President Obama has been talking business tax cuts as of late, prompting some Republicans to question why their similar proposals have been ignored. The summer recovery never materialized and the Democrats are sliding in the polls, so the political explanation for this change of tune is not very difficult to understand. But I’m a little concerned about the lukewarm response Obama is getting from the right.
Clearly, Obama’s proposal for a 100% business investment write-off through 2011 is a better idea that another pork-laden stimulus package. But this initiative suffers from the same Keynesian thought process, the notion that government intervention can cure our economic woes. An unintended consequence of business investment incentives is that they encourage firms to invest in areas where the projected returns would not otherwise justify the expenditure. Besides, businesses will still hesitate to invest until they are more confident about future economic conditions, and most expect another two years of heavy-handed government after the midterms.
Business leaders know that while Washington is prodding them to invest, it also stands ready to confiscate a greater share of the profits and regulate production even further. Business and economic uncertainty are very high now, and many executives are trying to ride out the storm in hopes of a reprieve in 2010 and real change in 2012.
Obama’s view on the economy—like that of other soft socialists—is flawed for two key reasons. First, it assumes that government can dictate markets in an efficient manner. But if the market doesn’t like a particular aspect of government coercion, it will find a way to work around it in a manner that is neither best for the market nor the government. For example, when the government raises the minimum wage, companies respond with a mix of fewer workers and higher costs. Neither is good for the economy.
Second, Obama’s view assumes that increasing demand will solve all economic problems. More demand leads to more production—the argument goes—requiring companies to expand and hire more workers. A “stimulus package” is the left’s favorite means of spurring demand because it uses government spending to pick specific beneficiaries, perhaps “green” industries, campaign contributors, or those with big union ties. But the increased debt creates a long term drag on the economy and restricts capital availability in the private sector. The demand created is usually in areas where it cannot be sustained, so benefits are minimal and last only as long as they are subsidized.
Our economic problems are much too serious to think that a government “jumpstart” will solve them. Investment tax breaks have some advantages, but there is little evidence that businesses will take the bait anyway, especially in the current environment. Besides, Obama’s proposal is what many leftists call corporate welfare. Many soft socialists realize that economic growth hinges on profit incentives in the private sector, but they just can’t admit it and let go of the reins. Even Castro seems to be figuring this out.
Republicans should seize the moment and call for an end to the manipulation of individual and business activity through the tax code, including BOTH incentives and regulations. A lower, simpler, and flatter tax rate across the board makes sense, not a temporary reduction or incentive that can easily evaporate after the election. Let’s free up consumers and businesses to keep more of what they earn and make their own investment decisions accordingly. This could be a first step toward the type of comprehensive economic reform that will probably have to wait until 2012, including a version of the “fair tax” or a flat income tax, an overhaul of social security, and an end to Obamacare.
Aren’t the R tax cuts just as bad as the D stimulus? Both interfere with markets.
Not exactly—Stimulus government spending is always political and therefore less efficient, so it’s worse than broad-based tax cuts or incentives. You’re right that neither is desirable. Republicans need to depend less on temporary tax cuts and business incentives and more on a long-term, hands-off approach. Simplify and cut taxes permanently, reduce government spending (including entitlements), and regulate only when absolutely necessary.
Also, tax cuts return to the market what was the market’s to begin with. I don’t call that interference, but a return to a close level of normalcy.
To make tax cuts and stimulus equivalently good or bad, one must assume that all capital belongs to the government (meaining that government creates wealth and capital), and not to the person(s) who labored for it.
Great read, Dr. Parnell.