Tuesday, January 27, 2009

Democrat economics VS the creation of wealth

Why Tax Rate Reductions Are More Stimulative Than Rebates:
Lessons from 2001 and 2003

With slower economic growth raising fears of a recession, Washington is abuzz with economic stimulus proposals centered on tax rebates. Tax rebates, however, don’t stimulate the economy. Lawmakers currently examining economic stimulus proposals should reject rebates in favor of tax rate reductions.

Tax Rebates Don’t Stimulate. By definition, an economy grows when it produces more goods and services than it did the year before. In 2007, Americans produced $13 trillion worth of goods and services, up 3 percent over 2006.

Economic growth requires four main factors:

(1) an educated, trained, and motivated workforce;

(2) sufficient levels of capital equipment and technology;

(3) a solid infrastructure; and

(4) a legal system and rule of law sufficient to enforce contracts and contain a functioning price system.

High tax rates reduce economic growth, because they make it less profitable to work, save, and invest. This translates into less work, saving, investment, and capital—and ultimately, fewer goods and services. Reducing marginal income tax rates has been shown to motivate people to work more. Lower corporate and investment taxes encourage the savings and investment vital to producing more and better plants, equipment, and technology.

By contrast, tax rebates fail, because they do not encourage productivity or wealth creation. To receive a rebate, nobody has to work, save, invest, or create any new wealth. [...]

Read the whole thing, it goes on to give examples from recent history: the failed 2001 tax rebates, and the successful 2003 tax cuts, which illustrate this dynamic in action. You can't "fix" the economy, without a basic understanding of how it works.

I always thought this understanding of wealth creation was common sense. But is it? We've elected a government that is going to do the opposite of creating wealth, at a time when wealth and job creation is most crucially needed. It seems common sense isn't so common anymore.

Yet ironically, the latest Rasmussen poll shows that a majority of Americans see a problem looming:

59% Fear Too Much Government Spending Is Coming

Hat tip to Neal Boortz for the link. He said about it:
Well duh! What did you expect when you voted these people into office? A bit late to worry about that, don't you think?

If you vote in a Democrat majority, expect them to behave like Democrats and do Democrat things. Duh, indeed.

Related Links:

Dave Ramsey's solution for the financial crisis

Financial Crisis: a free-market solution?

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