Liberally Conservative

"Freedom is never more than one generation away from extinction. We didn't pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same, or one day we will spend our sunset years telling our children and our children's children what it was once like in the United States where men were free....... ~Ronald Reagan~

Friday, February 03, 2006

Supply-Side vs. Rubinomics...Tax Cuts Win!

Supply Side Economics: An economic theory, which holds that reducing tax rates, especially for businesses and wealthy individuals, stimulates savings and investment for the benefit of everyone. Sometimes referred to a “Reaganomics” tax cuts were emphasized that in order to spur growth and jobs, to encourage people to save, invest, and take risks.
Rubinomics: Named after Robert E. Rubin, President Bill Clinton's Treasury Secretary, this theory focuses instead on cutting the budget deficit. Its proponents argue that reducing long-term interest rates is the best way to foster growth and the creation of new jobs, since that frees up resources for private investment.
It would be argued the Clinton years had great economic success because of the Rubinomic policy set forth. Rubin himself finally admitted they didn't expect or plan on the great "Technology Revolution", which is the prime reason for low deficits, economic growth and low unemployment in the 90's. Technology's growth provided the "boom" the Clinton's take credit for. Reduced spending in the Clinton years came from huge cuts at the military's expense.
Democrats embrace Rubinonomics, blaming the Bush tax cuts for the escalating deficit projections while they are proposing tax hikes. "Rubinomics," proposes that government borrowing crowds out private investment. The so-called "crowding-out" hypothesis holds that when the government borrows money to finance spending it competes with private companies that are also seeking to borrow money, thus increasing demand for credit and causing interest rates to rise.
Higher interest rates increase the cost of doing business and therefore reduce economic growth. If the government raises taxes to reduce deficits or run surpluses, then, the conjecture holds, interest rates will decline, the cost of business will fall and economic growth will rise.
In 2003 capital gains tax rate was reduced to 15% from 20%. Government spending whether tax-financed or debt-financed crowds out private investment and retards economic growth. The 25% reduction in the tax penalty on stock and other asset sales triggered a doubling of capital gains realizations, to $539 billion in 2005 from $269 billion in 2002. Stock values over that time increase, due in part to the higher after-tax return on capital induced by the tax cuts.
Investors sold existing asset holdings in order to realize some of their profits and pay taxes at the lower rate. They could then turn around and buy new assets, hoping for higher rates of return. Freeing assets promotes the efficiency of capital markets by redirecting investment into new and higher value-added companies.
In 2002, the year before the tax cuts, capital gains tax liabilities were $49 billion at the 20% rate. They rose slightly to $51 billion in 2003, then surged to $71 billion in 2004, and were estimated by Congressional Budget Office to have reached $80 billion last year, all paid at the lower 15% rate. The result was lower tax rates yielded more revenue. When Clinton displaced Rubinomics with Supply-Side thinking by reducing capital gains from 28% to 20% in 1997 revenue jumped $84 Billion.
The House of Representative voted for new leadership in an effort to reform themselves from bigger government, spending through entitlements and earmarking pork for special interests. The success of the Bush tax cuts demonstrates the need to make those cuts permanent. Tax cuts spur economic growth by increasing business investment, providing consumers a choice to spend their money as they wish, and job creation. Repubicans need to show leadership and backbone to ensure economic growth for years to come. They need to stop the free government spending and embrace conservative economic principles.

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