home > archive > 2006 > this article

In praise of investing money gained from tax cuts

By Gennady Stolyarov II
web posted September 25, 2006

Recently, several frequently articulated objections to tax cuts for upper-income individuals have been brought to my attention. The scenario feared by the objectors and used as grounds for denying tax cuts to the wealthy is the investment of the money gained by the recipients. I shall address three of these objections using the principles of economics and rational self-interest to display the virtues of such an outcome. Indeed, no damage will result from investment of such money; quite the contrary, this practice will fuel economic growth in the United States and rising standards of living for Americans.

Objection 1: What if the wealthy invest the money gained from their tax cuts in foreign nations? Especially if faith in the U.S. economy is weak, they will tend to invest elsewhere. Thus, the government will lose out on that money. The wealthy will essentially take U.S. dollars and give them to China, thus not helping our economy.

Refutation: No harm can be done to the U.S. economy from Americans' capital investment abroad. If wealthy American investors (or any other investors) decide that some overseas company or industry will yield a more profitable return than a domestic U.S. company or industry, the successful investors will get a higher return in interest and thus more money flowing back into the U.S.—while the failed investors, caring about their financial well-being, will quickly curtail unwise choices. Eventually, the investors will wish to consume some of the fruits of their investment.

It is important to remember that U.S. investors do not give money to foreign institutions; they loan it to them on the condition of receiving regular returns above the principal. If the investors are rationally self-interested, they will either keep their money at least long enough for the accumulated interest to exceed the amount invested, or they will withdraw the amount invested beforehand—having in the meantime accumulated interest on it. In either case, they—if successful—will take back more money than they invested originally. If they fail, they will likely correct their course of action to prevent future losses to themselves.  

Objection 2: The more times a dollar is traded, the better. When the wealthy invest their money derived from tax cuts, this reduces the overall velocity of circulation of money.

Refutation: And good riddance! The quantity theory of money—developed by John Locke and known since—states that MV=PQ, where M is the amount of money in a society, V is the money's velocity of circulation (the number of times the money changes hands in a given time period), P is the price level, and Q is the quantity of goods available. If V rises, other things equal, so will P. Thus, an increased velocity of circulation of money fuels price inflation. Americans are already suffering from mild but steady inflation, and any change that reduces it and stabilizes prices will be a welcome one; it will prevent Americans' hard-earned savings from being needlessly eroded.

Objection 3: When there are a lot of tax cuts, it does not always promote a proportional growth because people are investing as much or more than they are consuming, and consumption is what drives the economy. The rich will not buy anything that really promotes economic growth with the money they obtained from tax cuts.

Refutation: This is a Keynesian fallacy which presumes that consumption is responsible for economic growth and prosperity. Quite the contrary, it is savings and investment which make possible capital accumulation and thus more efficient production of goods and services and research into new methods of production. Capital is the stock seed of the economy. The more seeds one plants, the greater a harvest one reaps. If one consumes all or most of one's stock seed, one's future harvest will be correspondingly diminished. The more one forgoes present consumption and invests one's resources into the future, the greater one's future rewards. The more one consumes of one's present goods, the less productive capacity is left for the future. So it is with a whole economy; the more capital is accumulated now, the higher living standards and productivity will be in the future.

Thus, let the wealthy invest the money they receive due to tax cuts; it will improve everybody's quality of life as a result. Investors do enable the creation of goods to promote economic growth; the money they loan to banks, corporations, and entrepreneurs gets invested into productive equipment which fuels economic progress. Adam Smith's invisible hand principle works here as in all economic cases: let people dispose of their money as they see fit, and universal benefits will result. ESR

Gennady Stolyarov II is a science fiction novelist, independent philosophical essayist, poet, amateur mathematician, composer, contributor to Enter Stage Right, Le Quebecois Libre, Rebirth of Reason, and the Ludwig von Mises Institute, Senior Writer for The Liberal Institute, and Editor-in-Chief of The Rational Argumentator, a magazine championing the principles of reason, rights, and progress. His newest science fiction novel is Eden against the Colossus. His latest non-fiction treatise is A Rational Cosmology. Mr. Stolyarov can be contacted at gennadystolyarovii@yahoo.com.




© 1996-2024, Enter Stage Right and/or its creators. All rights reserved.