It doesn’t take a rocket scientist or even a Harvard MBA to understand that it is the velocity of money that is the prescription for a healthier economy.
It is common sense that every time a dollar changes hands it gins up the marketplace, whether it is exchanged at the deli on Main Street or the brokerage house on Wall Street. If a dollar changes hands only once in a day we are in a Depression. But if that same dollar changes hands ten times in one day we are in boom times.
So how do we increase the "velocity" of money? We return to that which has been done before and proven effective. We need to unleash the power of the individual. Get rid of the restrictions to velocity imposed by the government on taxpayers and small business owners.
The problem today is that the age old fundamental differences in philosophy between Democrats and Republicans still exist when it comes to the economy. Add to that the fact that the Democrats are in control of government by a big majority and it's even tougher to advance policies that benefit the individual over government.
Democrats believe it is the velocity of government spending that will improve the economy while Republicans believe that smaller government and the power of an individual's money moving around will be the cure for our weakened economy.
Here are a couple of things the government could do right now that would have an immediate and positive effect on the economy and get money moving around:
1. Eliminate the Capital Gains Tax: Today, individuals are penalized for selling their property out of fear that they will have to pay 20% on the gain of the sale of assets like stocks, bonds, precious metals and real property. If this tax were eliminated, people would be free to move their property through a sale, exchange or some other means without being encumbered by a tax burden. The sheer velocity of the money moving throughout the country generated by these transfers would be immediate and real.
2. Eliminate the Death Tax: American families are faced with a huge tax liability when a loved one dies. The same assets that were taxed on the purchase of an asset during one’s lifetime are taxed again after a death. This amounts to double taxation. The current death tax rate is 46% with a exemption on the first $2 million of assets. This burden hits small business owners the hardest. If, for example, a gross estate is comprised of a small business with assets of $3 million dollars the estate would have to come up with $460,000 in taxes. In most instances this burden would spell the end of the family business. The heirs would be forced to liquidate or sell the business just to pay the death tax! Many economists believe that the elimination of the death tax would favorably increase the velocity of money because businesses would continue to operate and would be more successful without the fear of a looming tax that would in affect put them out of business.
By eliminating the restrictions on the velocity of money and by encouraging the American people to be successful, more money will flow into our Treasury through our income taxes. The sheer velocity of money at the hands of the individual will create and preserve jobs. And, what's more, it will encourage and foster the great entrepreneurial spirit that is America.
Bradley A. Blakeman, is a professor of Public Policy and Politics Georgetown University. He served as deputy assistant to President George W. Bush from 2001-04.