Thursday, March 22 , 2018, 6:19 pm | Overcast 57º


Harris Sherline: Around and Around the Money Goes

Whether an individual or corporation, Democrat or Republican, all tax cuts follow the same path, at least initially

Listening to pundits argue endlessly about taxes is enough to make your head spin — taxes are too high, they are too low, the “rich” are not paying their fair share, whatever that is, on and on. For whatever it’s worth, here’s my take.

Money is fungible, meaning that all dollars are indistinguishable from one another. Since there is no way of telling them apart and they all have the same value, when taxes are cut and “spendable” income increases as a result, do we really understand where the money actually goes?

Liberals, who oppose tax cuts in general, argue that reducing everyone’s taxes simply makes “the rich” and big corporations richer. The implication is that affluent taxpayers do not spend tax savings but hoard it or that the money disappears into corporate coffers, as if never to be used again. They also claim that tax cuts for the middle class and low-income taxpayers boost the economy because the money is spent immediately and that each dollar spent has a “multiplier effect” of two to 2½ times — that is, has an impact of $2.50 on the economy.

On the other side, conservatives believe that reducing marginal tax rates and implementing across-the-board tax cuts increases incentives to earn and invest, thereby stimulating the economy and creating jobs.

Where does a tax cut — any tax cut — go, since on the surface the money all appears to follow the same path, at least initially?

The impact of tax cuts for low-income taxpayers is obvious. The savings are normally spent on day-to-day needs, to help pay for rent, food or various goods and services, which immediately stimulate the economy. President Barack Obama’s “stimulus” distributions were intended to have this effect, but it didn’t work.

For one thing, most low-income taxpayers don’t pay any income tax at all. As a matter of fact, about 21 million wage earners are classified as “low and moderate income,” and since almost 50 percent of all American wage earners don’t pay any income tax at all, a “tax cut” has no direct effect on them.

On the other hand, tax savings that businesses receive are subsequently passed on to vendors, suppliers, employees and owners (stockholders, partners, etc.), and then make the same journey through the economy that low-wage earners’ money does.

Contrary to popular hype, the rich don’t just sit on tax cuts. They either spend it or invest it. If it is spent, the money goes to vendors, suppliers and employees, or to repay debt and, in turn, follows the same route that low-income taxpayers’ tax cuts do — it is either spent or saved. If it is saved, it isn’t hidden under the mattress but is deposited in banks or savings accounts or perhaps is used to buy securities, or it may be invested in real estate, to start new ventures or expand existing businesses — all of which stimulate growth.

The tax savings of the “rich” that are deposited with institutions are generally loaned out and repeat the same journey through the economy that any other dollars do, while stock purchases send it to other individuals or to corporations, to be spent for equipment, services, goods and payrolls, to expand or to pay dividends to their shareholders, thus repeating the cycle again, including turning over in the economy the same 2½ times as the money that is spent by low-wage-earners.

Tax savings of corporations also make the same circuit as the money from individual taxpayers — that is, to vendors, payrolls and profits, which are invested or distributed to shareholders. If they are distributed to shareholders, the payments are taxed as dividends, with the balance either being spent or saved, and going around again.

Around and around the money goes, but no matter what your political persuasion may be, perhaps the question that should be asked is: How does government create jobs without producing anything?

They don’t. Government can only spend or distribute money it takes from its citizens, unless it owns the means of production, and that’s socialism.

In 55 B.C., Cicero said: “The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.”

If America does not return to the principles espoused by Cicero, we are doomed to go the way of the Roman Empire.

— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who as lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his blog,

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