The Natural History of Tax Cuts

The Natural History of Tax Cuts

By Dean Kedenburg

Just what is the true efficacy of tax cuts?  This is a question with a simple answer but some tortuous details.
For those who argue that leaving money in the hands of the people who earn it fails to generate economic and social growth, here are some other simple questions.
Did you stoke the embers of the fire in your cave this morning, hone spear tips for a hunt, or wrestle with a hand-hewn yoke and some surly oxen?
Or, in a more modern scenario, did you derive your daily exercise by cranking over the Tin Lizzy in your driveway, greet the iceman's knock on your door, or dial up (literally) a friend to chat?
Today, the great majority of us live with the benefits of climate-controlled housing, personal transportation and communication, excessive nourishment, state-of-the-art medical care, and universal education – all unimaginable to even the most prescient of our forbears.
Where did all this stuff come from?
This stuff is the product of capital – the application of human capital employing resources in the form of financial capital toward the advancement of products and services.  So who wields capital better: the taxman or the taxpayer?
Research and development markets give the nod to the taxpayer by a current margin of three to one.  Twenty-fifteen National Science Foundation estimates of total R&D expenditures show 69% funding by the business sector versus 23% federal sponsorship.
The spread between these two numbers is indicative of the roles the private and public sectors play in society.  Much of the public-sector effort is aimed at basic research, while the private-sector adds a hefty measure of development to bring the fruits of research into the hands of the consumer.  For example, the genesis of the worldwide web was a government creation known as ARPNET, but this fledgling network came replete with a stamp reading "Not for Commercial Use Under Penalty of Law."  The private sector latched on to the web concept, raised R&D capital for everything except a stamp, and set forth to transform the world.
The history of the internet also illuminates a common fundamental misunderstanding of the process of economic and social growth.  Pundits habitually insist on demanding a clear temporal link between cause and effect of any event, but timelines of results can range from micro-seconds for a stock market to decades or longer for societal shifts.
While it seems as though the internet has exploded upon us in short order, early commercial applications such as CompuServe date back to 1969.  The internet march from a modest initial user base to becoming a part of the everyday landscape for more than 3 billion users (almost half the world's population) has been a nearly 50-year development.  Who could have predicted that the progeny of a CompuServe meme would grow up to be smart watch apps 50 years later?  Results often take time.
Detractors of the idea of tax cuts for economic growth tend to cherry-pick one or more of their favorite historical time slices to advance their thesis.  That's simply bad science, leading to biased findings and confusion.  The truth is that economic growth always moves in fits and starts.  Trying to capture definitive results within a specific time-period yields many a false conclusion; it is the lessons of history that fill out the story.
Results also need...well, results.  Development of ideas far outruns research.  Research creates sophisticated circuitry; development builds smart phones.  To borrow from the oft cited baseball analogy, the public sector is quite capable of designing a hit or even a home run, but it's the private sector that invests in a bat and steps up to the plate.
The path of economic growth is far wider and smoother when the taxpayer retains capital instead of ceding it to the taxman.  Most of that stuff we enjoy as a part of our quality of life emerged from the sweat of private investment, with an honorable mention to assists from the public side.
Every dollar retained in the hands of the taxpayer, short of imperiling the primacy of public safety, improves the forecast for more good stuff to come.  America is a remarkable place, sporting less than 5% of the world population while generating about 25% of global GDP.  Now, imagine the United Stated having leaned heavily socialistic during the 19th or 20th century, draining resources away from innovators and developers and toward the state.  What are the chances that we would be living the 2017 lifestyle we take for granted?
Would we be driving Teslas or Ladas, watching Lucy on CRTs or HBO on HDTV, dancing with new hips or poking through the park with canes, traveling everywhere on jets or booking a seat on a DC-3?  Would life as we know it be 2017 or 1950 or...?
The trail of details in the aftermath of any tax policy will always foster an industry of speculation for myopic politicians and economists, but history proves that the best way to distance ourselves from caves and Model-Ts is investing in people, not in government.