Let me start by saying that we should move to the Fair Tax system. You can click on that and it’ll open in another window.

But that’s not what we’re here to talk about. To understand why reducing taxes isn’t enough, we first need to understand how the economy works, and to do that lets use the example of … Beggar communities in third world countries:

What happens when lots of people give them money? They develop a lifestyle of begging. But more than that, they now have money to spend. With enough living in an area, small shops start to form, and small service economies pop up to support the needs of these beggar communities. Leaders of sorts, small time entrepreneurs, crime lords etc. pop up to help coordinate, provide safety and take their cut. Predatory money lenders might find people to take advantage of here because these people do have a consistent source of income, and things they feel they need that they will make bad deals for.

Children raised in these situations will likely not receive schooling and even if they do, this is the life style and the kind of people they grew up with so they won’t be able to integrate easily with people outside of these societies. Short of severe external interference and people willing to force their will on them to change their lives for the better, their fate is sealed because few people ever manage to leave their comfort zones – even when those comfort zones are also painful.

… This is an example of the bad that can come from unintelligent use of money. Even if the act of helping beggars out seemed well intentioned to the people giving them money, it has long term consequences.

Now, lets consider an example that’s closer to home: You can invest money or buy products from a new food chain that sells some new random brand of tacos that sounds cool, or you can invest money or buy products from a company that creates more efficient truck engines. In the first case, money will contribute to the expansion of that new taco chain and maybe research into improving the taste. On the other, the company will expand its business and do more research that may produce more efficient trucks.

What’s the difference? The latter case creates the opportunity of building new engines that make all transportation cheaper. That means that the price of food and other goods might drop because it costs less to transport so that even if your salary doesn’t increase, you have more money left over and can buy more stuff that you want. We might be able to sell these new engines to other countries and make some money off of that. The world’s supply of oil might last longer while we try to find alternate energy sources.

If you just reduce taxes all around, the government has less money to be able to take any kind of productive action, and since there is no large guiding principle in people’s use of money, there’s a random increase in the flow of money into the various parts of the economy. Some of it will actually go to stuff that might save our economy from oblivion, while other money will flow towards helping the competition between companies selling different brands of toothpaste and creating that minty new flavor.

Obviously, a random reduction in taxes isn’t what we’re looking for. Some people and businesses can afford to pay more taxes and likely aren’t going to help improve things much. But stuff that has a chance to either make things cheaper for us or help our country make more money internationally – that deserves to have more money flowing to it. Perhaps not just as reduced taxes but also in the form of additional funds – that could be paid for by taxing companies or people that aren’t doing stuff that’s as useful.

And yes, some companies may be able to afford fewer workers or expand less if they have less money. But in the long run, if the economy tanks because we couldn’t stay ahead of the curve, it won’t matter if we saved a couple of jobs in the middle of nowhere today because there will be fewer jobs everywhere tomorrow. The solution for jobs isn’t to try to save every small business today by reducing taxes, the solution there is to create systems to help support moving people to other more valuable jobs more easily and keeping them okay on the way to getting there. Change is uncomfortable but change is necessary and what we have to focus on is making positive change easier.