By Aaron M. Rodriguez
Most economists agree that when used properly, tax cuts will stimulate a struggling economy. The logic is sound and the notion is simple: reducing tax rates encourages consumer spending and business investments. Oftentimes, we see the same principle applied in the marketplace when businesses lower their prices in order to allure more customers. Will they make less profit on each item sold? Absolutely, but they widen their consumer base and create a greater return in the process. Similarly, cutting taxes will stimulate greater consumer involvement in the market meanwhile widening the tax base and creating increased government revenue.
Interestingly, the British government is expected to cut their national sales tax 2.5% in an attempt to bolster business sales. The idea is that tax cuts will stimulate consumer spending; and history demonstrates this fact. In 1997, New York Governor George Pataki took a similar approach. He authorized a one week suspension of the sales tax for purchases under $500. According to the New York Department of Taxation and Finance, the result was a 73.1% increase in sales for that period.
To be fair, however, there is always the possibility that a sales tax cut might incite retailers to adjust their pricing in order to neutralize the benefit of a tax cut for consumers. From an economic standpoint, price adjustment would be beneficial to retailers, may preserve more jobs, and would certainly stimulate more investment; but it would be at the expense of the consumer – literally speaking. If Walker’s proposal is considered, then perhaps more oversight is necessary by either public or private sources in order to safeguard against adjusted pricing by retailers.