Some Tax Cuts are Better Than Others

The key thing to understand is that not all tax cuts are created equal. If policy makers want to boost growth, they need to reduce marginal tax rates on productive behavior such as work, saving, and investment. This "supply-side" insight is why the Kennedy and Reagan tax rate reductions were successful. It also is why flat tax jurisdictions such as Hong Kong and Slovakia enjoy such strong growth. And it is why zero tax regimes such as the Cayman Islands are beacons of prosperity.

Unfortunately, all reports indicate that the Obama plan will revolve around a gimmicky idea to give $500-$1,000 of tax relief to every household. Households certainly will be happy to receive this money, and I surely will cash any check that President Obama sends in my direction, but simply giving people money does not give them any reason to engage in additional productive behavior. And without more work, saving, investment, or production, there is no increase in national income.