Suppose someone offered you a great business opportunity. You invest $50,000. You will take home a profit of $100,000 every year. You are ready to write the check.
Oops. Adjustment time. Looks like you will make only $80,000 per year.
Wait. Other problems crop up. You will make only $30,000. Then the figure drops to $20,000.
Lately this has come down to $4,000.
Somewhere along this ladder you dropped out. At some point you figured the return was not high enough for you to plonk down your $50,000.
I offer the above to illustrate why America needs serious tax cuts. Our economy is simply sluggish. It is growing at under 2 percent per year. It needs to grow at 3 and 4 percent and more.
If it grows at higher rates it will create millions more jobs. And it will spin off more and more money to government.
The reason it is not growing at these rates now is because we have too many regulations. And our tax rates are too high.
You see, capitalism is simple. People have capital. Or they will borrow capital from others. If they can get a healthy return from their capital invested, they will invest it. In enterprises. They will invest their own capital. They will invest capital they borrow. They will take the risk and start businesses. Or expand businesses. If they feel the returns will be healthy.
Our tax rates are so high too many capitalists sit on their capital. They have it in cash. In treasury bonds. They have it offshore. Sitting. They can borrow capital to invest. But they donít. They figure the returns are not healthy enough for them to invest more. The returns are not healthy because the tax rates are too high.
This was the situation in the late 1950ís. JFK listened to advisors who told him to cut tax rates. Critics said donít do it. If you cut tax rates people will pay less tax. Government will starve. JFK began a move to cut tax rates. By a lot. (After he was assassinated, LBJ maneuvered the cuts through Congress.)
Result: Capitalists saw their returns would now be better. They poured money into enterprises. Created lots of jobs. Economy grew a lot. With millions more working, taxes streamed into Washington in ever greater amounts.
Same situation in the late 1970ís. Economy was sick. Reagan listened to advisors who said we should cut tax rates. He did. Result: Capitalists dumped money into new businesses. And into expansions. Created many millions of jobs. Economy soared. Money poured into Washington.
TV performer and economist Lawrence Kudlow and another guy have just written a book. ďJFK and the Reagan RevolutionĒ. They describe how the tax rate cuts of these two presidents transformed the countryís economy. They argue that our economy desperately needs the same types of rate cuts today.
And they point out that JFK was a Democrat. While Reagan was a Republican.
Tax rate cuts are magical. They stimulate economic activity. Because they lure more capitalists into the game. Which puts more capital to work.
Economists and politicians can be pretty thick. History tells them tax rate cuts have stimulated countless economies. (A good example was West Germany after the war. It was devastated. Government desperately needed more revenue. But instead of raising tax rates, Germany slashed them. The economy expanded like a Zeppelin.)
Too many economists and politicians donít hear what history screams at them. When Reagan pushed for cuts in tax rates, George Bush The First called it voodoo economics. Alan Greenspan scoffed. A lot they knew. The U.S. ended up with the most explosive and sustained growth in its history.
An economy is simple. The more government taxes it, the larger is governmentís share of that economy. And the slower the economy grows. The less it taxes, the more growth the economy will experience. Through the investments and activity of capitalists.
Those birds will deliver miracles if you let them earn healthy returns. Those miracles will in turn deliver more jobs. Which will in turn deliver more tax money to government.
We all deserve lower tax rates. We all will benefit from them, one way or another.
From TomÖas in Morgan