The most economically confused U.S. president since Jimmy Carter, or maybe longer, is proposing both new taxes and tax cuts in his State of the Union address. So maybe a short tax tutorial would help.
Not all taxes are created equal. Those taxes that make it more expensive for companies and individuals to invest and create jobs will, on average, hurt economic growth. Those taxes that just take money from Peter and hand it to Paul do nothing to spur growth, and may even have a negative impact.
Similarly, not all tax cuts are created equal. Those tax cuts that reduce the cost of (and thus increase the return to investing) will, in general, have a more stimulative impact on the economy. While tax cuts that help families meet their expenses, such as paying for child care or college, may help the families who get the handout, they have virtually no impact on the economy.
So what does President Obama propose in his State of the Union address? The same destructive ideas he has tried to foist on the country and the economy for six long years: He wants to raise taxes on investment so he can hand that money over to middle-income families to defray the cost of some of their expenses.
Understanding basic tax principles isn’t hard—because we do it in our daily lives. For example, when parents give their kids an allowance, the kids certainly benefit, but no one argues—and certainly not the parents—that this wealth redistribution enhances the family’s financial position. The money just went out of one pocket and into another.
Indeed, the parents hope that a day will come when the kids are earning their own money—i.e., become productive citizens—so the parents can end the income transfers.
However, Democrats and Obama have embraced the notion that such redistributions stimulate the economy because, they claim, lower- and middle-class families are more likely to spend the money.
Yes, money spent is beneficial to the economy, but—and this is the point liberals never seem to grasp—money invested is much more beneficial, because that’s what entrepreneurs, investors and companies use to finance their investments, expansions and job creation.
As a parent, Obama surely understands the allowance example; as a president, he should grasp the economic principle. That he doesn’t may help explain why the economic recovery has taken so long.
January 20, 2015