“Since most people who collect UI immediately spend it on essentials such as food, rent and gas, the money they receive is pumped through the economy.”

This is the crux of my disagreement: UI is only temporary, and it doesn’t help them in the long term (or even after their unemployment runs out).

“However, you ignored the fact that fiscal stimulus to the poor is often more effective at stimulating the economy because they have higher marginal propensities to consume, i.e. they save less.”

I absolutely agree with that point. However, extending UI continues that cycle and, in a sense, locks them in poverty. However, if they had access to microloans, they could help themselves, save money, and be self-employed (and therefore contribute to, and not be a drain on, the rest of the economy).

“…the majority of money subject to capital gains is eventually re-invested into the economy…”

I actually have a hard time defending the capital gains tax with anything but a moral argument, and this point makes sense. However, you ignored the fact that fiscal stimulus to the poor is often more effective at stimulating the economy because they have higher marginal propensities to consume, i.e. they save less. Since most people who collect UI immediately spend it on essentials such as food, rent and gas, the money they receive is pumped through the economy. Since the capital gains tax is normally applied to richer Americans, a tax break is more likely saved.

Also, it’s important to note that high taxes aren’t the big thing keeping people from starting businesses. Instead, it is the credit crunch. Because banks are still worried about giving out a loan for a risky venture. However, there’s no real solution for this problem, besides waiting for the economy to turn around, and injecting stimulus in other places, hopefully through government spending and tax breaks to people that will spend, not save.

Thank you for your comments on my article. Your in-depth critique is highly appreciated. Because of the unpredictable nature of economics, it is important to have discussions on the different approaches to solving economic problems and makes the science a bit less dismal, if you will.

I would, however, like to clarify a few points you brought up.

First: “To suggest that this is regressive, and benefits the “rich” disproportionally is most likely, therefore, not correct… And, so, to suggest that capital gains are the rich man’s only “profit” from investment is false (because dividends are income) and to suggest that he gains more than those who formerly did not have a job but for his investment is dishonest, as this is not something that is necessarily true (and my intuition suggests that it is actually false).”

I understand your frustration to those who say that cutting capital gains only helps the rich. I intended to make the argument that while on the surface it is the rich who are mostly subject to the capital gains tax, they often re-invest it in the economy. I quote myself, “it is therefore in the best interest of the entire economy,” by which I meant the poor as well as the rich. I could have made this point much more clearly and I do apologize for the confusion. And to clarify: never, ever, did I say, imply, or mean to imply that it is dishonest for the rich to benefit from their investments. I believe in that excerpt I have quoted after the ellipses you are more standing on your own soap-box and not specifically responding to the content of my article. Investment helps the entire economy, most certainly including the out of work and the disadvantaged.

Second: With regards to your speculation about my macro ideology, I do not subscribe to Keynesian nor Monetarist theories; I am more in the Edward Prescott/RBC line of thought. You will notice in the article that I said nothing regarding cutting income taxes and once again I believe you have left the argument at hand for your apparently rather tempting soap box.

Third: “Cutting taxes will also raise deficits, and the current existence of severely underfunded entitlement programs makes this irresponsible at the very least without massive reform of said programs.” You will notice in the first line of my article I explain that I am writing a rebuttal to a piece written by another author on the Politicizer in which he argued in favor of expanding entitlement programs. To double unemployment benefits, as he suggested, would also certainly raise the deficit; in this case, however, I am firm in my belief that cutting taxes and encouraging investment would be the much better option in a situation in which we are left with two deficit-causing evils. Given the choice between expanding entitlement programs that discourage economic growth and pro-growth policies, my optimal “policy” bundle (if you will) would certainly include the latter. And with regards to your last rather snippy comment: I prefer to emphasize the practical consequences of policy.

We current have a HUGE problem where income taxes cause serious amounts of tax evasion, especially with around US$2 trillion involved in the nearly untraceable “underground economy” based on cash and the legal funneling of American-owned liquid assets through tax loopholes to “offshore financial centers” estimated somewhere between US$12 and US$17 TRILLION (not a misprint!) just to avoid income taxes on these assets. It’s also why corporate headquarter and manufacturing operations are leaving the USA at a record pace.

Maybe it’s time that the FairTax consumption tax system replaces our current income system. FairTax effectively ends all taxes on -earning- money, and that could result in a land rush of liquidity into the USA from all that repatriated liquidity and new investments for foreigners discovering the USA has become the world’s largest legal tax haven. The prospect of injecting as much as US$20 TRILLION in liquidity in the the US financial system would immediately turn our economy around for strong, solid economic growth.

This is at best partially true, and probably completely false.

The last time we slashed the “Capital Gains Tax,” (which, in reality, should be referred to as the “Long Term Capital Gains Tax,” because short term capital gains are taxed as income), we had a drastic increase in revenue. This would seem to indicate that slashing the capital gains tax results in higher capital investment (as you suggest) which means higher employment. Formerly unemployed people, rich or poor, gain from this, in addition to the person who has made a 2+ year investment in a firm. To suggest that this is regressive, and benefits the “rich” disproportionally is most likely, therefore, not correct. A rich person invests, which employs many more “poorer” people. Two years (or more) later, if/when he/she chooses to sell his/her ownership stake in the firm, and profits as a result, he/she is responsible for a capital gains tax. Dividends earned while the person is an “owner” of the firm (by owning stock) are taxed as “income.” It is only by his/her choice to divest–to sell–shares of his/her ownership stake and move from one business to, presumably, another business (or cash) that subjects him/her to the “Capital Gains Tax” to which you refer. And, so, to suggest that capital gains are the rich man’s only “profit” from investment is false (because dividends are income) and to suggest that he gains more than those who formerly did not have a job but for his investment is dishonest, as this is not something that is necessarily true (and my intuition suggests that it is actually false).

If the real goal was to help the poor and stimulate the economy, cutting other taxes might also have a greater effect. Corporate taxes in this country, which cripple our firm’s ability to compete worldwide, are something that should definitely be in the public eye right now. It can actually be measured as to what proportion of these taxes are paid by consumers and what portion comes from the owners’ equity. Consumers often lose more than the owners.

But, to suggest that cutting income taxes to stimulate the economy will do a better job than government spending is ambiguous at the very least, to those who believe in Keynesian theory. I am not a Keynesian (in fact, as a monetarist, I tend to question fiscal stimulus in general), but I recognize that IF they are right, and IF the “multiplier” is greater than one (at least on economist has published that he believes it to be less than one), then cutting taxes will have less of a stimulative effect than simply spending more. Although I do not agree with this (because its historical effectiveness has been very low compared to monetary effects), it is unquestionable that it is a legitimate macroeconomic theory that has widespread acceptance.

Cutting taxes will also raise deficits, and the current existence of severely underfunded entitlement programs makes this irresponsible at the very least without massive reform of said programs.

The policies you are proscribing are idealistic and quite obviously based on ideology, rather than the perceived theoretical consequences of such policies. This is not analysis–it is simply fundamentalism.