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Wednesday, 24 October 2012 00:00

Here’s why tax cuts aren’t working

Written by 

To the Editor:

The economy is the largest accident ever designed by man. We think we can’t control it, but we the people do. Unfortunately, it’s human nature that is in control and not our logic. 

Trickle-down Reaganomics is one attempt at control. The idea is to give tax cuts to people that don’t need them.  These people will then invest that money in their businesses, if they have one. They will hire workers, if they need them.  They will buy more and better equipment, if it’s need, etc.  This spending will end the recession. If you are having trouble comprehending the efficiency of this, some might ridicule you for not having an advanced degree in economics.

Taking a look at it from what really controls the economy, human nature, it is easier to understand. Indulge me with just one small example. Let’s pretend we are rich. We own businesses that like most are limping along. Demand for our products is down. We are eking out a profit only because payroll and expenses have been cut. Things are OK, but any dip in the economy would likely mean a loss or even bankruptcy. 

Let’s pretend an income tax break puts $50,000 in our hands. We want to invest it, but how? More inventory? Inventory on hand is barely moving. Another employee?  Too costly. More advertising? Foolish. Purchase more equipment? We are getting by with what we have. Another product line or service? Potential profit could be years away. The competition is not significantly investing big in anything; why should we?

What to do with the $50,000? No problem; we’re rich. We have financial advisors. They are all too happy to invest our money in the market, and they are right. Financial investments are making money. Although it will earn only a few percent, there is little chance of total loss. Even a 30s-style crash would not mean a total loss of investment like bankruptcy. Our bonds and hedge funds have protection from loss anyway. The only jobs created or protected are those of the money managers themselves. Call it, “No stockbroker left behind.”

Think these advisors are only after commissions. Take a look at where top financial experts in the huge banks are putting their banks’ money. Remember the bank bail out money? Remember the money given to banks so that they could refinance folks’ underwater mortgages? Many legislators would not vote for the measures until restrictions were removed, saying that the bankers knew best what to do with the money. They did; the money went right into financial investments. It paid off big. They got big bonuses. Unfortunately, the poor homeowners behind on their mortgages received only pennies of the money intended for them. 

You can risk your $50,000 in your tottering business. As for me, I will follow the smart money. I will invest it, perhaps in financial institutions helping rich people invest tax cut money. When conditions warrant, my $50,000 plus interest will be available for my business.

Still thinking income tax cuts for the rich will restart the economy? Good luck. Don’t spend your pretend $50,000 all in one place.

Warren Riley

Franklin

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