Let’s suppose that you are an ocean diver with an air hose connecting your diving helmet to the air supply on the boat. And let’s also suppose that the manager on the boat is anxious for the job to finish faster. He’s not diving to help get the job done, but he is certainly willing to tell you how to do the work. And to motivate you, he steps on the air hose while telling you to work faster. Sounds pretty dumb, doesn’t it? How does choking off his life-giving air make the diver work better? The diver needs all the air he can get since cutting down on the air flow starves the diver of the vital oxygen he needs to work at his best.
Likewise, the government is guilty of stepping on the economic air hose every time it raises taxes, especially when companies are the ones being taxed. Corporate taxes depress economic activities just as standing on a diver’s air hose depresses that diver’s ability to work. Taxes are an economic punishment, and people will respond to punishments by doing less of that which is punished. It’s just basic human nature. So a government tax on business activities will result in fewer business activities, and in a time of a recession, do we really want to depress the economy further?
“But the government needs to tax businesses! The government uses that tax money to ‘prime the pump’ of the economy during a recession.” That’s the economic theory of John Maynard Keynes, but Keynesian economics just don’t work. You can see this by taking it to the extreme. If government were to tax businesses at 100% and redirect the results to ‘prime the pump’ of the economy, what would be the result? Sure, the government would pull in taxes the first year, but once businesses realized that the government was serious in taking all their profits, business owners would close their factory and office doors. Why would they work hard for no reward? And if businesses were to shut down, how much of an economy would be left? With a dead economy, the government would get nothing from taxing the vanished businesses, and nothing from a non-working public, so just how successful was “priming the pump?”
Let’s reverse it and see what happens: suppose government dropped the business tax rate to 0%. With no one stepping on their air hose, businesses would be unleashed to work as hard as they wanted to make money, and the economy would roar to life. After all, the economy is not the government handing out confiscated money, but it is businesses and people working for themselves. “But how will the government get the tax revenue it needs to run the country?” Well, if the government doesn’t need to “prime the pump” with confiscated money, its needs are smaller. But because a business is comprised of people, the government will still get taxes from the workers. And interestingly enough, when government has reduced tax rates on businesses and people, the total taxes brought into the treasury go up because the economy runs better with the government off its air hose. It happened with the tax rate drop proposed by President Kennedy and passed after his death. It happened with President Reagan’s cuts in 1983. And it happened again with President Bush in 2003.
Can you point to a time when government “priming the pump” has met with equivalent success? President Roosevelt is often held up as an example of triumphant Keynesian economics, but it’s not the example people think it is. The economy was certainly depressed when FDR entered office, but all the economically stifling actions he pushed for only succeeded in depressing the economy for a full decade. Likewise, the actions of the current administration have done little to stimulate the economy. Unemployment is hovering around 10%, and businesses are wary of hiring as the government continues to meddle, and the economy remains lifeless.
What is the solution for our current doldrums? If the government would step off the economic air hose by greatly lowering tax rates on people and businesses and drastically cutting back on government deficit spending, the economy would explode with activity. And when the economy is roaring along, the lowered tax rates will still result in increased revenue to the government’s coffers, money that the government could use to pay down our country’s debt.
How can I state this with such confidence? Simply because it has worked that way every time it’s been done. Let’s try an economic theory that has a proven track record.