Tax cuts

I've had several conversations with people about tax cuts recently, and most of them seem to have no idea how tax cuts work. It is my attempt to explain the rational behind tax cuts as I understand it.

Most tax revenues come from money moving through the economy (income tax, sales tax, trade tariffs, etc.). Making this look more simple than it is, the equation might look something like this: T x I= R, where T=tax rates, I=money changing hands in the economy, and R= government revenue. Now, if we want to raise R higher, then we can raise T or I. Everyone agrees we need more tax revenue if we are going to stave off economic collapse

The argument for higher tax rates goes something like this: The best way to raise revenue is to increase tax rates. The money is there, we just need richer people to give more of it to the government so we can continue taking care of the poorer populace. In the short term they are right, raising tax rates will indeed bring in more tax revenue.

The counter argument is more complex because, I think, it takes the real world into consideration. The counter argument states that the way to raise revenues over the long term is to lower tax rates, which will increase the amount of money changing hands in the economy, (lowering T to raise I in the equation above). When you tax something, people will pay the tax until it gets annoying. At that point they will either try to do it somewhere you can't tax it (outsourcing) or as little as possible. The more money we leave in the economy, conservatives argue, the bigger the economy will get. The increase in the size of the economy will off set the reduction in taxes enough to raise the amount of money that is raised through taxes. In the long run, they are right, though tax cuts will not do a whole lot in the short term to help the economy.

With tax increases, people will pay more money to the government. Pulling money out of the economy, through the government, and then putting it back into the economy is terribly inefficient and doesn't do a whole lot.

A lot of companies are taking moving out of the states because it is cheaper to do business abroad than here. Part of that is, I admit, because you can't pay Americans a dollar a day, but neither do they have to pay the Chinese government 35% of their earning in taxes. If tax rates where decreased, a lot of business would return to the U.S. I admit that I am not an economic major or a math genius, but it doesn't take a genius to see the difference between how New York and Texas are weathering the economic crisis. New York has some of the highest tax rates in the nation and they are going bankrupt. Texas has far lower tax rates and we're growing.