One of the difficulties we run into when discussing economics is that the numbers we're talking about are always so vast it's hard to get a grasp on what's really going on. Politicians, particularly Republicans, like to take advantage of this fact to convince us to do things we probably shouldn't. However, I find that if we break down those big numbers into a more real world scenario it all ends up making a lot more sense.
So to that end, I'd like to illustrate how ridiculous the Republican proposal to cut taxes is as a form of stimulus.
Let's say that you own a consulting business. You've done well for yourself, hired several employees, and you're generally a model of an ideal small business. In 2007 here were the basic numbers:
Annual revenue: $2 milllion
Employees: 15
Average salary/employee: $100,000
Now, I'm simplifying this a bit in that I'm not going to factor in expenses aside from the cost of employees because it's irrelevant to this discussion. What I want to point out is that you have employees and you make a given amount of revenue from their work and a profit. So here's how the numbers added up in 2007:
So, in 2007 you were making a profit of $500K on $2 million. Let's say you were paying 35% taxes on that. Your take home would be $325K. Not bad, right?
2008
In 2008 the economy is slowing and business is a bit off. You weren't able to renew a more minor contract and revenue is off. So now you're paying your employees the same (yeah, you didn't give them a raise you jerk), and revenues are off by 5%. So your revenue is now $1.9 million. Now let's look at the math again:
Gross profit: $1.9 million
Expenses: $1.5 million
Net profit: $400K
After taxes (35%): $260K ($65K less)
That's a pretty big hit to your bottom line. You're probably going to want to cut salaries or maybe lay somebody off. Well don't worry because the Republicans are going to cut your taxes by a CRAZY 5%. WOW!!!!
WOW! You're ... wait... you're still down $45K over where you were before. Are you going to take this "windfall" and go by a new car? No. You're still trying to figure out how to get by with less money than you had before. You aren't going to be stimulating the economy, you're just less bad off and probably still looking to cut costs. Guess you'll have to can somebody or cut salaries.
Strange... I thought tax cuts solved EVERYTHING!
If you think that's bad consider what happens if you made no profits because the economy really sucked. You know what happens? Your ZERO taxes get cut to ZERO. WOW! You go stimulate that economy with all that... ummm... right.
REAL Stimulus
Now, let's say the government pours a bunch of money into infrastructure work instead of cutting your taxes. Your most clever sales guy manages to land another contract from the government worth $250K. Now your profits are actually higher than they were before the economy sucked. If you weren't such a jerk you could give that sales guy a bonus. Instead you spend that extra money you got on a new car, and that helps keep somebody at an auto plant in a job. It's STIMULUS!!!
Now of course this is a very simple example, and not every business is going to benefit equally from such stimulus. But what is definitely true is that the benefit of cutting taxes in a shrinking economy is practically nil. Yes, people will have more money than they'd otherwise have, but if they still have less than they had before, they aren't going to be inclined to spend it.
Tax cuts CAN be a positive thing depending on where you cut taxes and what you're trying to accomplish. Cutting taxes when the economy is shrinking DOES NOTHING. It makes things less bad, okay sure, but that doesn't get people to spend which is what's actually needed.