Wednesday, January 14, 2009

Incentives for Producers The Real Stimulus Plan

A recession is not a lack of spending, and recoveries are not brought about by the government providing free money to boost consumption. A recession is a reduction of economic activity, a lack of production. Just ask the people who put together the statistics on recessions what they measure. You already know the answer, they measure Gross Domestic Product. When GDP is negative for a quarter or two it's called a recession. That's right, it is all about production, so why is the crowd in D.C. hellbent on stimulating consumption rather than setting the stage for a lasting economic recovery through incentives that foster increased production.

The gargantuan spending bill being cobbled together will do nothing to promote real economic prosperity. It can't, as it does nothing to alter the long term incentives for saving, investing and risk taking that are the underpinnings of economic expansion. It is simply a massive serving of Pork, with a side dish of phony tax cuts, and a steamy hot bowl of state welfare spending stew. A true stimulus would replace this economic sacrifice to the gods of pork with a package of long term incentives that would reward the virtues of saving, investment and entrepreneurial risk taking, instead of the vice of all out consumption. Our current system does too little of this, and that is the problem.

Bolstering consumer spending with government transfer payments does not produce economic prosperity. What makes a nation prosperous is expanding economic production. The proposed tax reduction through credits and rebates on the work you performed last year come after the fact, and can't possibly provide an incentive to produce more this year or in the future. Washington's concurrent warnings that we are not saving and not spending enough belies the fact that they do not have a coherent economic vision, and instead craft fiscal policy with an eye towards accommodating their desired spending plans, not economic growth and opportunity.

Recently Congress was on the warpath looking to take the scalps of the CEO's from Detroit for their role in the mismanagement of their respective companies. How hypocritical it is for Congress to now be rewarding the Governors, the CEO's of state government for their gross mismanagement of state budgets. That Congress is now playing the part of enabler for a growing line of Governors in denial, looking for taxpayer handouts to avoid facing the reality of their profligate spending habits of the last decade is beyond the pale.

If the idea is to create additional private sector jobs an expanding economy is the answer. The relevant question is what policies will promote the greatest expansion of our economy, long term? Is government borrowing on a massive scale from the private sector to promote public sector spending initiatives over the course of the next two years the best answer? Of course not! The real solution is to revitalize American business. Our business sector is the greatest job production machine ever created. We'd all be much better off if the monkeys in congress would stop throwing wrenches into it's economic gears.

The American way to wealth creation has always been through capital accumulation, by saving, investing and risk taking . Denying new capital to the markets by the threat of confiscation is exactly what the tax on capital gains does. It keeps capital locked up in mature companies, and locked out of start up ventures, preventing the formation of new firms and the commercialization of new ideas that are the engines of job creation. These taxes that hinder Americans in their efforts to accumulate and redeploy that capital, in turn starve the economy of an ingredient essential for expansion. Government spending on the scale now envisioned will do the same.The time has come to start treating capital and capitalists better.

That it has become politically correct to demonize entrepreneurs as the greedy idle rich is deplorable. Instead, they should be praised for their industriousness and their role as the true community leaders who risk their own capital to organize businesses, creating opportunities for those who can't or won't. You can't hate employers and love the employees.

Marginal tax rate reductions are the key to revitalizing the economy, as they provide the increased reward for the next unit of production. We should start with a permanent across the board reduction in marginal income tax rates, followed by a complete overhaul of the tax system. This same tax code has been in existence, in pretty much the same form, since it's creation in1913 when it was sold to the American people as a revenue generator that would only tax the rich. In the past 96 years, Economist have accumulated plenty of evidence of the damage high income tax rates cause the economy, even if politicians have come to learn precious little about their disincentive effects.

If creating additional employment opportunity is really job #1, we should permanently reduce the job killing tax on labor that Social Security and Medicare have become. Employers and employees now pay a combined 15.3% tax on each dollar of earned income. Even those who aren't subject to the income tax pay this levy. A reduction in this tax would narrow the gap between what it cost an employer for an hour's worth of labor and what an employee receives, increasing both the employer's return on labor and the employee's take home pay. This tax on employment shares a good measure of the blame for the lag in employment growth over the past decade.

It is amazing to me that in today's competition for a share of the global economic pie, our claim to fame is having the highest corporate income tax rates in the developed world. Aside from reducing our global competitiveness, corporations only pay these taxes indirectly. The folks who actually pay the corporate income tax bill are consumers. Tax costs are figured into the price of all goods and services. The Tax Foundation, a non partisan educational organization, has estimated that the average consumer pays $3190 in corporate taxes that are incorporated in the retail price of goods. How's that for promoting prosperity and economic expansion?

The government's unending quest to spend more money comes at the expense of the vibrancy of the private sector. If after a decade of unbridled spending at all levels of government, including the $3 trillion dollars the federal government currently spends each year isn't getting the economy moving, what makes them think that an extra 500 billion this year and next is going to somehow make a real difference? It's time for Bailout Nation to scale back this entitlement mania. This will give those of us in the private sector a break today, and remove the threat of the oppressive tax burden that is sure to follow this massive government spending boondoggle called the stimulus plan.


Anonymous said...

The Tax Foundation does not argue that it's all paid by consumers. In fact, it assumed that 70% of the corporate income tax was paid by workers and 30% by owners of capital. None is passed forward in the form of higher prices.

It's still paid by people, however, whom are all consumers.

Anonymous said...

Right on, Dave. What this economy needs is new work and new investment. Simply pushing dollars around won't get neither done.