Reposted from donaldsensing.com
Thinking about the president's proposals for more tax cuts hearkens me back to a summer job I had in college as a desk clerk at the 300-room Jack Spence Motor Hotel in Nashville, almost 30 years ago.
Jack Spence owned the hotel and one or two others in town, including a very upscale, very expensive hotel near the heart of the music-recording section of Nashville. What I learned from Mr. Spence one day was pretty interesting. I learned that hotel owners don't want the hotel to be 100 percent rented routinely. If the hotel is almost always hanging out the "no vacancy" sign, then it is not maximizing profit. It is not making as much money as it could if some significant percentage of the rooms went routinely vacant.
The reason is this: A fully rented hotel incurs higher overhead costs than one rented say, 85 percent. Wear and maintenance costs are higher, linen costs are higher, pilferage is higher, swimming pool costs are higher, staff costs more, and so forth. Sure, the hotel is operating with more profit than an 85-percent hotel, all things being otherwise equal. But it's still not maximizing profits.
What Mr. Spence had to pin down was a double-curve problem. If he raised room rates, occupancy would drop, (but so would overhead costs). If occupancy did not drop too much, then revenue and profit would actually rise. However, if he raised prices too much, occupancy would drop too much and what he saved in reduced overhead was less than lost revenue.
So a hotel running at 100 percent occupancy might make more money at 85 percent occupancy if the rates were raised the right amount. Problem is that hotel owners can't change their rates every day like gas station owners can (who have a virtually identical math problem regarding gasoline sales), or even every quarter, really. So owners know they will never nail the problem exactly. "Pretty close" is the best they can do.
Now consider what Daniel at Reason of Voice has to say about the proposed tax cuts:
I'm no economist, OK? But this latest round of Tax Cuts of 550 billion, considering the state of this economy strikes me as just the most irresponsible move right now. It's not just because of the cost of a recent war, mind you. This is an economy largely inherited by President Bush and not created by him, I'll grant. It's sickness is a swing of the economic pendulum that no one could stop from happening. But can this administration turn a tremendous SURPLUS into an enormous DEFICIT any faster??The question of tax cuts versus deficit spending sounds a lot like the occupancy/rate problem. Tax cuts stimulate the economy because they leave more money in the hands of taxpayers to be taxed. While each dollar is being taxed at a lesser rate, there are so many more of them being taxed that total tax revenues can actually go up with the reduced rates - and have, under the tax reductions of John F. Kennedy and Ronald Reagan, for example.
Of course, if you reduce taxes too much, tax revenue collected could fall rather than rise. In a deficit economy, that is not good. So leaving ideology aside (only for a moment) the problem is a straightforward but very difficult math problem: where do the curves of lowered tax rates and rising tax revenue intersect? I do not know the answer.
But no one in government treats the problem as purely a math problem. Ideology always tilts the math. (In Washington, mathematical answers are always political answers. All answers to any question are always political answers) To be most effective at stimulating the economy and ultimately increasing tax revenue, tax cuts must be coupled with federal spending cuts. And you know the cat fights that erupt over spending cuts.
Somewhat cynically, I might observe that the federal government really is a money-distribution organization. We govern ourselves by the way we spend each others' money. How much gets spent and for what is determined by how much agreement can be reached by a majority. But whether Left or Right, whether Democrat or Republican, the only real questions of American government and governance are, "Who will be be the beneficiaries of government spending? How much shall we exact from the public for it, and by what means?"
All matters of governance come down to that, no matter where they start.
There are such things as tax-and-spend liberals. Presidential candidate Dick Gephardt is one. He stated recently that he wants to repeal all the Bush tax cuts enacted so far, discard the Bush cuts proposed for future years, increase spending and raise taxes. Gephardt is the gold medalist for tax and spend liberalism.
But I yet to be shown a cut taxes, cut spending conservative. They are all for cutting taxes but can you point me to a single Republican administration during which federal spending declined in real dollars? (Cue "Jeopardy" theme music.)
Bush's plan does a new thing in recent American politics. He wants literally to cut taxes. Before, tax reduction plans really shifted the tax burden among categories of income earners. Tax credits for one group were paid for by tax increases for another. Hence, savvy voters understood that when politicians talked about "tax cuts for working families," they meant tax raises for other families (what other families are there, though?). The reason was that there really was almost never a net tax decrease, just changes in who paid how much.
But Bush really does want to cut taxes. He wants the people who pay X in taxes now to pay X-minus in taxes later. This proposal scares the blazes out of Washington's lifelong governmental factotums an all sides of the aisle. They have become ideologically entrenched about how your money and mine should be confiscated and distributed to their own favored classes. Hence the Democrats screamed that Bush's tax cuts would spell the End of the World As We Know It and Republicans, well, they did, too, just not as shrilly. And all of them most sincerely said that The Deficit means that we cannot afford a tax cut at all now (Dems) or the tax cuts proposed must be drastically pared back (Reps).
The central issue - the only issue, really - is federal spending. The Reps, including the president, say the tax cuts will stimulate the economy. Dems attack the cuts because the cuts will not permit them to raise favored spending as rapidly as they want. But the real issue is that it's not their money, its ours. They have no right to it at all except as a steward. They have no proprietary rights whatsoever.
Beyond that is a metaphysical issue: what is government for? That is the question that should every day shape the entire debate. But that's a topic for another time.
Update: Christopher Lansdown has some further thoughts.
Update 2: Daniel at Reason of Voice (my first citation, above) responds that federal debt is very difficult to recover from (true), and this seems to cut against Chris Lansdown's contention in his post (see first update) that the government should go into debt to get out of economic downturns.
Read'em both and see what you think.
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