Tags: U.S. | economy | velocity | money

‘Velocity of Money’ Is Rx for Economy

Friday, 02 Mar 2012 12:54 PM

By Bradley A. Blakeman

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It doesn’t take a rocket scientist or even a Georgetown 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 once, we are in a depression, however, if that same dollar changes hands 10 times in the same amount of time we are in boom times.

velocityofmoney.jpg
The velocity of money refers to the speed at which a dollar changes hands.
(Getty Images)
How do we then increase the velocity of money?

Do that which has been done before and is proven. Unleash the power of the individual. Get rid of the restrictions to velocity imposed by the government on the taxpayer and small business owner.

It is not the government collecting and spending money on its own maintenance that increases velocity, it is the private sector exchanging money that creates a velocity of money that will rally and rebound our weakened economy.

The problem today dates back to age-old, fundamental differences in philosophy between Democrats and Republicans regarding the economy.

Republicans believe in smaller government, lower taxes, less regulation and people. Democrats believe in large government, high taxes, more regulation, and more government.

Here are a three things we could do now that would have an immediate positive affect on the economy and get money moving:

1. Eliminate the capital gains tax: Today, individuals are penalized for selling their property out of fear that they will have to pay 20 percent on the gain on 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 via sale, exchange, etc. unencumbered. 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 upon the death of a loved one. The same assets that were taxed on the purchase of an asset during one’s lifetime are taxed again upon their death.

This amounts to double taxation. The current death tax rate is 46 percent with an exemption on the first $2 million. This burden hits small business owners the hardest. If for example a gross estate comprised a small business with assets of $3 Million, the estate would have to come up with $460,000 in taxes.

In most instances this burden would mean the end of the family business. The heirs would be forced to liquidate or sell the business just to pay the tax.

Many economists believe that the elimination of the death tax would favorably increase the velocity of money because businesses would continue in operation and would be more successful without the the fear of a looming tax that would in effect put them out of business.

3. Do not let the Bush tax cuts expire. The marketplace needs surety and confidence. We need to keep tax cuts in place while severely reducing government spending. Then in 2012 with a new president, work to scrap the tax code for a simplified national tax structure.

By eliminating the restrictions to velocity, and encouraging the American people to be successful, more money will flow into our treasury by way of income taxes.

The sheer velocity of money at the hands of the individual will create and preserve jobs and encourage and foster the great entrepreneurial spirit that is America.

Bradley A. Blakeman is a professor of public policy, politics and international affairs at Georgetown University and he appears regularly on FOX News. He served on President George W. Bush’s senior staff from 2001-2004. Read more reports from Bradley Blakeman — Click Here Now.

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