Business as vacuum cleaner

Tax breaks for businesses, and the wealthy that own them, do not stimulate economic activity. Tax breaks for folks without enough to pay for the life necessities do stimulate economic activity. Tax subsidies directed at economic activity, i.e. point of sale credits and rebates, also stimulate the economy.

Often people view business (micro economic) decisions and governmental macro economic policy that affect those decisions without understanding how business decisions are made. There can be no other explanation for what now proposes to be sound economic policy regarding taxation. It is not only the right wing that believes that tax cuts will stimulate the business cycle. Many Democrats try to find a balance with business tax cuts and social service funding levels, without understanding that tax cuts to businesses will never revive a depressed economy, never increase hiring.

We can describe a business by using the analogy of business as vacuum cleaner. The vacuum is turned on when there are dollars to be sucked up. In that process the business uses energy, collects dust, and expends dollars to separate the dollars from the dust. The productive part of the business is the collecting the money, accomplished by hiring labor and purchasing materials of production from other companies, and providing demanded goods and services. The labor and materials are the dust and business tries to keep these costs to a minimum.

The important part about this analogy is that the purpose of the vacuum is to suck up money. Without the presence of money the business will not turn on, labor will not be hired, and materials will not be purchased. Of course there needs to be a minimum amount of dollars available or the business will just close up forever. But the issue here is how to stimulate a business to run more than it normally would given current depressed market conditions. Adding money directly to a business via a tax cut is simply adding more money into the vacuum cleaner without turning the machine on. Adding money directly into the vacuum is supply-side economic theory. It does not increase labor nor purchases of materials of production and it does not provide more goods or services. At best it rewards large and inefficient businesses. At worst it provides the wealthy dollars to create competition away from of our labor markets while increasing government deficits.

Demand-side economic theory attempts to get the vacuum to operate more, to suck up more money and dust. Consumption of dust, use of labor and materials of production is the point of demand-side theory. To accomplish this there needs to be more money in the general environment, it is called demand. One way to accomplish that is for government to purchase goods and services. Business will respond to this demand stimulus by turning on – hiring labor and purchasing materials – and sucking up those government dollars. Another means is for the government to directly place into the hands of people the dollars they require to fulfill their needs when they and do not have enough. This can be accomplished by direct cash grants such as unemployment insurance or general assistance payments, or by reducing tax withholding on lower wage earners. The important qualifier is that they are not able to fulfill their needs with their current income. Tax rebates for purchases, i.e. cash for clunkers and solar panel rebates, are essentially the government aiding the purchase of targeted goods and services by others.

Targeted tax breaks can be good for an economy and are sometimes required to increase economic activity. But across the board tax cuts only increase deficits, provide minimal stimulus, and will never pay for themselves.