Tax cuts vs. tax rebates

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With slower economic growth raising fears of a recession, Washington is abuzz with talk of economic stimulus plans.

President Bush may offer a stimulus package; congressional leaders are discussing a proposal centered on tax rebates. Tax rebates don't stimulate the economy. Cutting tax rates does.

To explain, let's take a step back. By definition, an economy grows when it produces more goods and services than it did the year before. In 2007, Americans produced $13 trillion worth of goods and services, up 3 percent over 2006.

Economic growth requires four main factors:

(1) A motivated, educated and trained work force.

(2) Enough capital equipment and technology.

(3) A solid infrastructure.

(4) And a legal system and rule of law sufficient to enforce contracts.

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 that results in fewer goods and services. Reducing marginal income tax rates has been shown to motivate workers to work more. Lower corporate and investment taxes encourage the savings and investment vital to producing more plants and equipment, as well as better technology.

By contrast, tax rebates fail because they don't encourage productivity or wealth creation. No one has to work, save, invest or create any new wealth to receive a rebate.