Explain how tax cuts, especially supply-driven tax cuts, could help an economy plagued with excess supply?

Jim Demint's "American Option" plan that Republicans tout as the solution to our problems does the following: * Reducing business taxes from 35 percent to 25 percent; * Making the tax policy changes of 2001 and 2003 permanent; * Dramatically reducing the estate tax rate to 15 percent; and * Keeping tax rates on dividends and capital gains at 15 percent. First of all, making the Bush Tax Cuts permanent doesn't do anything to stimulate the economy. The tax cuts are currently in effect, they aren't changing right now, and we are still where we are right now. The only changes in this plan are directed at businesses and the wealthy - reducing business taxes and the estate tax. These are efforts directed solely at increasing production and supply and putting more money in the bank accounts of the rich. Folks, we don't have any lack of supply, and the rich aren't the people struggling with unemployment right now. We're in a period of deflation (negative inflation), we have been since October, and we were in a period of disinflation from June - Sept. Inflation was only 1/10th of 1% (0.01%) for all of 2008, with inflation in the first half wiped out by strong deflation in Q4. In comparison, inflation for 2007 was 4.1%. http://www.bls.gov/news.release/cpi.nr0.htm This situation is in part the effect of excess supply in relation to demand, which causes the prices of goods & services to drop and the value of currency to increase. Additionally, credit markets are frozen, decreasing the availability of cash, and cash is subject to the law of supply and demand just like everything else in the economy. Thus, when supply decreases, demand increases in relation to it, and the value of cash increases. This is obviously just adding to the deflationary problem. We're entering a deflationary spiral where prices across the economy continue to fall, profit margins decrease, more workers are laid off as labor costs are deemed cost-prohibitive for many products, and production thus decreases further while demand decreases at the same time as unemployed workers have no money to create demand for anything. With this understood, could someone please explain to me how these tax cuts, and only tax cuts, directed toward increasing our already excess supply and putting money in the savings accounts of more-fortunate Americans could possibly lead us out of this mess? Has this guy talked to an economist? Has anyone in the GOP talked to an economist? Because I don't know of any honest-to-God, trained and respected economist who is touting anything resembling this tripe. If you want a more technical economic explanation of our situation, read the links below to the articles written by Nouriel Roubini. He predicted this economic mess years ago but those words fell on deaf ears. He has since followed that prediction with a number of other predictions relating to this recession, and all of them have been dead on. By the way, he supports the stimulus plan, and thought it should have been implemented months ago, and he feels the TARP was poorly implemented and excessive. http://www.forbes.com/2008/10/29/stagnation-recession-deflation-oped-cx_nr_1030roubini.html http://www.rgemonitor.com/ Martin, did you read what I wrote? We're in a period of strong deflation. That is no joke. There isn't an economist on the planet who disagrees with that fact. We're quickly approaching a deflationary spiral. Inflation is the LEAST of our concerns, and periods of massive, abnormal inflation haven't occurred since the 1970's. Time to drop the "stagflation" scare propaganda. That's not the direction in which we're headed. Samuel, tax cuts to the middle class put money in the pockets of people who spend money. The GOP plan puts money in the bank accounts of businesses who are going to increase production & supply. We have a SUPPLY SURPLUS and diminished demand. Hence my question - HOW COULD SUPPLY-DRIVEN TAX CUTS HELP IN AN ECONOMY PLAGUED WITH EXCESS SUPPLY AND LACK OF DEMAND? With government, the only way to increase income is to increase tax revenue. That's pretty tough to do when your unemployment is skyrocketing - even for the supply-sider who believes in the Laffer Curve. Sorry, READ what I wrote, and Nouriel Roubini's articles, and then come back with an EDUCATED response. Screwdawg - how does a business spend money? On labor and materials for production. Why would they do that if they're sitting on a surplus of inventory? They wouldn't, they'd drop prices to move inventory. And they'd lay off workers because the cost of labor is cost-prohibitive to their bottom line when they can't move what they've already produced at a profit as it is. If you read my post, you'd realize that is the negative aspect of a deflationary spiral. decreasing demand, Decreasing prices, supply surplus, unemployment skyrocketing, all leading back to even further decreases in demand. That's why it's called a deflationary spiral - it's a vicious circle. Misty, you also didn't read what I wrote. I listed Jim Demint's plan. That's what HE is calling for, and that's what the GOP faithful are calling for. No spending, more tax cuts. Half of the GOP caucus wants nothing but tax cuts. Holy cow, and they nixed the school construction from this bill. Do they realize that their base has horrible reading comprehension issues? Samuel, in economics, surplus means an excess of supply over demand. Ever heard of a surplus liquidation? To unload excess inventory that won't move, you cut prices until the point that it will move, often at a loss. It's an expected part of doing business, but not at the level that many businesses are dealing with right now where the price of everything is dropping. Demand is so far below supply across so much of the market that we have a major disruption in market equilibrium that has launched the economy in to a serious deflationary period. And Samuel, what I'm cutting and pasting is my own essay based on research and an understanding of the economic data right now. It you feel that it's moronic to make sense, so be it. Call me a moron then. I don't believe everything I read. I do believe the economic assessments of very well-respected economists who make assessments that are backed up with fact and pass the logical test. And again to everyone, I don't disagree with implementing tax cuts and credits to working Americans. It's a great way to quickly infuse cash into the economy. My question is what do tax cuts for the wealthy and supply-driven tax cuts directed at businesses do for THIS economy when demand is the issue, not supply, and when average Americans are dealing with unemployment? The answer is that it does nothing, and the GOP congressmen and talking heads who keep preaching this tripe have their heads dug so far in the sand it's incredible.

