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November 21, 2007

Do Tax Cuts Really Help The Economy?

-- by Dave Johnson

At the weblog Angry Bear last week, they presented some graphs in a post titled, Tax Rates and Growth Rates, Some Graphs. Go take a look.

The first graphs shows marginal income tax rates over time, and the third shows real GDP per capita, both starting in the 1950s.

As you look at these graphs, it seems that the periods of higher real per-capita growth coincide with the higher tax rates. Both graphs appear to have higher numbers on the left side, and the numbers drop as you move over to the right side. In other words, as the tax rates dropped since the 50's, so did economic growth.

This is the opposite of the "conventional wisdom" that people have come to believe. But it's just plain what happened - no way around it. And, to top it off, remember that FDR raised taxes on the rich, and then we started coming out of the depression. You can look those charts up as well.

For some recent validation of this observation -- that higher taxes coincide with higher economic growth -- remember what happened after the notorious 1993 tax increases on the very rich. After those tax increases we all shared an incredible decade of economic growth and shared prosperity. (Even the rich who paid more taxes.) The national budget was balanced and we reven started paying off the huge debt that had accumulated. Then, following the 2001 tax cuts which primarily went to the very rich growth rates have not been so hot, and regular people actually feel more pinched, not less. And the country has had to borrow an incredible amount of money - which will have serious consequences in the future.

So what could be happening here? Conservatives like to say that taxes hurt the economy. That they "take money out of the economy." But is this really what happens?

If the money is "taken out"of the economy, where does it go? Isn't this a perverse view of what government is, to think it is so separate from the people that it isn't even part of the economy? Perhaps this is wishful thinking on the part of anti-government conservatives, but in reality the government puts the tax money back into the economy by paying teachers, building roads, etc.

Conservatives say that taxes are a "cost" to businesses, forcing them to raise prices. But taxes are on profits, which are calculated after costs. And if a company is doing well enough to be profitable enough to be paying taxes, why would they want to raise prices and discourage customers?

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Posted by Dave Johnson at November 21, 2007 5:50 PM

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