Econ 101

January 13, 2002

by Brian W. Peterson

Before the terrorist attacks, our economy moved with a mild limp. Now the economy has been wounded and is in need of attention. At a time like this, when a sudden drop in consumer spending has occurred, economic stimulus is necessary.

But this stimulus need not come in the form of potentially inflationary government spending which can simultaneously produce jobs and negate increases in tax revenues. Rather, there is a simple yet misunderstood principle that can be easily grasped when properly illustrated: lowering tax rates stimulates the economy and increases tax revenues.

Mr. Jones receives a tax cut that amounts to $100 a month more in income for his family. For the next few months, Mr. Jones pays off a variety of small debts. He is a frugal man, so he occasionally sets aside some of the money for the family savings account.

The months pass. As the Jones family feels more secure, they spend some of the extra $100 a month. Mr. Jones purchases an energy efficient refrigerator from a local appliance store with the money that he saved. Mrs. Jones buys more clothes for the kids and gets herself a perm.

Mr. and Mrs. Jones feel more secure than they did a year ago, so they agree that they can afford a car payment higher than their current payment. They need to replace their old car, so the time is right.

Two years after the tax cut, the Joneses have not done anything extravagant nor purchased excessive luxury items. So who profited from the tax cut? The answer: everyone, from the Joneses to the government.

The Joneses bettered their lives by paying off debts and upgrading items in their house. The local appliance store sold a refrigerator that they would not have sold otherwise. The department store benefited through increased sales of children’s clothes. The beauty salon had an increase in revenue. The car dealership made an extra sale.

Excepting the Joneses, all of the above paid more in taxes due to the increased economic activity of the Jones family. Additionally, the community has thousands of Joneses who received similar tax cuts and made similar expenditures. One sell of a perm, refrigerator, or car quickly multiplied. Therefore profits - and taxes paid by the businesses - also increased.

A cut in tax rates leads to an increase in economic activity that leads to more taxable income going to government coffers. The increased economic activity also creates more jobs.

There are also hidden winners from this tax cut, namely the businesses and middle class workers who manufacture refrigerators, clothes, and cars and car parts. Those businesses also enjoy increased profits as new jobs are created and the money for more capital purchases flows to the manufacturers. This produces even more jobs for those who produce machinery to make the machines.

More jobs means more taxpayers.

When a rich individual receives a tax cut, the additional money is either spent or invested. Investing is also an economic activity that stimulates the economy, such as when an investment goes to a specific company in the form of stock purchases, thereby allowing that company to purchase extra capital.

When a business receives a tax cut, they have more money to increase wages, expand the payroll, or to purchase additional capital. These actions begin new economic activities illustrated with the Jones family.

For those who doubt, recognize that the Federal Reserve uses the same principle when cutting interest rates. Lower interest rates effect business debt payments, borrowing, and purchases of capital, thus spurring the economy.

Our economy will rebound with great strength, but great strength will not be reached until there is stability in all sectors of the economy. The same principles that drive the Joneses drive businesses. Either way, tax relief spurs the economy.

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Brian W. Peterson writes a political column for the Antelope Valley Press (circulation approximately 60,000) in Palmdale, California. He is a graduate of Oral Roberts University, where he majored in TV/Film. Brian’s weekly commentary and newspaper columns can be found at www.LifeAndLiberty.com.

Send the author an E mail at Peterson@ConservativeTruth.org.

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