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December 1, 2010

Do Tax Cuts Help The Economy?

-- by Dave Johnson

This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF.

In the news: Congress debates extending an extra tax cut for the rich, Obama's "deficit commission" proposes tax cuts to cut the deficit. Both of these assume tax cuts help the economy. But do they? What is the record?

In this morning's public hearing of the National Commission on Fiscal Responsibility and Reform (deficit commission) Rep. Paul Ryan repeated the conservative mantra: "Economic growth comes from lower taxes." You may have heard this before. In fact, you may not have been able to avoid hearing this, repeated over and over, until you are running in circles with your hands over your ears. You can't get away from it.

In the Congress, Republicans and some conservative Democrats are demanding that the special Bush-era extra tax cut for the wealthy be extended, repeating (over and over and over and over and over) that you must not raise taxes in a recession, because it will hurt growth.

It is certainly a convenient argument, if you are really, really wealthy. But is it based on reality or ideology? A look at the record can provide some answers to that question.

To start, here are three charts I have been using that show what happened after previous tax cuts:

First, as top tax rates declined, so the the GDP:

Top Tax Rate vs GDP

Second, a different look at growth since the 80s tax cuts using 12-quarter rolling average nominal GDP growth:

Third, the effect of tax cuts for the rich on the country's debt:

TopRates_vs_Debt_Chart

Economist Mark Thoma yesterday at MoneyWatch, Did the Bush Tax Cuts Lead to Economic Growth?

What impact did the Bush tax cuts have on economic growth?

The evidence is not favorable. For example, according to this Census report (see table A1), median household income in 2007, adjusted for inflation, was lower than it was in 2000. ... employment growth was particularly weak ... real wages and salaries grew at a 1.8 percent average ... as compared with a 3.8 percent average... (Click through to read)

It’s Possible for Tax Cuts to Reduce Economic Growth

Furthermore, even the part of the tax cuts used for investment purposes may not result in enhanced long-run growth. ... the growth disappears as soon as the bubble pops. In fact, this type of investment leads to reduced growth relative to what could have been achieved with other investments. Thus, to the extent that tax cuts helped to fuel the housing bubble, they actually harmed rather than helped long-run growth. (Click through to read)

The Bottom Line

... Like it or not, tax increases will be required. ... If allowing the Bush tax cuts to expire for the wealthy is the only acceptably equitable way to raise taxes in this political environment, then there is little evidence that this will be harmful. ... (Click through to read)

It is obvious that the Reagan and Bush tax cuts for the wealthy have hurt us in many ways.

  • They hurt the economy. (See charts above) (also, just look around you.)
  • They caused massive debt.
  • They hurt government's ability to do its job.
  • They caused extreme concentration of wealth.
  • They changed us from a democracy to a plutocracy: government of, by and for the wealthy.
  • They kept us from maintaining and modernizing our infrastructure.
  • But this was the plan all along, wasn't it?

    Click here to Tell Congress: Don't extend the Bush tax cuts for the wealthy

    Click here to read the The Citizens’ Commission On Jobs, Deficits And America’s Economic Future's report on how to create jobs, grow the economy and reduce the borrowing.

    Sign up here for the CAF daily summary.

    Posted by Dave Johnson at December 1, 2010 1:37 PM


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