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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 10551  
Subject: Re: Wall Street Journal Doesn't Get It Date: 5/20/2003 12:43 PM
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brucedoe,

I'm afraid that I have a completely different perspective than you do on markets and the economy in general.

Sorry, but I think that if the government returns taxes to the wealthy that cause deficit spending, it is a cost.

First of all, tax cuts do not cause deficit spending - overspending does. The government spends over $2,000,000,000,000 a year, and the spending is rising.

According to: http://www.whitehouse.gov/omb/budget/fy2004/tables.html

Year Spending (Billions) Percent y/y Change Percent change from base
2002 2011 n/a n/a
2003 2140 6.4 6.4
2004 2229 4.2 10.8
2005 2343 5.1 16.5
2006 2464 5.2 22.5
2007 2576 4.5 28.1
2008 2711 5.2 34.8

That's right. Our big, fat, bloated govermnent is projecting that it will spend almost 35% more in 2008 than it spent in 2002. And that's without the effect of new pork barrel spending not yet budgeted. According to http://inflationdata.com/Inflation/images/charts/air20030516.gif , the trend line for the annual inflation rate is about 2.5%. If the bloated pigs in Washington were really concerned about deficits, they should and could stop growing the government faster than inflation. If they spent only in line with inflation, the spending curve would look quite different. In fact, in this next chart, I'm going to display the spending, if the feds could keep their grubby hands to themselves and only 'grow' at the rate of inflation. I'm going to chart that against the OMB projected tax receipts, also found at http://www.whitehouse.gov/omb/budget/fy2004/tables.html , to show an amazing point:

Year Spending (Billions) Tax Receipts (Billions) Surplus (Defecit) in billions
2002 2011 1853 (158)
2003 2061 1836 (225)
2004 2113 1922 (191)
2005 2166 2135 (31)
2006 2220 2263 43
2007 2275 2398 123
2008 2332 2521 189

Yet, according to that same page, thanks to the ever expanding government, a $190 billion deficit is expected in 2008. I'm not calling for any radical cuts. Simply by restraining the pork in Washington and limiting governmental growth to the rate of inflation, it results in a $379 billion difference in 2008. Tax cuts do not cause deficits. Overspending does.

...contributions from your tax money such as NIH which is responsible for the origins of 70% of the health drugs...

This is patently false. Pharmacutical companies are responsible for the research and development of new medical drugs. The way the process goes is that the pharmacutical companies develop a new compound and run computer simulations and invitro (test tube) tests to come up with potential new drugs. If the invitro tests go well, then animal, and eventually human tests go forward. These tests are supervised, regulated, and monitored by the FDA (Food and Drug Administration), which has ultimate say in whether or not a medication can be approved for use in the U.S. The NIH does do some basic research, but to have it claim responsibility for 70% of the medications in the U.S. is a stretch. The NIH may give out grants to pharmecutical companies, and it does a bit of research itself, but that's about it...

If you give back taxes and cause or increase a deficit then you are giving people something for nothing (actually less than nothing because of interest you have to pay on the debt).

Again, it's not tax cuts that cause deficits, it's overspending. Think of it this way: If you lost your job, and the only job you could find paid you 1/2 as much as your current job, would you keep spending as much as you currently are? Or would you find a way to cut back? Apartment rents in Cincinnati (where I currently live) go as low as $295 per month, according to http://www.apartments.com , and at least one complex with rents that low has air conditioning in those units. In the real world, we cut back our spending when our income decreases. In the pork barrel world 'inside the beltway', spending never decreases. Only in Washington is a 3% growth in spending considered a 'cut'. And it's a 'cut', only in the terms that spending was projected to grow 5%, and only grew 3%.

The government gives you back taxes, and then borrows the money back in bonds thus decreasing, if not eliminating, any benefit from the tax refund.
Okay - first of all, the money never belongs to the government to begin with. It's earned by the hard working employees in America's company. The government taxes our earnings and the profits of the companies that we form and work for, and it uses that money to pay for its spending. Some of that spending is constitutionally required - a national defense comes to mind. Much of the rest of it is not. If the feds would cut back their spending growth rates to merely the rate of inflation, the deficts would disappear, even in the face of tax cuts.

Additionally, the benefit of a tax cut is not just the additional money in people's pockets. The benefit of a tax cut is the multiplier effect on the economy. Think of it this way... Say you want to buy a $1.00 item. How much does that $1.00 item actually cost your employer?
Well, let's presume the following: 6% sales tax rate. 5% state income tax rate. 2% local income tax rate. 30% federal income tax rate. 6.2% Employee and 6.2% Employer Social Security and Medicare tax rates.
Well, in order to buy that $1.00 item, you need to come up with $1.06 in cold hard cash ($1.00 + 6% tax). To get at that $1.06, you and your employer first need to pay income and social security/medicare taxes on your salary. First, income taxes:

Local: (1.00-0.02) = 0.98 left after local taxes
State: (1.00-0.05) = 0.95 left after state taxes
Federal: (1.00-0.30) = 0.70 left after federal taxes

Multiply the residuals left after each tax (to account for the fact that, at least on the federal level, you get a credit for state/local tax paid), and you get: 0.98*0.95*0.7=0.6517. Of your salary, given the presumptions outlines above, you 'keep' 0.6517 of the marginal dollars that you earn, after income taxes. So, to come up with the $1.06 after income tax that you need to buy that $1.00 item, you need about $1.63 in salary, (1.06/0.6517) after social security and medicare have been taken out.

And we're not through yet! You are responsible for paying 6.2% tax for social security and medicare. To get that $1.63, your employer needs to pay you a salary of 1.63/(1-0.062) = about $1.73. The employer is responsible for paying another 6.2% for social security and medicare, which brings the total cost to your employer, after taxes to $1.73*(1.062) or about $1.84.

Yup. That $1.00 thing that you want to buy? Its real cost, after income, social security, medicare, and sales taxes, is $1.84. An 84% tax.

Any time taxes are lowered, it lowers the real cost of those products and services. If that $1.00 item, thanks to a tax cut, really costs $1.79, it's just that much more economically efficient. That many more people can buy the $1.00 item. That many more $1.00 items can be sold, which leads to and is the definition of a growing economy. So, not only do lower taxes mean more money in your pocket, they also mean a faster growing economy. And for those of you who LIKE higher government spending, a faster growing economy, in the long term, mean more government tax revenue, or more money to spend...
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