Public Comments

1. The only way to have tax cuts is to cut spending first, it will never work when we have a government spending our money for foreign aid, welfare, and for bureaucratic departments, and agencies. Also, halting the creation of new money from the Fed will reduce inflation for the middle class, we need to keep this in mind if we want the currency to survive.
2. They won't. But good luck with this Q. The chance that the Party of 5% of America will start to represent the other 95% is nil. Obama understands that demand is gone and is trying to address that. When will R's apologize for the state of the economy? That's what I thought.
3. Your long post has a very simple answer. Tax cuts put more money in the pockets of people. Those people then spend that money in the economy. If I get a 10 dollar a year tax break then that's two extra packs of smokes I can buy. Now multiply that by 40 million people that actually smoke in America. That's just the adults that smoke. The surplus of smokes will be decreased. You can then apply that example to all the different types of surplus that exist. Most people will get WAY more than a 20 buck a year tax cut BTW. So that's more surplus that they can buy up. Even if they saved it then the banks will invest that money into the economy. edit below: Truth B told is dead wrong. If I personally spend less that doesn't mean I have more net income. It just means I'm spending less money. If I got a raise (tax cut) then that means I have more net income. Its not about tightening my belt and spending less. Its about raising my net income. A tax cut raises my net income. Hence my answer....more net income decreases supply. More net income means more people will buy up the surplus that exist. If you wanted to argue then you should have started a blog instead of posting on yahoo answers. Just in case you didn't know...surplus is supply. PS...your cut and paste degree makes you look very uneducated. It makes you look like you believe everything you read. That actually makes you a moron.
4. Agree with first poster. Tax cuts won't work unless you cut spending. Think about your own personal finances. When you are in financial turmoil, you try to reduce your own spending and increase your income (like by taking a 2nd job).
5. Say you make $1000 a week after taxes you have $500 to spend, however, if taxes were cut then you would have $750 left to spend. What is so hard to understand about that... PS - It works the same way in business, but need to plan in the long run about investments, which they can't because of the uncertainty of taxes...
6. Taking money out of the economy never helps the economy.
7. Tax cuts, especially the ones listed above would do little. Consumer spending has to go up, and tax cuts won't do it. With a contracting economy, consumers will tend to use tax cuts to pay off credit cards or stick it in the bank. Only government spending has any hope of turning things around.
8. I don't remember anybody at any time saying that tax cuts were the only way to help this economic crisis - only those idiots on the news and Obama have accused the republicans of this. The republicans know the economy needs stimulative spending - and very targeted spending to create jobs. Not this Christmas tree Pelosi and the dems have written.
9. I didn't read your entire piece. But, tax cuts would give a number of people the ability to pay down debt or save money. Either of these actions would put more cash into the banking system, which would improve many bank's balance sheets and allow them to issue more credit. It's the evaporation of credit that has stopped the economy.