Wednesday, July 06, 2005

Tax Relief Can Wait

I hate to disagree with my friend Mark Coffey, as well as many other fellow conservatives, but I have to. Mark thinks that President Bush should make the tax relief permanent. As an ardent capitalist and a conservative, I have been advocate tax cut in most scenarios. However there are exceptions. (1) When there are a budget deficit and (2) when we are at war. Currently we meet both criteria, we have a budget deficit and we are at war.

Most advocates (and fiscal-conservatives) of tax cut believe that it is a function of government spending. We desire minimum spending by the government. And due to this reduction in budget, we can return the people money to the people. This accomplishes two goals. It eliminates the crowding out effect, allowing more investment in the private sector. It also stimulates the economy by increase consumer spending and shifts the demand curve. There are two interdependent factors for the theory to work, government spending and tax cut. It cannot work with only one factor and the process cannot be reversed. There can be no tax cut until spending is reduced. To call for a tax cut when there is a budget deficit is unsound. It further exaggerates the crowding out effect. With the government borrowing, there is less money for private sector to borrow for investment. So far I have not seen a plan from the current administration to reduce the budget deficit and there is no push from the Democrat to curve spending. The Republican used to be the party that restraint out of control Democratic spending. Such party no longer exists. We have both parties that love to spend.

The Global War on Terrorism is another reason to oppose permanent tax cut. If the current administration claims that this war is the most vital issue of the day. I wholeheartedly agree. There is no other issue more important than winning the war. We have paid dearly in blood and treasure. It must be won. The financial cost for this war cannot be calculated in advance. With the cost for this noble endeavor unknown, it would be wise to have reserve some money for it. Furthermore, we have asked our servicemen and women to make sacrifice. I do not see why if I spent a year in Iraq, risking my life, be away from my family, and have my regular life disrupted, why can my fellow countrymen sacrifice some of their hard-earned money. My pay during the deployment hardly compensate for what I endured. 1,700+ of us have sacrificed far worst. In the time of war, I do not think most American would mind paying more tax.

Tax relief can wait. There will be other time to advocate it. When we are out of a budget deficit or the war is near victory, I will go back to my conservative self and passionately advocate tax relief. For now, I have to respectfully disagree with my fellow conservatives.

4 Comments:

Blogger Michael said...

You'd have to admit there is quite a bit of pork in the federal budget. I'd sure like to see that addressed.

Regarding the GWOT -- I would not be adverse to letting the tax cuts fall to the wayside if it meant we kept dollars in the military, but do you think the bureaucrats will spend it on more military or more pork?

6:29 AM  
Blogger Mr. Completely said...

I understand that the last set of tax cuts actually stimulated the economy, resulting in an increase, rather than a decrease, in tax revenues.

I understand that this is not an unusual result.

How can you tell when a tax cut will raise tax revenue or lower it?

4:00 PM  
Blogger Minh-Duc said...

Mr. Completely,

There is no way of knowing if a tax cut will raise or lower revenue. It can go eitherway depending how steep or shallow the curve is.

Regardless, the budget deficit will have a long-term negative effect. Because the goverment is borrowing, there are less fund available to private sector to borrow - hence less investment. It is called the crowding out effect. A tax cut only worsen the effect.

Bottom line. Tax cut is good only if there is no budget deficit.

7:01 PM  
Blogger Dymphna said...

Minh-Duc:

The deficit is dropping BECAUSE of the tax cuts. When taxes are cut -- and this is the counter-intuitive part most people don't get -- tax revenues increase. This is what Robert Mundell meant by a supply-side economy. Or rather, part of what he meant. There is a "sweet spot" in tax reduction, that when you get to it, revenues increase and so does production but the economy doesn't heat up.

This is a good time to reduce taxes further. It provides income for the stupidly bloated government while providing optimism for the producers and consumers in our economy.

You're very smart, M-D, and it shows. Do some reading on supply side economics. You can find it if you google Jude Wanniski or Supply Side University. Free lessons.

Ol' Jude has some strange ideas, but on economics he's a genius.

4:13 PM  

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