by das monde
Thu Oct 30th, 2008 at 11:37:29 PM EST
The libertarian ideology is suffering quite a few setbacks amidst the ongoing financial crisis. Say, the governments just can't stop expensive stimulations. Maestro Greenspan acknowledged that reliance on everybody's self-interest was a mistake. And what other way is there to prevent fools to bank everyone all in than some regulation?
But one of libertarian recommendations is still never criticized: Low taxes are always good, as they encourage economic activity, job creation and what not. No one ever tells how low the taxes eventually must be, but many insist that tax cuts are always wonderful.
But do low taxes really work that wonderful way under any circumstances? Are there not any ill side effects? Any theory, however nice, has its limits of application. Whoever looked for limits of tax cut benefits?
Here below I share some thoughts, how Bush-led tax cuts might had actually fueled the current economic crisis.
Lower taxes leave more money to people. But more money circulating is not always a good thing. You have heard of scenarios of "too much money chasing too few assets". That's a definition of a bubble. And the Real Estate bubble (in particular) was a key component of all this financial mess.
Surely, lax credit practices were most instrumental in blowing the gargantuan Real Estate bubble. But what pushed banks to make so many crazy subprime loans? This is rarely voiced fortissimo, but it was Wall Street investors who were eager for more mortgage derivatives. And they had more money to "invest" (or leverage) thanks to tax cuts as well.
It all depends on how most of the tax cuts are really spent. Does most of the extra money indeed go into creation of quality jobs, better services, investments into future? Or do they go into Ponzi-lite schemes of asset and commercial paper manipulation?
It is not a big secret that most of the tax cuts benefited a rather small but already very wealthy portion of population. The "trickle-down" theory is nice, but there is little evidence that it really worked so wonderfully. Many self-help advices told that hard work and direct venture are not the best way to "get most of your money". You rather invest and let others work. And what are the best investments in bubble times? Theoretically, nothing can beat a Ponzi scheme in the short term. Surely, all those games of hedge funds and with CDOs looked most attractive. No wonder if not much of the extra money trickled down to the real eco-nomy.
Let me encapsulate in four points:
- Tax cuts may fuel bubbles as bubble investments appear to offer best profit.
- Tax cuts may increase leverage volume. With more money you can do more stupid things.
- Tax cuts may fuel inflation after a bubble bursts. With no reliable assets to invest in, wealthy people like to spend, and they do not mind if the prices get too high for regular folks.
- Equality of tax cuts does matter. Not only "trickle down" may work or not work. Bush tax cuts disproportionally empowered wealthy individuals and bigger companies. Smaller businesses got their modest cuts, but were often crushed or swallowed by giants' competition. Advocates of small-scale businesses should tell more precisely, what tax cuts are needed.
Of course, tax cuts might work as wonderfully as prescribed as well. Say, they might decrease inflation
, if the value created by boosted economic activity clearly exceeds the extra monetary volume. But if tax cuts have their own way of self-interest, anything else may happen.
What are your thoughts of whether the modern fashion of tax cuts fueled the ongoing crisis? Do low tax policies keep making things worse? Couldn't things actually improve with higher taxes?