Bookmark and Share

Friday, November 2, 2007

Tax cuts. Always a good idea but not all taxes are created equal.

Some tax cuts are more important than others. Here is a list.

by StFerdIII

Tax cuts! We feel your pain! However be aware of false claims of so-called tax cuts. Usually governments announce tax-cuts but fail to tell you that they are spread over a long period of time. When you analyze the 'cuts', you find out that they are not really cuts, but mere parings. Governments also spectacularly fail to reduce spending and budget items, as they slightly pare back tax rates. All tax cuts are good – but real tax cuts, with real attendant spending cuts, is what we need.

A simple fact eludes the head-scratching, polar bear loving Marxist. Call it the rule of reality: 'lower tax rates, coupled with lower spending actually benefits society far more than increased state control and the augmentation of the all-knowing Marxist elite’s powers.' This rule applies to all historical circumstances. Never in man's history has excessive state power benefitted society. The only exception to the rule is the case of total war.

Some simple examples explain why.

The Canadians for instance, just announced a $60 billion Federal tax decrease. This sounds large – and on face value it is. Yet in reality it is paltry. $60 billion over 5 years is the actual amount, and this equates into $12 billion per annum out of a total federal budget of $200 billion, or 6%. Significant reduction? Not really. The Canadian federal government is running a $20 billion surplus. The actual tax reduction should be $20 billion per year or about 10% of the total budget.

Along with this, government spending on non-military, non-essential items should be reduced. Many studies have pointed out that the Canadian Federal government could reduce spending without harming any of the vaunted and much beloved [tears in eyes], socialist welfare programs by $15 billion per annum. This amount should be taken out of program spending and spent on reducing the national debt and increasing the military budget.

The type of tax cut is also important. The most vital taxes to be eliminated or reduced are; 1) marginal tax rates on income; 2) taxes on investments, 3) taxes on capital and assets and dividends and 4) income taxes and associated fees on corporations. Value added or consumption taxes are actually the least important taxes to reduce. The reason why the above taxes are more important is that they directly affect investment, employment and GDP growth. In fact their economic impact is massive.

The US proves this point. When J.F. Kennedy – a conservative in a blue liberal suit – cut the marginal rates from over 90% to 70%, the US economy grew. When the Reaganites drastically reduced and simplified US marginal tax rates; and reduced investment and dividend rates, the US economy went on a 20 year bull-market run. When Bush in 2003 slashed US taxes on income and investments by $1.3 Trillion, he helped stimulate a massive US economic expansion adding 2 million jobs per year, and increasing Federal government revenues by 10% plus, per annum.

By reducing taxes you also stimulate disposable income growth. Consider the American experiment. US unemployment is now at a 30 year of 4.8 percent. Wage growth is between 4-6% per annum – improving all levels of incomes, except those negatively affected by illegal immigration. While debt levels have risen somewhat the debt service level is still in the 12-15 % of net income band that it historically has been in for the past 30 years. In other words most US workers and citizens across all classes and incomes are richer today than ever. They are far wealthier on a per capita basis than either the average European or the Canadian.

Contrary to media and elite anguish, it is lower tax cuts that result in better jobs and more wealth for society. Thirty years ago Reagan economic guru Art Laffer proved that lower tax rates ignite economic growth. Corporate profits, much to the chagrin of Marxists and socialist engineers, spur the economy, stocks, and create better jobs and higher pay cheques. According to the US Fed, after-tax profits in the in 2006 and 2007 both posted record highs. At about a trillion dollars, profits are way ahead of their prior peak in 1999 and have nearly doubled since 2001. This translates directly into family net wealth creation which advanced 8 percent in 2006 to a record level of $52 trillion.

Tax cuts – and cutting the right ones it must be emphasized, simply work.

But we need more. Here is a short list of key tax cuts which are badly needed in any country at any time:

1. Reduce the capital gains and dividend tax rates to zero. This will do more to spur investments, venture capital and job creation, stock market performance [which has a huge impact on the 60% of people who own stock and collect price and divident gains], than almost anything else.

2. Cut the Corporate income tax from 35 %, to 10 % in year one, then to zero in year two. Corporate taxation is double taxation – an immoral and unproductive use of government coercion. You never tax a dollar twice. More corporate profits translate in the longer term into more business investments, business process innovations and job creation.

3. Cut non-military spending including entitlement spending, drastically. Unless the US [and all other advanced countries] drastically reduce non military spending and government size, future tax increases and debt accumulation will be a reality. By doing this you can reduce personal income taxes to a flat rate of about 20% of income.

4. Look at removing the entire tax code and replacing it with a consumption flat tax of 20%. The entire tax code can be eradicated and a simple consumption tax employed on all goods and services. This would provide more than enough revenue to cover all government obligations. The best details on this can be found in Neil Boortz's book on the Flat Tax, or the H-R Flat Tax proposal, being widely discussed in US conservative circles.

Here is another thought on tax reduction. It limits government power and arbitrary coercion. Reducing tax levels should not be equated with abandoning social responsibility, or consigning the poor and the sick to an early death. That is nonsense. By reducing tax rates and the mommy state you actually improve your economy, and allow these services to be provided. The fact that government should not be providing most of the services it now does, is another matter however. But it should not blind people to the prerogative of minimizing the role of government through reduced taxation levels.