Tax Rebates Merely Redistribute Existing Wealth, Whereas Tax Cuts Create New Wealth

As the risk of American economic recession increases and portions of the economy soften, politicians in Washington and along the campaign trail climb over themselves with stimulus proposals.  In most cases, liberals find it fashionable to propose new governmental intervention and tax rebates of $250 per tax filer, or $500 per couple, to allegedly "put money in the pockets of those who would go out and spend it." 

Recalling President Reagan's famous quip, however, that the most frightening words that citizens can hear are, "I'm from the government, and I'm here to help," a healthy dose of sobriety is appropriate. 

Although tax rebates, increased unemployment benefits and other short-term payments may feel good and appear superficially attractive, they do very little to actually boost the economy and improve Americans' well-being. 

Rather, cutting tax rates, not mailing tax rebates, is what stimulates prosperity.  This is a critical distinction for Americans to keep in mind during this important debate. 

The primary reason why tax rebates don't work is that they merely redistribute existing wealth, as opposed to creating new economic growth or encouraging innovation and entrepreneurship.  They do nothing to encourage risk-taking, investment or enlargement of the wealth pie, but instead re-slice the existing pie in a zero-sum manner. 

The 2001 tax rebates once again proved their ineffectiveness as a substantive or long-term economic stimulus.  For one thing, most people actually placed those $300 or $600 rebate checks into savings, instead of going out and spending them.  Moreover, the rebates provided little, if any, change in GDP or economic activity.  In contrast, the tax rate reductions of 2001 and 2003 stimulated the economy substantially and almost immediately.  The proof is in the pudding. 

Despite this proof, tax rebate advocates claim that they somehow inject money into the market, thereby stimulating economic activity.  But the fact is that these dollars must necessarily be extracted from someone else by way of taxation or borrowing.  In other words, tax rebates remove dollars from Peter to hand to Paul.  No new wealth is created, but is merely taken from one group and given to another. 

To illustrate, imagine that you sell windowpanes for a living, and your neighbor sells tires.  Accordingly, you encourage your neighbor to throw a baseball through his window to "stimulate" your sales.  Afterward, you purchase unneeded tires from that neighbor to "stimulate" his sales.  Has either party benefited or produced any benefit to society?  Obviously not. 

Other forms of governmental wealth redistribution, such as increased unemployment compensation or housing subsidies, fare no better.  This is because they also require additional government taxation or borrowing, so the resulting spending fails for the same reason that tax rebates fail. 

In contrast, cutting tax rates will provide the best economic stimulus, because they provide the incentive for entrepreneurs to create jobs and pursue business endeavors.  This is how prosperity is created.  Reducing tax rates, whether individual or corporate, encourages people to invest in new equipment, plants, technology and hiring of employees, and they also motivate people to work more, create more and take more chances on new ideas.  Furthermore, tax rate cuts provide businesses with greater confidence that their expansion plans will continue to pay off in the future, not just the short-term. 

Thus, over both the short-term and long-term, tax reform strengthens the economy and creates wealth.  Tax rate cuts encourage businesses to not only retain employees, but to hire new ones, and reward the types of risk-taking that makes America's economy the most dynamic in the world.  No nation has ever become wealthier through government intervention; only the free market increases wealth. 

Accordingly, this is not the time for fashionable Keynesian tax rebates that only increase government meddling, taxation and borrowing.  Rather, we must permanently lower tax rates to encourage growth and hiring, and demand from our elected officials that they refrain from redistributing existing wealth and causing further harm.