Reducing Taxes Will Impact the Economy....If?

Will lower taxes improve the economy? There is a current initiative to lower the tax rate with the belief that doing so will increase business and raise the economy. The proposal is a solid one but exists under set of fundamental beliefs that if such taxes are lowered there will be more to invest thereby spurring the economy. Any tax reduction proposal should consider the need to reinvest such money within the U.S. versus loosing it to investments in foreign markets.

Lower taxes means more profits for businesses and essentially more return on investment money. This is great news depending on what businesses and investors plan on doing with it. There are four broad possibilities on what happens to the money:

1.) Investors take the profits and invest in foreign markets: The money is essentially lost to the American economy, businesses, and workers.

2.) Investors take the profits and put the money into a bank account or other wealth holding account: Under this circumstance the money is held without working for the economy and is placed in reserve for some future spending date.

3.)  Investors spend the money on their lifestyle: Investors use the money to buy houses, cars, condos, clothes, merchandise and services. The money contributes to the economy only if the products and services are from the U.S. and support the growth of businesses.

4.) Investors and businesses opt to reinvest the money into their business. Assuming CEOs and investors believe that the economy will continue to grow, they will option to earn a return on their money by investing in their business and thus leading to an expansion of capabilities, jobs and the economy.

Respending the money on local goods and services is a nice deal but the reinvestment of that money into businesses produces a much larger benefit for the economy. Any plan to lower tax rate can include the encouragement of reinvestment in American based businesses versus allowing those savings to be reinvested somewhere else.

People are not necessarily opposed to tax reduction as 18.9% of the total economy is used like a drug to feed a spend happy government. Yet, providing tax breaks for businesses without a mechanism of ensuring that money stimulates the American economy would be foolhardy. Perhaps if we make the tax reduction contingent on reinvestment we will have a better result.