The Truth About Tax Cuts

Editor’s Note: This is another guest post by Two Clubs. This post tackles the issue of tax cuts.

The Truth About Tax Cuts…

We are all very aware that the United States has a budget problem. The Republicans have taken to the roof tops and are shouting that spending cuts are required to solve the budget crisis. To these folks, who claim to be the party of business, they continue to focus on only one side of the balance sheet and completely ignoring the other. In this post I’ll try and do both and explain the real world impacts of tax cuts and how the country got into this mess.

The Republicans think that the government should be run more like a business. This mantra has been repeated for decades. Fair enough, we’ll look at the budget issue through the lens of a business and see how the problems can be fixed. The Republican solution to all of America’s budgetary problems is encapsulated in the proposed Paul Ryan budget. This budget is heavy on reducing social spending while extending Bush era tax cuts and hoping to make them permanent. From a business perspective, this concept is completely void of common sense. Here’s why.

To make things as simplistic as possible we’ll point out that in business everything you do is based off of revenues and access to capital. All decisions are based on your ability to generate revenue and sustain your access to working capital. From hiring employees to carrying larger inventories of products everything is linked directly to your ability to generate revenue. When your revenues drop your ability to gain access to working capital is restricted by your lenders and creditors. The same issue arises when your debt load becomes unmanageable. This is where the government finds itself. This is the root of all of its problems.

Currently the government is spending more that its revenues can sustain. This is increasing our debt and gives our creditors heartburn. The Republicans point to social spending as the root of all evil, and believe that by reducing spending in this area we can solve the budget problems. This is where they are wrong, as our business example will show.

To the government business, revenues are collected in the form of taxes. When taxes are cut revenues drop. This is where we find the big problem. The Bush administration passed a series of tax cuts that greatly restricted the government’s ability to generate revenue. The biggest part of this problem is that the tax cuts were passed on to those in the country who really didn’t need the tax relief in the first place. These tax cuts were akin to the government having a huge sale and slashing prices on everything, but only allowing those consumers with the right membership card to attend. That membership card was only available to those in the top 1% of earners in the country! Goods were flying out the door, but revenues were not meeting the levels to sustain the bottom line. These tax cuts reduced the business revenues by some $200 billion a year. That was only half the issue though.

Back after 9-11 the government (a Republican government!) went on a spending spree, engaging in two wars and creating a massive expansion of government, and money pit, called the Department of Homeland Security. Defense spending has better than doubled, to just under $664 billion, an increase of almost $350 billion. The DHS budget is tagged at $42.7 billion. This was an increase of almost $400 billion in spending just between these two departments. Add in the $200 billion in revenue shortfall and you have a massive $600 billion a year problem that started in 2001 and has remained unchecked to today.

So what are we to do? Do we keep the big red and white sale sign out there, reducing our revenues? Do we continue to spend in areas that might not be prudent? I think it is wise to again treat this like a business. We need to increase our revenues. This means eliminating the Bush era tax cuts, getting back $200 billion a year in revenues. This also means reducing spending in areas that caused the problem to begin with. We need to reduce our military spending back to 2000 levels, which would still see us spending as much as the next top 30 military spending nations combined. We need to look a lot closer at the way money is spent in Washington bureaucracy, and not in the way of entitlement programs for the common good. These programs were created to be self sufficient and were operating just that way, until the government started to abuse their powers and borrow against them. Leave these programs alone and focus on fixing the big revenue problems. That’s the elephant in the room the GOP appears to be blind toward. They like to call the Democrats "the tax and spend party", but they are doing nothing to face the reality that their own Republican brethern are the "tax break for the wealthy and spend our children into the poorhouse party." You can't call out the other guys as failing to fix the problem when it was you who created the problem to begin with, and are actively preventing mitigating strategies from being put in place. The big spending has to stop and the revenues must increase. Achieve these simple goals and our business is again capable of meeting its financial needs.