Radiofree West Hartford -- HOW TO PERMANENTLY STIMULATE THE ECONOMY by Ben Cerruti

HOW TO PERMANENTLY STIMULATE THE ECONOMY

By Ben Cerruti

September 14, 2002

Whenever our economy experiences a recession calls are made for fiscal action by the Executive and Legislative branches to stimulate it. Unfortunately the proposals that are proposed by those of different political persuasions fall far short of what is truly required for a variety of reasons. Narrowed, the reasons fall into two categories.

1. Increased government spending providing for increased unemployment benefits, employment in government funded programs and other means to subsidize lower income households including the use of increased relative taxation of upper income households. The theory being that putting more money into the hands of lower income households will result in increased spending.

2. Reduction of all income taxes. The theory being that putting more money in the hands of everyone will result in both investment by businesses, and by those in higher income households, resulting in the development of more jobs - and - increased spending by those at all income levels.

Common sense should tell us that the second category provides a comprehensive approach since it provides the means for creating jobs. In other words it offers supply as well as demand. Businesses will simply experience a lower rate of growth when funds are limited to only that derived from the profit made from consumer sales. With lower taxes on businesses and individuals that have excess funds to invest, needed funds to enable growth become available to businesses both internally and through borrowing.

So what can be done at this time by the executive and legislative branches of our government to stimulate the economy, over and above those monetary actions taken by the Federal Reserve Board. At the recent economic summit, where business leaders were called to meet together with the President, proposals were made to lower the taxes on dividends, capital gains and to allow a higher amount of losses on investments to be deducted from gains in any one year. These would be steps in the right direction but are much too limited. If it makes sense that placing more money in the hands of businesses by lowering taxes, then doing so for investments surely poses the consideration for complete eliminating them.

The dividends declared by Corporations are not allowed to be deducted from their taxable profit. They are thus taxed twice, once at the corporate level and again at the recipient's level. Capital gains on investments made with after tax dollars again imposes double taxation. Capital loss deductions are limited to only $3,000 per year against larger gains leaving the remainder to be twice taxed. Does this make sense if one truly wants to stimulate the economy?

It has been proven in the past that decreasing taxes stimulates the economy. In the 1920s, under President Calvin Coolidge, tax rates were lowered to 25 percent from 73 percent. In 1963 Congress enacted tax-rate reductions proposed by President John F. Kennedy that brought the top tax rate down by more than 20 percent. In both cases these tax rate reductions preceded economic growth that averaged more than 5 percent per year. In 1978 Congress cut the tax rate on capital gains from 49 percent to 28 percent. In 1981 Congress accepted the proposal of President Ronald Reagan and cut the top tax rate on income from 70 percent to 50 percent and then to 28 percent in 1986. The result was a marked improvement in economic growth over the anemic average rate of 1.6 percent between 1973 and 1982. The economy grew at the healthy rate of 3.5 percent per year between 1983, the year when these new tax cuts became fully effective, and 1990 when it was decided to again raise tax rates.

Further, allowing Corporations to deduct the payment of dividends from their taxable profits would mean that they would have the incentive to distribute this portion of their profit to a much greater degree. Investors would see a greater direct return on their investment and the valuation of the equity value of company stock would be reflected accordingly rather than speculatively on the its potential capital gain or loss.

Why is it so difficult for those in government responsible for enacting our laws to see the obvious? The answer to this question must lie in the apparent fact that they personally benefit from the actions they take on these issues. They certainly are not acting in the best interests of the greater majority of the American people. If they were they should base their actions on the facts presented herein which are available to them. If they did their homework and really had a desire to act to permanently stimulate the economy they would completely eliminate taxation on dividends, interest and capital gains, both Corporate and personal. To realize the ultimate in economic stimulation they could repeal the Income Tax and replace it with a Consumption Tax but that would be asking much from the self-aggrandizing greater majority of those elected to represent us in Washington.