Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

Tax cuts actually good for the economy

- by Alan Duvall 

Published in Dayton Daily News May 14, 2006 

Congress is slapping together a watered-down tax extension bill intended to provide finger-in-the-dike relief from expiring prior year tax cuts. 

Capital gains and dividends tax breaks would be extended two more years to 2010.  Exemptions from the goofy Alternative Minimum Tax would likewise be extended, the expiration of which would subject an estimated 15 million additional taxpayers to the subterfuges of a stealth tax increase.  Small businesses would benefit from the extension of Section 179 asset acquisition deductions. 

Predictably, opponents of the bill argue that in this age of budget deficits why is a tax reduction act needed?  Following this line of logic – a tax increase would be the proper elixir to economic prosperity. 

Surprisingly - if history is any guide – tax cuts may actually INCREASE, not decrease, government revenues. 

How can this be?  To illustrate, assume an income tax cut.  Individuals now have more cash to spend and throng to local stores. 

With increased sales, businesses earn more income (subject to tax) and hire more workers creating even more taxable income sources.  Thriving companies also buy more equipment from other businesses generating more taxed business income and increased hiring of workers.   

Thus, marginal tax cuts spur the economy creating an exponentially beneficial effect on taxpayer incomes and government tax revenues.   

As proof, Congress passed a massive tax cut package in May, 2003.  Immediately thereafter, the U.S. Gross Domestic Product increased at escalated rates in excess of 3 percent for 11 consecutive quarters, purportedly the longest sustained period of growth since World War II.   

The economy has also added new jobs at the rate of nearly 200,000 a month in 2005 and the jobless rate has fallen to 4.7 percent, its lowest level in six years. 

Consistent with this economic theory, federal government revenues have increased dramatically since 2003 – fiscal year 2005 revenues alone increased $274 billion from the prior year.  Even Ohio has benefited with steadily rising revenues in each of the last four years.   

So why are governments running consistently higher deficits?  Well, it’s not for lack of revenues.  Very simply, spending is out of control and expenditures are skyrocketing faster than the increase in funds.  Get pork spending under control and deficits will disappear. 

Campaign= for tax cuts.  They are good for the economy and, personally, I really need a new car. 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.