Will higher tax penalties on investment really spur jobs and faster economic growth? Most commentators would say no. It’s really a matter of economic common sense. But Tim Geithner says, Yes!

Speaking to a group in Washington this week, the Treasury secretary said that extending tax cuts for the wealthiest Americans would imperil the fragile economic recovery. He argued that government needs the revenues from those top-end tax hikes. So failure to raise taxes would harm growth. And then he went on to say that the trouble with the wealthy is that they save more of their tax breaks than do other groups.

OK. Are you confused now? Most people would be.

Let’s start at the top. The coming tax bomb would raise the top marginal tax rate on capital gains from 15 to 20 percent, on dividends from 15 to 20 percent (or perhaps all the way to 39.6 percent) and on top incomes from 35 to 40 percent. Meanwhile, the estate tax could go as high as 55 percent.

Now, it is indisputable that capital gains, dividends and estates are essentially investment. What’s more, most successful earners who pay top personal tax rates are, by nearly all accounts, the folks who are likeliest to save and invest.

But Geithner is suggesting the economy doesn’t need more saving. This thought was echoed by Jared Bernstein, a top White House economist, who told me in an interview that the saving and investment multipliers for economic growth are way below the stimulative effects of government transfer payments, such as more aid to state and local governments and further extensions of unemployment benefits.

Echoing that thought, the Senate this week voted to approve $26 billion in aid for state and local governments – partly funded, by the way, by an $11 billion yearly tax increase on the foreign earnings of U.S. multinational corporations. Here, too, a tax on profits is a tax on investment. The Senate also rejected an amendment by South Carolina Republican Jim DeMint that would extend all the Bush tax cuts.

In effect, pulling all this together, the position of the Democratic Party in power in Washington is that transfer payments (taxing and borrowing from Peter to pay Paul) are good for growth and that investment is bad.

Go figure. I guess it’s a battle between the demand side and the investment, or supply, side.

The great flaw in the thinking of the Democrats is that they are ignorant of the economic power of saving and investment. Saving is a good thing. Stocks, bonds, bank deposits, money market funds, commercial paper, venture capital, private equity, real estate partnerships – all that saving is channeled into business investment. And whether that capital goes into new startups or small businesses or large firms, it finances the kind of new investment in plants and equipment and software and buildings that ultimately creates jobs and family incomes. And that, in turn, spurs consumption.

But pulling out just one dollar from the private sector and rechanneling it through the government as a transfer to someone else creates nothing. At best, it’s a safety net. At worst, it may damage private-business activity and actually reduce employment.

Without saving, there can be no investment. And without investment, there can be no enhanced productivity, which is the ultimate source of long-term prosperity and wealth.

Now, there are some Democrats who understand this. Sens. Evan Bayh and Kent Conrad, among others, support an extension of the upper-end tax cuts precisely to increase investment incentives that will create jobs. Bayh and Conrad often refer to the John Kennedy tax cuts that lowered marginal rates across the board for successful earners and businesses. They correctly worry about small-business job creation in this process. And they have moved from the demand side of today’s Democratic Party to the supply side of the John Kennedy era.

Bayh and Conrad have the story exactly right. And Treasury man Geithner has it fundamentally wrong.

Geithner tries to make a deficit-reduction argument, saying that extending tax cuts for the wealthy would cost $700 billion over the next 10 years. But the real debate in advance of the Erskine Bowles deficit commission, which will restructure budget and tax reform, is about a one-year extension of the Bush tax cuts. That’s priced at $30 billion by the White House, about the same as the new bill to aid state and local governments. Which policy would help growth more?

My answer is to keep the incentives for investment. Or find spending cuts immediately to cover both options. That would restore even more confidence.

We might also be surprised when the growth- and revenue-increasing benefits of lower investment tax rates pay for those tax cuts in the future – just as they have in the past.

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