Tax smarts

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(Host) “To tax or not to tax?” Commentator Tim McQuiston says that “WHEN to tax” is the real question.

(McQuiston) Government is not a business, nor should it be run like one. The function of a business is to maximize profits for its shareholders. In the case of government, there are no shareholders, or if there are, they are the citizens whom it serves.

In fact, government should act in a counter-cyclical fashion. When the economy is down, people need government the most. Unlike a business that’s losing money and must downsize to save on expenses, government must respond by increasing the expense-side.

Also, government can be an even more vital economic stimulator than it already is. For instance, when the economy is in recession, there will be more people unemployed who will need services. But government can go further by making a concerted effort to spend more on things like construction projects and computer networks. This is not to be seen as “Make Work,” but projects that need to be done or are value-added. Look around Vermont and you’ll see plenty of roads, bridges and schools that need work.

Government not only can be a buyer, it can also be an economic stimulator, by cutting taxes during those same bad times. Yes, cut taxes during a recession. This will put more money into the economy.

Having said that, the recent federal tax cuts were a bad idea because it generated the worst thing for government and the economy: Unrecoverable debt. But more on that in a minute.

So, where does all the cash for this governmental spending spree come from? It doesn’t come from debt. It comes from surpluses, profits if you will, built up during good times.

Here’s what we should do. Raise taxes in good times to pay for the goods, services and lower taxes needed in bad times. There’s a natural tendency to do the exact opposite.

Here’s the ideal scenario: During a boom, pay off debt first, then raise taxes to enrich a Rainy Day Fund. Once the recession hits, government can pay for its necessary goods and services out of those previous services. If it’s been smart enough during good times, it can also spend more on needed projects and even cut taxes to stimulate the economy.

The greatest threat to the economy is debt. Getting rid of the debt should be job one. Taxes are just a tool, like anything else, to be used wisely.

The recent federal tax cuts are being paid for with borrowed money. We probably should have hung tough and waited for the economic rebound that seems to have started already anyway.

Of course, all this requires that our elected officials act responsibly with all this money. Now, that’s not asking too much, is it?

This is Timothy McQuiston.

(Host) Timothy McQuiston is editor of Vermont Business Magazine.

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