With the Presidential Primaries taking over the airwaves, presidential candidates are promoting tax plans for their nomination bids, but are tax plans alone enough to turn around a slumping economy (or soon to be slumping economy)? Let’s have a look at some of the reasons economists are warning that we are in for a rude awakening.
First of all, whether you believe we should be there or not, the fact of the matter is that the war in Iraq continues to drain the tax payer coffers of about $1 trillion dollars a year. The economy was able to offset most of this massive spending increase because of the growth of the past few years, thanks mostly to the Bush tax cuts. However, while the economy was able to offset some of the war spending, it wasn’t able to prevent additional national debt which has led to the plummet of the American dollar (which we’ll get to next). But while the American people are divided as to whether we should or should not be in Iraq, there is no doubt that we can no longer afford to fund the Iraq war in addition to all the domestic government programs that Congress continues to fund. Many Republicans argue that we can’t afford not to fund the Iraq war because of the national security implications of allowing Al-Qaeda to tear the country apart and cause instability in the Middle East (as though there weren’t enough already). While I can sympathize with that perspective, I don’t believe we can continue to trade foreign stability for domestic instability.
Additionally, the fall of the American dollar could be the most damning piece of evidence that we are in for an economic slump. Here’s why the fall of the dollar is reason for concern: As the American dollar continues to plummet, it makes exports worth less overseas and makes imports more expensive. The result is rapid inflation. If the rate of inflation continues to rise, American wages will not be able to keep up causing consumers to spend less and ultimately causing an economic recession. As inflation continues to rise, goods that are currently cheaper to purchase overseas will become more expensive, again, reducing American purchasing power and furthering recession.
While there are plenty of other reasons why the American economy could be in for a recession, the last one I will focus on will be our current tax policies. The income tax policies that have expanded drastically into the tax code we currently have favors fiscal insanity. Let me clarify. The income tax and capital gains tax penalizes those who save and invest. When savings and investing are penalized, consumers are encouraged to live beyond their means and without an emergency fund. Can you blame them? They are only following the example of the federal government. When consumers live on the edge of financial ruin and the economy (in this case, the housing market specifically) slows down and inflation rises, the result is bankruptcy. Households are defaulting on mortgages and losing their homes at increasing rates and that is additionally bad for the economy.
So if President Bush turned the economy around after September 11th by pushing thru his tax cuts, why won’t extending those tax cuts help continue our economic prosperity? The answer is simple… do a budget. It doesn’t matter how much money you make if you continue to spend over and above that amount. The Iraq war and Congress’ lack of the courage to cut government spending has brought this country to the precipice of financial disaster. Our government continues to believe that it knows how to spend our money better than we do. It continues to send foreign aid overseas to dictators and governments to “fight terrorism” and provide aid to the less fortunate. It continues to fund government programs for economic sectors best suited for the free market. It continues to use the tax policy as a social engineering experiment and a means to purchase votes and it continues to spend the inheritance of future generations of Americans with reckless abandon.
The presidential candidates, well at least the Republican candidates, are all proposing tax cuts of some form or fashion. McCain and Giuliani are promising to keep taxes low, which means they will probably be in favor of renewing the Bush tax cuts. Fred Thompson has proposed a Flat Tax plan which would be the same across all income levels. Romney proposes a reduction in capitals gains taxes for the middle class. Mike Huckabee has proposed the FairTax Plan which proposes a national retail sales tax and the elimination of the IRS (and the Sixteenth Amendment). But tax cuts aren’t enough to solve our economic dilemma.
I know what you’re thinking… “So if tax cuts won’t solve the problem, what do you propose? What is your magic bullet to resolve all of our economic woes?” My economic magic bullet was created many years ago and now resides in the National Archives in Washington D.C. Yes, I’m referring to the Constitution. I know, I know… very taboo. But the Constitution addresses issues like government spending. Davy Crockett once said, “The people have delegated to Congress, by the Constitution, the power to do certain things. To do these, it is authorized to collect and pay moneys, and for nothing else. Everything beyond this is usurpation, and a violation of the Constitution”.1
So you see, Congress has no right to grant federal aid, compete with the free market, or pay other countries for fighting terrorism. Ron Paul has proposed eliminating the income tax altogether and replacing it with… nothing. What a crazy idea, no income taxes or sales tax… maybe no funds would force Congress to address the spending issue. That would take us back to… 1776…
While giving people their money back is never a bad thing, tax cuts must always be married to spending cuts. Until Congress realizes that it doesn’t have the right to give my tax money away, tax cuts won’t save our economy. And until they can stop giving our money away, we cannot afford to fund a war overseas. The President and Congress need to make a decision: Do they really believe we should be in Iraq? Then arrange your priorities as such and cut the unnecessary social programs and fund the war. If we really don’t need to be there, then stop funding the war (but still cut the unnecessary social programs too). Don’t misunderstand this as an anti-war or pro-war debate, but rather a debate about the reality of the American financial situation and priorities. As an economics professor of mine used to say, there is a limited amount of funds, so if you spend the entire treasury on guns, you have none to buy butter. Our government is buying guns… and butter… and we will pay for it one way or another.
1 excerpted from the book The Life of Colonel David Crockett (1884) compiled by Edward S. Ellis