by Archie M. Richards, Jr., CFP^®
January 8, 2001

The Fed finally came through. And it should lower the fed funds rate by considerably more than the half-point recently announced. This would furnish the economy with additional, much needed dollars. The sooner the better.

It's time, also, for income tax rates to be cut. Rank and file Congressional Democrats having become more conservative, the prospect is realistic.

The press likes to think of George W. as stupid. His being so wouldn't be all that bad. Big government does more harm than good. If the President is incompetent, it would do harm more slowly and less effectively. This would be a net gain.

California regulators have required utilities to buy high and sell low, threatening electricity suppliers with bankruptcy and causing serious ripple effects among California banks. If the regulators were stupider, they'd be more likely to do nothing rather than doing harm. If the citizens of California were wiser, they'd repeal all government regulation of utilities.

W is far from incompetent. Having chosen a fine cabinet, he may emulate Eisenhower's model of leadership, namely, that when things go well, give subordinates the credit. When things go badly, take the blame yourself.

The press has been referring to W's tax cut plans as a $1.6 trillion reduction in tax revenues over ten years. It will be no such thing. The government, you see, does not control its tax revenues; it controls only its tax rates. When U.S. rates go down from their current high levels, the revenues will go up, not down.

After President Reagan cut tax rates, federal revenues rose. (Yes, I know, the deficit went up, but only because the Democratic Congress increased expenditures even faster.) A rise in revenues also occurred after President Kennedy cut tax rates. The reaction stands to reason. With citizens forking over a smaller portion of their income, they work harder, put less money into tax shelters, and declare income to the IRS they would otherwise have hidden. The effects of government policies are topsy-turvy; the actual results are usually opposite to the expected results.

Personal incentives matter. Let's say you buy a radio station that fills 40 percent of its airtime with advertisements. Hardly anyone listens, because people are sick of all the ads. Brilliant executive that you are, you reduce the ads from 40 percent to only 20 percent of the airtime. Lo and behold, your income goes up. The percentage of airtime for ads falls by half, sure, but your revenues nevertheless increase because the number of listeners rise by more than a double.

When tax rates are cut from today's high levels, government revenues will go up. If Congress places some kind of collar on expenditures, the deficit will also fall. Not that deficit reduction matters much. As long as the economy grows faster than the deficit, the deficit becomes less and less significant. Economic growth is the key. Increasing the money supply and reducing tax rates are the ways to achieve it.

Let's you and me now step out ahead of George W. and most other people. The most damaging form of taxation is progressive tax rates with withholding at the source, gosh, the very system we have now. The higher a person's income, the greater the percentage of tax. And the withholding - yuck! Many people think their tax is the amount they pay on April 15. They have no idea of the egregious total.

A flat tax is preferable, with no withholding. Even better, repeal all income taxes and impose the least damaging form of taxation: a sales tax on everything. Each quarter, the government would pay everyone a modest amount. To citizens with low income, the payments would refund all of the sales taxes paid.

Better still would be no taxation whatever. The government would depend for revenues on voluntary gifts. It could advertise about what a great job it's doing, but no coercion would be permitted. Government would shrink significantly, from which everyone would benefit, especially the poor.

Enough pie-in-the-sky. Here's what's likely to happen: The Fed will provide more new money, and Congress will cut tax rates. There are lags, of course, but eventually we're talking a bull market, friend; we're talking a big time bull market.