The Trouble With Business Tax Cuts
July 27th, 2010 Filed under: News — Contributing Writer
A lot of discussion has arisen lately over the potential expiration of the tax cuts pushed out during George W Bush’s presidency. These cuts gave extensive tax incentives for the upper class, allowing them to save millions of dollars. As the tax cuts are set to expire at the end of 2010, Congress is in heavy debate over whether to let them expire or to extend the cuts. Unfortunately, extending these cuts can be very dangerous.
The notion of the Bush tax cuts was the idea of trickle down economics. By giving the wealthy bigger chunks of their income, the government believed they would give them more capital to launch businesses. These investments would then spur the creation of new jobs, helping the economy grow. In a country that prides the small businesses, this is a big benefit as more wealthy means more business creation.
However, the trouble is, this tax doesn’t quite work with the effectiveness you would think. As recent news stories have shown that the Fortune 500 have over one trillion dollars in reserves, the concern is not a lack of funds, instead, it is a lack of interested purchasers. Demand is low, so is a reduced tax on the wealthy going to increase demand?
Not likely. When you study the marginal propensity to consume (or the percent of every dollar you earn which you spend), the wealthier you get the less likely you are to spend money. Think, if a person has millions of dollars, they are in no rush to spend that extra money. However, if you are living paycheck to paycheck as the poorer people are, as soon as you give them money, it will go straight into the economy, thereby increasing businesses demand.
As such, increasing demand for businesses is more about giving money to the lower classes. Lack of funds is not stopping businesses from growing, and so giving them better tax cuts will not help the economy.
Martin Fister is an active product blogger, writing for web sites including nook vs kindle and haynes furniture. In his spare time, Martin also pursues his interests in the music industry as a journalist.
