When it comes to income taxes there are basically two ways you can cut them. You can either have tax cuts that benefit consumption (geared primarily towards the large middle class in modest amounts and are designed to encourage consumer purchases) and those that are across the board (the same percent for each income group) and encourage production (also known as a “supply-side” tax cut). President Obama favors the former because he considers them more “fair” and they have the ability to help him with the middle class which has become increasingly unhappy with his policies. Rumor has it, he is considering such cuts as we approach the 2010 mid term elections. Someone needs to teach him some history.

For decades Republicans have resisted Democrat attempts to provide small and modest tax cuts for the middle and lower class at the expense of those with higher incomes, simply because such polices do not work. In 2008, as Republicans were fighting for their political lives, President Bush passed just such a consumption tax cut package of his own with very weak results. Most Americans received checks that were designed to make them go out and buy a new TV, maybe take a vacation, or even use it towards the down payment on a car. However, because of the rampant economic fear that our country has been suffering from, people used those checks to pay off credit cards, to make a payment on their mortgages, or to do other things to reduce debt.

These demand side, or consumption tax cuts, are very different from those on the supply side. Supply side cuts are usually long term (multi-year in scope) and proportional (giving as big of a percentage to the affluent as those in lower income brackets). The amount of savings for the affluent—who pay the vast majority of all the revenues the government acquires annually—are typically significant enough to lead to the creation of new jobs, the expansion of businesses, and to stimulate the economy. History has repeatedly proved this to be true.

Calvin Coolidge passed a huge tax cut that led to one of the greatest expansions of the economy in US history during the 1920s. In the 1960s, presidential candidate John F. Kennedy eloquently stated that it was imperative to “get the economy going again” and believed that tax cuts would lead to a “rising tide that will lift all boats” (rich as well as those who wish to be rich). Those tax cuts, which were predicted to lead to a depletion in revenue, led to one of the last balanced budgets the US enjoyed for decades and economic expansion. In 1980 Ronald Reagan inherited one of the worst economies since the Great Depression (similar to the one today) and he attacked taxes with a plan that was largely modeled after the Kennedy tax cuts. That tax bill was called a “jobs creation act,” which is exactly what supply side tax cuts achieve, and it contributed to one of the strongest periods of economic growth in US History. Finally, following the technology bubble burst at the end of the Clinton Administration and the tragedy of September 11th, President George W. Bush used supply-side tax cuts to create an economy that sustained the lowest unemployment for the longest period of time since the early part of the 20th century (in terms of years of full employment). He followed that up with the ridiculous consumer tax cut of 2008 that did nothing to move things in the right direction (including voters that he was trying to appeal to) and has left many scratching their heads. We have learned that all tax cuts are not alike.

Part of the dramatic decline in the economy is actually linked to the end of the Bush supply-side tax cuts that had to be approved each year by the Congress in order to stay in effect. In 2006, pro supply-side Republicans were beat by Democrats who opposed those policies. The businesses that largely drive the economy knew their days were numbered. Hostility towards a pro-business view of taxes has become even worse following the election of Obama. After a few years since the 2006 elections unemployment went from 4.5 percent to around 7 in no time (and is now pushing double digits), consumer confidence reached a record low. 2008 should have been a Referendum on the Democrats. Instead, Americans decided to consume more of the poison that is destroying the economy.

Americans need to know the difference between consumption and supply-side tax policies, and remind their representatives of those differences in the up coming election cycle. Meanwhile, pro-growth candidates for Congress should use 2010 as a year to remind their constituents of what works and to use this as a wedge issue for Obama and his Democrats who seem to hate wealth (and, thus, job) creation.

Kevin Price
http://BizPlusBlog.com/