by G. Stolyarov II

Created on: December 23, 2006   Last Updated: April 19, 2007

Recently, several frequently articulated objections to tax cuts for upper-income individuals have been brought to my attention. The scenario feared by the objectors and used as grounds for denying tax cuts to the wealthy is the investment of the money gained by the recipients. I shall address three of these objections using the principles of economics and rational self-interest to display the virtues of such an outcome. Indeed, no damage will result from investment of such money; quite the contrary, this practice will fuel economic growth in the United States and rising standards of living for Americans.

Objection 1: What if the wealthy invest the money gained from their tax cuts in foreign nations? Especially if faith in the U.S. economy is weak, they will tend to invest elsewhere. Thus, the government will lose out on that money. The wealthy will essentially take U.S. dollars and give them to China, thus not helping our economy.

Refutation: No harm can be done to the U.S. economy from Americans' capital investment abroad. If wealthy American investors (or any other investors) decide that some overseas company or industry will yield a more profitable return than a domestic U.S. company or industry, the successful investors will get a higher return in interest and thus more money flowing back into the U.S.while the failed investors, caring about their financial well-being, will quickly curtail unwise choices. Eventually, the investors will wish to consume some of the fruits of their investment.

It is important to remember that U.S. investors do not give money to foreign institutions; they loan it to them on the condition of receiving regular returns above the principal. If the investors are rationally self-interested, they will either keep their money at least long enough for the accumulated interest to exceed the amount invested, or they will withdraw the amount invested beforehandhaving in the meantime accumulated interest on it. In either case, theyif successfulwill take back more money than they invested originally. If they fail, they will likely correct their course of action to prevent future losses to themselves.

Objection 2: The more times a dollar is traded, the better. When the wealthy invest their money derived from tax cuts, this reduces the overall velocity of circulation of money.

Refutation: And good riddance! The quantity theory of moneydeveloped by John Locke and known sincestates that MV=PQ, where M is the amount of money in a society, V is the

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