking.

Suckers who run companies with steady, reliable profits became targets for takeovers by people who were willing to milk them for everything they are worth; leveraged buyouts, hostile takeovers, cut the work force, raid the pension fund, sell the assets, outsource production, issue junk bonds; who cares what happens in 10 years, you can make a bundle by screwing everyone else!

After they gutted American industry in the 80's, the rich folks had way too much money to play with, and they become greedy bastards. Investing in business is slow. You don't often get immediate returns on your capitol. Plus, it exposes you to the risks of the preceding paragraph.

This causes investors to look for the latest "hot" sector, where they can make a quick profit and move on. They find the area and flock to it. It heats up even more.

Joe Sixpack, who can’t afford to take the same risks the big boys can, sees people making tons of money quickly and easily, simply by buying and selling, and doesn’t want to miss out. He doesn't realize he already has by the time he gets on the bandwagon.

Sub-prime mortgages, derivatives, mortgage-backed securities, and other Ponzi schemes were all very profitable for a few people who got in early, but they do not create sustainable wealth. Just a boom, then a bubble….. Followed by a bust.

Tax cuts are the root of our economic distress. A responsible tax policy that creates long term investment in business growth is the rising tide that will lift all boats.