A simple lesson in Economics 101.
This is albeit a very simple and basic lesson, there are many other factors that could be and should be included in a more sophisticated plan, but I’ve come to realize that citizens just do not understand basic economics.
Fiscal policy and tax cuts to the wealthier households. In a time of recession, what is needed is expansionary fiscal policy, that is, the government needs to run a deficit. They do this by providing tax cuts – taking in less than they spend. Tax cuts are intended to let people keep more of their money, to be used back into the economy.
A family of four earning $26,400 a year will pay no taxes because the $11,600 standard deduction plus four exemptions of $3,700 each will lower their taxable income to zero . That goes for all households earning up to about on average $100,000. In America, that is 47% of households.
If we have 47% of Americans who pay no taxes, then tax cuts have NO impact on the economy. Nothing from nothing is nothing. You can’t cut someone’s taxes who are paying none. Therefore tax cuts to the 47% do not push money back into the economy.
Tax cuts for those 53% of Americans who do pay taxes – those in the income bracket of $100,000 and above – will most certainly do what taxing the 47% cannot: Pump money into a dried up economy. The more income you have, the more the tax cut benefits all of us. Give a household, earning $250,000, a 2% tax cut (arbitrary) and that’s $5,000 remaining in their pocket. That is invested into bank accounts, where banks can then use it to make more loans, and is increased through the money multiplier effect. Of course that also depends on monetary policy which is another post. Or its spent in the marketplace, duplicating through the multiplier effect overtime. The bottom line is, to get money INTO the economy and duplicating, we have to give it to the people who are earning it and are ALREADY being refused its use through tax impingement. In America that’s the 53%, those earning over $100,000.
So denying tax cuts to those making more than $100,000 is cutting our own throats. If our public can move beyond the middle school jealousies and petty rivalry and just understand simple math, we might just be able to work our way out of this mess.