It’s time to acknowledge an ugly fact: poor people use their money differently than rich people. Even if they are able, the poor don’t usually save their money. They spend it on luxuries they really don’t need or can’t afford.
To an extent, this is understandable. When life is hard, the natural inclination is to take pleasure where you can get it. Thus, buying little things for yourself or blowing extra cash on lottery tickets to pursue the fantasy of escaping your financial situation makes a certain kind of sense.
By way of contrast, the rich didn’t get that way by spending their money. They saved it and invested it wisely. Thus, they have plenty and spend some of it on pleasure and hold onto the rest.
A lifetime of these sorts of fiscal decisions are not unlearned easily or quickly, and dark financial times encourage the most conservative financial practices, not the most aggressive ones.
Why does this matter? Because to solve an economic crisis, you have to take people’s financial habits into account. In the U.S., consumer spending accounts for more than 60% of the gross domestic product. Thus, a healthy economy depends on people spending their income.
Here in Kansas, Governor Sam Brownback has proposed overhauling the tax code. If the governor’s plan is adopted, the poorest Kansans would see their taxes rise 5000%. That’s not a typo. All those zeros belong in that figure. Middle-income families would also see a significant rise in their tax burden, while the wealthiest Kansans — those earning $1M per year or more — would benefit from a $17,000 tax cut.
These cuts and raises will be accomplished by eliminating a lot of tax credits, many of which benefit the poor, such as the Earned Income Tax Credit (ironically, a highly touted tax reform created by the Reagan administration). The Brownback administration claims these losses will be offset by investing more dollars in programs that benefit the poor, but they have so far been vague on what these programs are or how much money will be allocated to them.
Meanwhile, the governor contends the tax cuts on the wealthy are needed to stimulate the economy. After all, it is the rich who own companies and can thus afford to hire more people.
But let’s go back to that ugly fact; poor people and rich people use money differently. Poor people spend just about everything they have. Rich people save most of theirs.
Therefore, if the purpose of overhauling the Kansas tax code is to stimulate the economy, raising taxes on the poor and cutting them for the rich is not only the wonrg way to do it, it’s absolutely backwards. The governor’s plan takes money out of the hands of the people who spend it and puts it in the wallets of those who don’t. And, since consumer spending is the engine of the modern American economy, that approach will slow the recovery instead of speeding it up.
Forget any moral/ethical implications of where the tax burden is being laid. The Brownback plan is just illogical from an economic point of view.
Now, it is true that the rich invest their funds, and investments are another key component of a healthy economy. Giving the wealthy more money to invest does offer some economic stimulus. But the companies they invest in won’t be worth much if they can’t sell their goods, and they layoff their employees, creating more drag on the state’s financial status.
From a logic standpoint, it makes sense to cut corporate taxes. In theory, companies could hire more workers and pay existing employees more if they had a lower tax liability. Of course, they’d actually have to follow through on that, but that type of policy could actually stimulate the economy.
Nationwide, the GOP is advocating for reduced taxes on the wealthiest Americans to stimulate the economy. Simple logic defies this idea as good policy. For better or worse, we’ve transformed our economy into one that runs on consumerism. To get things going again, we’ve got to put money in the hands of the spenders.
That isn’t accomplished by raising their taxes.