Larry Kudlow calls it “The Washington War on Investment.” Taxpayer Tim Geithner said that extending tax cuts for the wealthiness Americans would imperil the fragile economic recovery, would harm growth; this because the wealthy save more of their tax breaks than do others.
So, according to Geithner, savings and investment are bad; and the corollary, transfer payments from the government to the unemployed are good. Let’s take a simple case of the dollar in question, the one that winds up as investment or tax. The dollar of tax goes through the government collection machine and comes out at 80 cents, then it goes to the state in need (most of ‘em) so that it can be distributed to the long term unemployed worker or about to be unemployed teacher (bloated administrative bureaucracies don’t get laid off) who receives about 70 cents. He or she spend that 70 cents at the supermarket producing 70 cents of revenue and a penny of profit. The penny of profit nets a half penny of income for the market, half of which as dividends may get invested by the market’s shareholders. Note that none of that dollar went to reducing the deficit and debt that Hussein and Taxpayer Tim loaded on our children and grandchildren.
Alternatively, the dollar not taxed is either saved as Taxpayer Tim would argue or spent. On the save side, that dollar is invested for an economic return. It may go to stocks, bonds, real estate, start-ups, small businesses, etc. But it is invested in expectation of an economic return. It produces, technological advancement, new business, growth, and yes indeed, taxable income! It goes into expected productive investment at best case 100 cents or worst case 92 cents covering transaction costs. So here for growth we have 92 cents versus one-quarter of one cent!
If the dollar is spent instead of invested by the wealthy American, and this is contrary to Taxpayer Tim’s hypothesis, it produces 100 cents of revenue, that is GDP. So here the comparison is 100 cents versus 70 cents for the tax and transfer case. In either case, Hussein Obama and Taxpayer Tim are wrong. And their position will drive this country into ruin.
Larry Kudlow says it better and I recommend a full read of the article: “The great flaw in the thinking of the Democrats is that they are ignorant of the economic power of saving and investment. Saving is a good thing. Stocks, bonds, bank deposits, money-market funds, commercial paper, venture capital, private equity, real estate partnerships — all that saving is channeled into business investment. And whether that capital goes into new start-ups or small businessesor large firms, it finances the kind of new investment in plants and equipment and software and buildings that ultimately creates jobs and family incomes. And that, in turn, spurs consumption.
“But pulling out just one dollar from the private sector and rechanneling it through the government as a transfer to someone else creates nothing. At best it’s a safety net. At worst it may damage private-business activity and actually reduce employment. Without saving there can be no investment. And without investment there can be no enhanced productivity, which is the ultimate source of long-term prosperity and wealth.”
Would that there were there just some modicum of economic intelligence in Hussein Obama’s administration!