Taxes and economic growth

Taxes and economic growth

August 12th, 2011 in Opinion Free Press

It's strange to hear those who want higher taxes argue that tax relief doesn't stimulate economic activity.

From a commonsense standpoint, it's clear that when people can keep more of their earnings, they have more to spend on goods and services, or to invest in ways that produce economic growth. In fact, we had a clear example just last weekend of tax breaks generating economic activity.

In preparation for students returning to school, Tennessee had a three-day sales tax holiday. Clothing up to $100 per item, school supplies up to $100 per item and computers up to $1,500 were exempted from the usual sales taxes.

The result was eye-opening. Customers jammed stores in Chattanooga and all around the state to take advantage of the tax break. Many shoppers came up from North Georgia, which is not having a back-to-school sales tax holiday this year.

News accounts said the same was true on Georgia's border with South Carolina. South Carolina had a sales tax holiday, and Georgians along the border flooded into that state to seek bargains, too.

It's hard to think of a better way to demonstrate that lower taxes can and do stimulate economic activity.

Some inaccurately point to the Bush tax cuts and say that tax relief is to blame for the current economic crisis. But that crisis was brought about largely by the housing market collapse, as the federal government pressured lenders to give too-large mortgages at adjustable interest rates to people with shaky credit. The interest rates eventually started rising, and many borrowers became incapable of making their payments, forcing millions into foreclosure.

We cannot see how higher tax rates would have headed off the housing market collapse, but higher taxes would have made it even harder for small businesses to invest and would have deepened the economic crisis.

Still, some are pushing for tax increases, based on the assumption that Washington can "invest" your money more productively than you can -- despite evidence to the contrary, such as the failed $862 billion federal "stimulus."

Others say it is wrong to have tax relief while Congress continues its deficit spending. But that simply means Congress should cut spending, not raise taxes!

Whatever the weaknesses of our economy, income tax relief isn't one of them.