Not all tax cuts good for economy

How will the economy respond to the elections?

Of course, this may be a question to ask a political science professor. As an economist, my answer will probably differ. In addition, I do not have much interest in politics.

Does that mean my answer is unbiased? Probably not. But here is my answer for the record.

The presidency may have a lot of power and prestige, but there are checks and balances in place. This is the main reason that it bothers me when people want to place blame on the president for the current woes of the economy.

Where might the newly elected president have opportunities to change the economy -- through fiscal policy and by changing taxes or government spending.

Here is a brief breakdown of the known plans of the two candidates:

Mr. McCain is for cutting corporate taxes (to 25 percent) and Mr. Obama is for cutting income taxes for the working class.

Just a quick side note: Will someone define working class or middle class? For that matter, can you define the poor? This is where policy, in my opinion, becomes problematic. Once you start delineating these classes, then you alter the incentive mechanism for the poor, working class, or middle class.

Back to the different tax policies. Interestingly, cutting the corporate tax would lead to higher after-tax profits for companies. As such, higher profits for companies would increase their stock price, allowing for more capital investment. Higher capital investment can lead to higher levels of productivity and, when workers are more productive, they demand higher wages. Sounds good, sign me up.

Yes, I said higher after-tax profits for companies is a good idea. If this is applied across the board, then companies will still need to compete with one another. This will force companies to continue to innovate or they will no longer be in business. Companies will reinvest those profits into new technologies, new research, and new developments. In the end, our standard of living will increase.

Now, what effect does lowering income taxes for the working class have? I see, besides the incentive mechanism being skewed, that the working class will have more to spend. The additional spending would also provide a boost to the consumer market. However, there are no long-term benefits. Think about the recent economic stimulus plan. Short-term boost.

So what is different about these two options? First, corporate tax cuts do not have voter appeal., and corporations do not vote. The income tax cut has voter appeal and especially for the of the working class.

However, these two tax cuts are not equal in their impact on the economy. First, we must pay for these tax cuts if we want to continue our current level of spending. Let me add another point here. I am not advocating that we continue our current level of spending. I am just keeping the example simple.

The corporate tax cut will increase economic growth. This increase will indirectly increase tax revenues from other sources. Now, I am not sure that it will completely pay for itself, but the income tax cut will not come close. So, the government will need to raise taxes elsewhere or lower spending further.

While the president and his office have little direct impact on the economy, policies can influence the economy in the long run. We need to look at them from a long-run perspective and consider all the costs associated with them. Often, policies take time to work through the economy with indirect effects.

Hopefully, my own biases are left out, but you decide.

A final thought: Think of an example where government intervention benefited one group without hurting another group. Is there one?

MARK A. THOMPSON IS THE CREE-WALKER PROFESSOR OF BUSINESS ADMINISTRATION AT AUGUSTA STATE UNIVERSITY. HE CAN BE REACHED AT MTHOMPSON@AUG.EDU.