Federal tax cuts will affect the long term; it's not fast relief

By DAVID MOON, Moon Capital Management
April 1, 2001

On the day before the NCAA tournament championship game, imagine Duke coach , Mike Krzyzewski, ordering his players to begin a weight lifting and conditioning program. He tells his players that the long regular season and two tournaments have taken their physical toll, some conditioning is needed to get through the final game of the season.

Unrealistic, shortsighted and na've, don't you think?

Arguing for a cut in federal income taxes as a cure for the nation's current economic ills is just as silly. Like conditioning for an athlete, a properly constructed tax code is critical to the success of an economy. But like a conditioning program, the effects of changes in a tax code require discipline, diligence and time before they are realized.

As the economy slows and more companies announce workforce reductions, members of both political parties in Washington argue for their brand of immediate tax relief as the cure for what ails us. President Bush is in full campaign mode, arguing that his broad, across the board tax cuts are necessary to support a "winded economy." Democrats have their own proposal to send every American a check for $300, regardless of whether or not they pay income taxes or at what level.

The republican plan is akin to lifting weights at halftime of a football game, hoping it helps in the third quarter. Lifting weights is a critical component of any athlete's long-term conditioning program. But the effects often take years to fully realize - not weeks. A tax code has impact over a number of years, not weeks or months. The decisions we make today about tax policy, if we maintain some consistency in our national philosophical commitment to these changes, will impact the strength and vibrancy of our economy ten and fifteen years from now.

Of course, the long-term nature of a change in our federal tax income system is unrelated to the party presenting the tax plan. The democrat plan to send everyone $300 is like giving all of the fans in a stadium a caffeine jolt before a game, hoping it makes the players more effective. Despite the presence of 107,000 people in Neyland Stadium, there are only a few people who actually affect the outcome of a football game on Saturday. (I know this disappoints those who think they impact the game by wearing lucky underwear, holding a shaker in a particular hand, or sneaking a preferred brand of bourbon into the stands.) Sending everyone a few hundred dollars may give a lot of people a very, very short-term artificial boost (like that contraband whiskey at the ball game), but has no impact on who wins the game. The tax system is like a football game; there are a lot more spectators than players.

If you want to spur the economy with the use of the tax code, several conditions must be met:

1) The changes must be directed at the nation's economic engine - the areas that create jobs and real wealth.

2) The changes must be long-lasting to have any effect.

3) The changes must be long-lasting to allow market participants to make long-term plans about resource allocation. A vacillating tax system creates uncertainty and encourages people to find ways to 'avoid' the tax system.

4) We must differentiate between tax code changes to create an environment conducive for economic growth and those aimed at shifting wealth from one segment of the population to another. Transfer payments from a producer to a consumer may serve a societal purpose, but those create no wealth.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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