Commentary - Brian M. Riedl: Reduce taxes, don’t rebate

High tax rates reduce economic growth, because they make it less profitable to work, save and invest. This translates into less work, saving, investment and capital — and ultimately fewer goods and services. Reducing marginal income tax rates has been shown to motivate people to work more. Lower corporate and investment taxes encourage the savings and investment vital to producing more and better plants, equipment and technology.

By contrast, tax rebates fail, because they do not encourage productivity or wealth creation. To receive a rebate, nobody has to work, save, invest or create any new wealth.

Supporters of rebates argue that they “inject” new money into the economy, increasing demand and therefore production. But every dollar that government rebates “inject” into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another. (Even money borrowed from foreigners brings a reduction in net exports.)

Supporters of rebates respond that redistributing money from “savers” to “spenders” will lead to additional spending. That assumes that savers store their savings in mattresses, thereby removing it from the economy. In reality, nearly all Americans either invest their savings (which finances business investment) or deposit it in banks (which quickly lend it to others to spend). Therefore, the money is spent whether it is initially consumed or saved. Given that reality, it is more responsible to let the savers keep that money for a new home or their children’s education, rather than to have Washington redistribute it to someone else to spend at Best Buy. ...

Read more at heritage.org.