Friday, October 17, 2008

Dramatically cut or eliminate capital gains and small business taxes and save the economy

During the past few weeks as the conversation in America focused on the financial crisis hitting Wall Street, news reports would show some guy on the street saying, “who cares about those (pick your favorite word: fat cats, rich bums, sorry bastards, ) on Wall Street, what does that have to do with us on Main Street?”

Now, we in South Carolina are finding out. BMW, one the strongest economic engines in South Carolina, announced plans to layoff 733 temporary workers. BMW cites a nearly 30 percent drop in sales recently. When credit dries up from one bank to another, credit dries up from the bank to the potential auto buyer. Without credit, the car does not get purchased and the people who would normally make the car are laid off. Then, those laid off have limited money and almost certainly can not get credit. They do not buy things, which leads to more people being laid off and not buying things. Eventually, the economy hits a deep recession or depression.

It is not just businesses that are hurting, state government is hurting. While I know for some that might be a thrill to hear, it is a sign of how bad things are. An estimated $210 million of cuts need to be made to the state budget to balance it mid-year. The money simply is not coming in.

I, like many of you, get upset with wasteful spending and I think the bulk of the Department of Commerce’s budget, for example, is just a waste. But, even if the Department of Commerce was eliminated, it would not make a big dent in the $210 million shortfall. A good many of the dreaded earmarks would not add up to a big dent.

A chunk of education money comes directly from sales tax revenue. The General Assembly does to get to determine that amount of money. It goes directly to education. That said that revenue has been tens of millions of dollars lower than expected. In other words, education has taken a big cut already, and that is one of the reasons the General Assembly seems determined not to cut it more.

The Department of Transportation gets the bulk of its funding from the gasoline tax. The gasoline tax is at 13 cents per gallon, regardless the price of the gasoline. Demand for gallons of gasoline is down, and we went through about a month with supplies extraordinarily low. That resulted in far less per gallon sales and gasoline tax revenues. With some of the most dangerous roads and bridges needing attention, the DOT has taken a hit before the General Assembly passes on more cuts. Further, spending less on projects means less jobs created in the state.

It is the perfect economic storm playing out. One that has would be borrowers such as the University of South Carolina unable to borrow money to build new dorms at its Spartanburg campus. That, of course, results in upstate jobs building those dorms not being created.

How do we get out of this mess? It will not be easy. The State of South Carolina can not print money like the federal government, and that would be a mistake at any rate, resulting in an indirect tax via inflation. What can be done immediately by Congress and the various state legislatures around the nation is the elimination of the capital gains tax. At the very least the capital gains tax should be lower than the lowest income tax rate. That will give people with money an incentive to invest money. Further, business taxes on small businesses should be dramatically cut or eliminated.

I realize some readers will scream out loud that those measures would cut government revenues. Perhaps it would in the very short term. However, if major corporations got a boost of capital from people eager to invest tax free and small businesses were allowed to hang on to their capital instead of giving it to the governments they are under, then payrolls could be met. Those met payrolls would result in people making money and spending the money, thus increasing the income tax and consumption tax revenues. As people made and spent more, more jobs would be created, resulting in more income and spending and more revenues coming in to the governments.

I realize my prescription for the economy is not politically sexy. It will not make anyone swoon at a rally. It is not all that needs to be done. But, it would be a good start. There are 733 people in South Carolina who can tell you doing the things to get the American economic engine back up and running are needed by Main Street.

2 comments:

  1. If John McCain could explain the situation as plainly as you did he might have a chance.

    Good job. Too bad most of America will never get what you are talking about.

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  2. You have to mention school tax credits to be taken seriously by the new right, don't you know that. Where is the school tax credits? Where are they? Are a RINO?

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