Why Tax Cuts Do Not Stimulate The Economy

The common belief among most investors is that tax cuts stimulate economic growth. Indeed, there is even a group of misguided theorists known as Supply Side Economists (Supply Side Economics is Crank Theory and it is not Taught at a single accredited University in the Country, however, many politicians as well as voters believe such non-sense so it is worth mentioning here) who go so far as to state that a Government can cut the tax rate, which will then result in economic growth, and actually receive more revenues in the form of tax receipts. According to Supply Side Theorists this is because there is a larger "economic pie" to tax despite the fact that the "economic pie" is actually being taxed at a lower rate. To see the fallacy in the Supply Side Economists theory and the fallacy in the idea that cutting taxes can stimulate economic growth itself, one only has to ask oneself what actually makes an economy grow? The answer is, of course, an increase in the capital supply. Supply Side Economists insist that by cutting taxes a government is increasing the capital supply because there is more capital in the hands of consumers and less in the hands of government. While, this last assertion may be true, Supply Side Economists miss one crucial and, in my opinion, obvious fact. That being, the government is a consumer just like an individual citizen is. By cutting taxes all a government actually accomplishes is the shifting of the capital supply one from one consumer (the government) to another group of consumers (the citizens of that government). Thus, the capital supply is not increased from tax cuts and there is no economic growth as a result of said tax cuts. Now some may argue that individual citizens are better or more efficient spenders and investors of capital than the government and, therefore, economic growth does arise from tax cuts as tax cut advocates assert. This is not the case either. While the government (lets take the United States for instance) may be enormously wasteful in its spending so are citizens. It is true the government may spend billions and billions of dollars on military goods, far above what the country needs, that have no economic value and, thus, zero possible return on investment or it may allow billions of dollars it collects in tax receipts to go down the drain because of fraud, as what happened after Katrina and what is currently happening in Iraq because of lack of oversight. It is also true, that individual citizens are highly wasteful with the capital they earn or receive from investments. Think of how many people buy very expensive cars only to see them plummet in value ten minutes after buying them or those people who smoke tobacco, an addiction that not only costs tremendous amounts of capital but also ensures a short and unhealthy lifespan. All in all, most citizens are unwise when it comes to deploying their capital and so are the governments that these citizens form. The only way to artificially boost an economy is to either increase the education level of that economy's workforce, increase the number of individuals that comprise the workforce of an economy, or through deficit spending, which only is beneficial in the short term and is disastrous in the long term. Notice, however, that all of these actions will increase the supply of capital either in either tangible or intangible ways unlike tax cuts. Tax cuts can not stimulate an economy and investors who constantly desire tax cuts on the basis that it will improve economic growth should be careful for what they ask for. Especially, if those tax cuts result in either deficits or cuts in government services they rely on. That said, I will state that there are certain forms of taxation, such as the double taxation that dividends used to receive in this country and others, that are harmful for economic growth.