More for Maggie:
Lowering taxes without a cut in government spending merely moves the expenditure into debt financing.
Currently, the USA is funding most of its new debt by purchases by the Federal Reserve.
If taxes are cut, without at least an equal cut in government expenditure, the loss of revenue would be made up with an equal creation of new money via the FED.
Creation of new money into an economy is inflationary.
There may be a timing delay between a recent creation of money and the subsequent rise in inflation or, as is now, the banks, very fearful of lending into a distressed economy, continue to store this money as excess reserves with the FED thus preventing the release of new money into the economy – thus forestalling inflation.
But, no matter how you cut the cards, it is an inflationary tactic.
I am most certainly not against tax cuts – indeed, all taxes are destructive to an economy – there exists no such thing as a ‘fair’ tax, ‘equal’ tax, or a ‘good’ tax.
However, to properly evaluate a tactic, the consequences must be addressed prudently.
The excess reserves of the banks grew from $2 billion to over $1.2 trillion in a few months. The amount of ’stored inflation’ sitting in excess reserves is staggering. To add to this with tax cuts without budget cuts and a deepening budget deficit wholly dependent on money creation ….. is incredibly disturbing.
We can refer to history and President Harding’s success at reversing economic recession in 1920.
He cut taxes – BUT also cut government spending and paid down the national debt – at the same time.
“Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922. Federal taxes fell from $6.6 billion in 1920 to $5.5 billion in 1921 and $4 billion in 1922. Harding’s policies started a trend. The low point for federal taxes was reached in 1924; for federal spending, in1925. The federal government paid off debt, which had been $24.2 billion in 1920, and it continued to decline until 1930.”
His action was successful.
The tax cuts reduced government burden on the nation – but the tax cut was not replaced by debt – Harding reduced government spending. Without the government competing in the economy for money, enterprises could access these real funds for growth.
Additionally, by reducing government debt, it added to a further increase in available capital for these enterprises. With no surprise, the availability of money allowed economic growth, and reversed unemployment within in a time scale that was amazingly quick.
It was not just one of these tactics, singly, which lifted America out of the recession, it was the cooperation of consequences of all three tactics.
** Ah, the days of merely an annual budget of $6.3 billion – shocking to consider that today, the US government spends that amount of money – the entire nominal budget of the federal government of 1920 – in about 12 hours … non-stop…**
I am not against tax cuts, however, I do not see it providing any possibility of success on its own – indeed, may actually make the situation far worse.
I believe that budget cuts – real cuts – need to be done first.
Without that, any other tactic is merely ‘counter-flooding’ the sinking Titanic – it may level the ship – giving the appearance of recovery – but it most certainly will speed up the sinking.