The Folly of Robin Hood Tax Policies

Unfortunately, it seems that the current and future administration’s economic policies are merely focusing on who shall receive the next government handout, rather than actually eliminating the need for them.

So who is next in line for the handout du jour?

The American consumer of course!

I’m not sure if President Bush and President-elect Obama both have Disney’s “Robin Hood” in their movie library, but by looking at a great deal of their recent, economic policies, one may certainly believe that they do.

The incoming Obama administration is following in the footsteps of the current Bush administration by considering a second stimulus package aimed at increasing consumer spending. This stimulus package, however, is substantially larger than this summer’s Economic Stimulus Act of 2008 (ESA). This second package weighs in with a price tag of $500 billion, compared to the $152 billion devoted to the ESA.

By both administrations’ accounts, this is a “tax-cut for the middle class”.

Rubbish.

This is nothing more than an incredibly short-sided, socialistic approach to redistributing wealth by stealing it from the wealthy and giving it to the not so wealthy.

Besides the obvious unfairness of this thievery, I have another major issue with this sequel to the stimulus package…the first one simply didn’t work.

Why didn’t it work you may ask?

Well, for one thing, none of the money went to the top income earners in the country. As much as some may not like to admit, the vast majority of the wealthy are wealthy because they’re smart; they innovative and they’re willing to invest their money in things that expand their prosperity.

Not granting these people a taste out of the taxpayer coffers in not only wrong, it’s also incredibly ill-advised as they’re the ones that can really help boost the economy, or at least far more so than the people that received the previous handout can.

Then there’s the work of legendary economist Milton Friedman. His near universally accepted “Permanent-Income Theory” states that temporary increases in income do not lead to an increase in consumption. Friedman argued that consumption only increases when long-term income expectations rise.

There is no better example of this than the failed ESA. The government handout gave consumers a nice boost to their monthly intake, but it did absolutely nothing to improve their long-term financial situation, hence the lack of an increase in individual consumption.

So, some of you may be thinking, “what does promote long-term income expectations to rise?”

A permanent, across the board tax cut would improve the long-term income expectations for everyone in the country. It would also do something that government handouts have failed to do…it would actually boost the economy because of the short and long-term benefits it provides.

This tax cut would increase the incentive of the wealthy (as well as everyone for that matter because all future earnings will be subjected to less taxation) to innovate and invest, immediately boost individual consumption and provide some much needed stability to both individuals and the stock market.

This lack of stability should not be discounted as it perpetuates fear in both individuals and businesses and it is this fear that is really wreaking havoc on the stock market and our economy in general.

This fear either drives investors away or it forces them to make a number of assumptions on the future performance of the market. This fear and speculation has resulted in an incredible sell off and crazy fluctuations in the stock market.

Just to give you an idea of how crazy the stock market has performed, take a look at this snapshot from September 10 to November 21.

In that time, there were 50 trading days. On 25 of those days, the market moved over 4% (16 up and 9 down). That’s half of the days people! That’s almost, literally, unbelievable!

To illustrate this historic turbulence, take a look at the market’s performance directly before that. In the market’s previous 25 years, there were only 25 days that experienced a move of 4% or more! So we go from 25 days in 25 years to 25 days in 50 days.

Absolutely shocking.

I do believe these government handouts fuel this fear as well, as they appear to be an act of desperation. When people see desperation they get scared and when they get scared they don’t spend and when they don’t spend, the economy doesn’t grow and when the economy doesn’t grow, well then, the economy doesn’t grow and I don’t have to explain why that is a problem.

An across the board, permanent tax cut would instill some much needed stability as people would see that their long term income outlook is improving and businesses (especially small businesses) won’t be scared off by the potential of smaller revenues; making them more willing to invest further into their companies.

Furthermore, the tax cut would also have another extremely important benefit…it would provide less governmental influence over the financial decisions of both individuals and businesses.

This cannot be overstated, as more governmental influence on an economy is never, ever a good thing.

I know in a dark economic time like this it may seem hard to believe, but capitalism didn’t just break. Capitalism has been the dominant force in an unprecedented expansion of wealth over the past 125 years and if we continue to trust the market with our economic prosperity, rather than the government, we will get through this tough time.

An easy way of doing this is by rejecting another socialistic solution like government handouts.

That’s all for now folks. Until next time, take care and be well

-John