Tax Cuts

There are two real questions when dealing with tax cuts. The first, and the one this entry will not address, is whether it is moral for a government to take money from individuals based on the threat of force to give to programs the individual does not agree with. The second, and the reason for this entry, is whether it can get an economy rolling again. Will the people spend enough money to stimulate the economy.

We will first deal with why these tax cuts will not be as effective as possible, if at all. Milton Friedman, likely the best economist to ever live, spent a great deal studying the effect of tax cuts on the population. He developed the Permanent Income Hypothesis which states that people's consumption patterns are not determined exclusively, or even primarily, with current income levels. Instead, people base their consumption patterns on long term income expectations. People consume based on a constant proportion of their long term income.

He also found that short term increases do little to nothing to increase consumer spending. In fact, in one situation, a government gave the people a one term tax refund before hiking the tax rates. Friedman predicted consumer spending would go down even though the people received the refund and he was correct.

The tax bill passed is not an effective way of spurring consumer spending because it is a temporary increase. These increases are not effective. If Congress truly wanted to increase spending and spur economic growth they would pass permanent tax cuts. Unfortunately, this is politically impossible.