TAX CUTS – NO SENSE AND NONSENSE

Whose Interests—Country or Party?

When is a political party’s interests more important than those of the country? When Republicans try to pass a tax cut that makes no economic sense and spout nonsense to justify it. The fallacious claim that this tax cut greatly benefits the middle class, not high-income taxpayers should be enough to jettison the entire proposal, but as outrageous as this lie is, it is not the most significant issue. If this bill passes, the resulting impact will clearly put the economic security of the United States at risk.

Listen to the sales pitch justifying such economic foolhardiness: tax cuts will stimulate the economy, will create jobs and, best of all, will pay for themselves. And if you buy into this nonsense, perhaps I can sell you a bridge called George Washington that connects New York and New Jersey. Both sales pitches bear the similar characteristic of never coming to fruition. There is no deed for the bridge and tax cuts will never pay for themselves.

The Theory

Ideologically, this tax cut theory is based on supply side economics, or the Laffer Curve, developed by economist Arthur Laffer in 1979. Essentially, it postulates that with tax cuts, businesses will receive increased income from additional spending, will hire more workers to satisfy that demand, who will then spend their additional income. While the tax cuts cause a deficit in the short term, the added income creates a larger tax base, which ultimately generates more tax revenue to replace the revenue lost from the tax cuts. A beautiful theory—but does it work?

Ronald Reagan and Reaganomics

Ronald Reagan had the opportunity to put this theory into practice during his presidency with what was called “Reaganomics” or “trickle-down economics;” 16.8 million new jobs were created, which, arguably, did help break the country out of its recession. But Reaganomics did not deliver on the premise the cuts would pay for themselves. Instead the deficit increased more than five times raising the national debt to $2.6 trillion, breaking the trillion-dollar mark for the first time.

During Reagan’s eight-year term, the maximum tax rate was reduced from 70% to 50%, 38.5%, and then 28%. But three years into George H W Bush’s subsequent presidency, the rate was increased to 31% and then to 39.6% the first year of Clinton’s eight-year term. Reducing the maximum rate from 70% to 28% during the Reagan presidency was a significant incentive for expanding economic activity, but one might expect that the subsequent increase to 39.6% would be a drag on the economy. In fact, then U.S. House Speaker Newt Gingrich predicted, “The tax increase will kill jobs and lead to a recession, and the recession will force people out of work and onto unemployment, and actually increase the deficit.”

Bill Clinton and Higher Taxes

But Gingrich was wrong. Not only were 18.7 million jobs created during the Clinton presidency—almost 2 million more than during the Reagan administration—but just as importantly, this was accomplished with several years of budget surplus. In fact, since the budget in the first year of a president’s term is actually prepared by his predecessor, perhaps we should evaluate a president’s contribution to the economy over a different time period beginning with the second year of his term and ending the year following his departure from office. Using that formula, Clinton’s term would show a cumulative budget surplus of almost $63 billion.

To be fair, much more than tax rates go into creating a surplus or deficit. Certainly, Congress plays a major role in also controlling spending. But from the above experience, one can readily see that raising tax rates is no deterrent to creating jobs. Look at what’s happened since.

George W Bush: Surplus to Deficit

Top rates under George W Bush were reduced from 39.6% to 39.1%, in 2001, 38.6% in 2002 and 35% in 2003. The rational for these cuts was to return to the American taxpayer the budgetary surplus expected in the coming years. But as a result of those cuts, that surplus quickly disappeared, magnified by the cost of fighting wars in Afghanistan and Iraq, and later, the introduction of a prescription drug plan. These tax cuts did not pay for themselves, nor was there any way they could have.

Towards the end of the Bush term, the country entered the worst recession since the Great Depression. Though the number of jobs grew before the recession hit, job losses began almost immediately and continued well into the Obama administration. Ironically, job growth accelerated in the Obama Administration despite raising the maximum tax rate to 39.6%. Comparing the two administrations, net job growth under Bush was 4.4 million while under Obama, 9.9 million, even with a higher tax rate.

More Nonsense

If you need more convincing, let’s not forget Kansas Governor Sam Brownback’s grand promise that massive tax cuts would cause the economy to explode. It didn’t happen. The only explosion was the budget deficit, followed by a massive tax increase years later to alleviate the problem.

Conclusion

If the Republicans proceed with this proposal, they will inflict great damage on the future economic security of the United States. Placing a great mortgage burden on the lives of future generations, making them pay for the sins of today, will drastically limit their options to deal with the country’s then current needs. And why? So the rich can get richer at the country’s expense, while income inequality grows? Hopefully, there are enough patriotic Republicans who will place country over party and prevent this from happening.

Let there be no illusions that the proposed tax cuts will benefit the economy. Even Republicans have a difficult time trying to maintain a straight face when they acknowledge this bill will increase the deficit in the short term, but over the next 15 years, the cuts will pay for themselves. If they truly believe that, I still have a great bridge available for sale.

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