There are three areas of the economy which production can be used. You can use it in a way that doesn’t produce any other wealth (consumption). You can use it in ways that do produce further wealth (investment). Or it can be used by the government (I’m neglecting imports and exports for simplicity).
Adding investment capital to labor makes the labor more productive. More production makes the person richer. Imagine a capital poor farmer with a sharp stick vs a capital rich farmer with a hugenormous tractor. Which one eats better, sells more rutabagas and has a 62 inch plasma?
Tax cuts allow a person more money to consume and invest. The portion they invest becomes capital in the future. This grows the economy, and is better for everyone.
There is a huge ‘but’ here. If that tax decrease is not matched by a government cut, it creates a budget deficit which is financed by selling government bonds at whatever interest rate is needed in order to finance the deficit. This need for bonds ‘crowds’ out an equal amount of investment that would have otherwise gone elsewhere – like a business startup.
In summary, a tax cuts that create budget deficits creates some amount of increased consumption and some amount of increased investment on the one hand, but reduces the amount of investment equal to the sum of the additional consumption and additional investment.
On balance, a tax cut which creates (or worsens) a budget deficit increases consumption at the expense of investment. In other words… such a move increase consumption now at the expense of even more consumption later.
The national debt is approximately 5 ½ trillion dollars now. That is how much investment has been diverted from to fund the consumption of previous generations. Imagine if instead that money had been put to use created more wealth?
I support lower taxes, but I support a balanced budget even more.
If there is something we need bad enough that we require the government to provide, it's valuable enough to pay for.
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