Need Present Value Cuts And Not Accounting Cuts Of Government Expenses To Induce Private Sector Employment And Economic Growth

Major businesses use present value, aka discounted cash flow, analysis to determine the benefits of an investment, expansion, new hire, etc. Present value converts future costs and future revenue benefits into today's dollars.

Unlike a Congressional Budget Office legislative analysis, which treats a dollar spent today as equal to a dollar in expense reduction 10 years out, discounted cashflow adjusts for the differences in the timing of expenses and revenue. For example, at a seven percent discount interest rate, a dollar benefit 10 years out is worth about 50 cents in today's value. Spending a dollar today and receiving a dollar benefit in expense reduction in 10 years is not a wash and revenue neutral. In present value amounts, it costs 50 cents. CBO analyses are accounting based and do not adjust for the time value of money.

Many unsophisticated small businesses intuitively think in present value terms. They are aware of future expense increases, such as a lease renewal with a rent increase, and start planning on how they will be able to cover that additional expense, as the increase gets closer to the current date. They make a determination if they can pass the increase along via a future price increase or if they must cut other future expenses to pay for the increase costs.

Congressional actions that look beneficial on an accounting basis, or a CBO analysis, are not necessarily beneficial on a present value basis. Reducing payroll taxes, or deferring debt payments, both of which must eventually be paid back, do not produce any positive economic benefits or investment inducements to the private sector on present value analyses. These are examples of accounting manipulations that do not produce any long lasting economic value.

Businesses understand that on a going concern basis expenses and debts must be paid, if not today, then in the future with interest.

In a non-inflationary economic environment, US debt does not devalue over time because the US must pay interest on the debt. Reducing taxes, payroll or otherwise, without decreasing US governmental expenses, increases the amount of US debt. Tax reduction does not provide an economic value benefit to the private sector because the expenses and the debt associated with it remain valued in current dollars and must be paid back with tax increases. The present value benefit of the tax reduction to businesses and individuals is zero.

If Congress wants to induce private sector investment, Congress has to increase the value of investments. Reducing taxes today without reducing government expenses pushes the private sector tax increase to payback the current expense to some future date in future dollar equivalents. On a present value basis, there is no economic value increase to the private sector investment from the current tax reduction.

Congress needs to think in present value terms and set up economic programs that will reduce future government expenses on a present value basis. A present value reduction in government expenses is equivalent to a present value reduction in taxes. A present value reduction in taxes, a true reduction that does not just delay repayment and a tax increase, will increase the economic value of private sector investment and hiring.

A present value analysis of economic proposals to increase private sector employment and investment will more clearly delineate which proposals are likely to improve the US economy, increase private sector economic growth and lower the unemployment rate.