The Promise of Future Taxes Stalling The Recovery

Your taxes are going up, personal and business.  The Congress and President are planning on letting the “Bush” taxes cuts expire and the HealthCare bill has dozens of new taxes buried deep in it.

Businesses after downsizing to reach to the market demands are sitting on a lot of cash.  Apparently reluctant to increase spending.  The cause of all this cash sitting on the sidelines when it could be put to good use is the source of debate among some economists.

Greg Mankiw a Harvard Professor of Economics believes:

That is, businesses may be reluctant to invest in an economy that they expect to be distorted by historically unprecedented levels of taxation in the future.  The more the government borrows, the higher taxes will need to go, the more distorted the future economy will be, and the less attractive is investment today.

We do know that higher taxes discourage consumption or behavior. The oft sighted example of cigarettes. The only truly effective way to reduce smoking among teens is to increase the cost of smoking by increasing taxes. To discourage behavior, raise taxes on that behavior.

Raising taxes on economic behavior reduces economic behavior.  The same economic behavior we need to keep the economy moving in the right direction.

Paul Krugman writes: Is in favor of increase Government spending even more, even if it results in higher taxation.

Which then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs?….

The phrase being “borrow some of the cash”.

Mankiw writes further:

Higher future taxes reduce demand today for at least a couple reasons. First, there are Ricardian effects to the extent that consumers take future taxes into account when calculating their permanent income. Second, those future taxes are not likely to be lump-sum but will be distortionary; it is plausible that at least some of those future tax distortions may adversely affect the incentive to invest today.

It really comes down to the argument can government truly create good long lasting jobs without killing the economy?

Will the hiring of 20,000 new IRS agents to police the Healthcare bill be a good thing or a bad thing? I would submit this, if the jobs created do not make a product or service that can be sold, either domestically or internationally, I think not.