TAX CUTS: THEOLOGY, FACTS & TOTALLY F**KED
Do tax cuts stimulate the economy?
Yes. Tax cuts allow people to keep more of their own money therefore they have more to invest and spend into the economy and more money to start business and create jobs therefore also helping to stimulate the economy
I think when people take a look back at this moment in our economic history, they'll recognize tax cuts work. They have made a difference.
George W. Bush
The brute facts are these:
Large income tax cuts are followed by a bubble and then a crash.
High income taxes correlate with economic growth.
Income tax increases are followed by economic growth.
Moderate income tax cuts are followed by a flat economy.
All this is especially true as applied to the top tax rates, the amount paid on income that exceeds the highest bracket.
THE THREE GREAT TAX CUTS: BOOM, BUBBLE, CRASH
During World War One the top marginal tax rate went up to 73%. Not the highest ever, but pretty high.
In 1922, a series of rate cuts began. Down to 56%, 46%, and finally, in 1925, it went down to 25%.
The stock market took off. There was a boom. But the boom was a bubble.
It was followed by the Great Crash of 1929.
There were bank failures and the Great Depression.
From Franklin Roosevelt's second term all the way through to Jimmy Carter, - from 1936 until 1982 - the top rate was in the 70-92% range.
Then along came Reagan in 1981. In 1982 he cut that down to 50%.
The economy went into "the worst recession since the Great Depression."
His supporters argued that it was all Carter's fault and that the new policies would take time to work. The tax cuts stayed in place. In 1987, there was another round of tax cuts. They took the top rate down to 38.5%. It would stimulate the economy!
There was a boom. But it was a bubble.
Then, in October, 1987, there was a crash. The worst since '29. It was called Black Monday.
Much of the bubble money had gone into - ohmigod! -real estate.
Suddenly there were bank failures! More than during the Great Depression. There was a Savings & Loans crisis! There had to be a bailout.
3. BUSH II
George Bush came into office with the healthiest, post powerful economy in American history.
He immediately cut taxes. The top marginal rate went down from 39% to 35%. He also cut capital gains taxes and inheritance taxes. A recession immediately ensued. But he persisted.
Eventually, the economy began to grow.
Employment didn't grow very much. Median income went down. The stock market was pretty flat. But the financial sector - and only the sector - grew.
Which should have made it obvious to someone, that it was ... a bubble.
There was a crash.
Bank failures. A bailout.
The three worst economic disasters in American history follow the exact, same pattern. Tax cuts, boom, bubble, crash.
HIGH TAXES CORRELATE WITH ECONOMIC GROWTH
The four period of greatest economic growth in American history, by pretty much any measure, are:
· World War II (1941-45): top tax rate varied from 88-94%
· Post-war under Truman and Eisenhower: top rate bounced around from 81-92%
· Clinton years: Clinton raised Bush's top rate of 31% to 37% and then to 39%
· First two Roosevelt Administrations (1933-40). When Roosevelt came into office, Hoover had already raised the tax rate in 1932 from 25% to 63%. Roosevelt raised it again in 1936 to 79%.
A lot of ink, sweat, and ranting has gone into proving that the New Deal did not end the Great Depression. Nonetheless, the economy grew 58% from the time Roosevelt came into office and when the US entered the war.
Some of that anti-New Deal rhetoric also claims that the recovery began under Hoover. Perhaps, but to say so, is also to say that it began with tax hikes.
Likewise, many right wing critics insist that the Clinton boom actually started under Bush the First. It is necessary to remember that Bush the First also raised taxes (from 28% to 31%) and was soundly thrashed by the conservative for doing so. Stephen Moore, of the Cato Institute, called it "The Crime of the Century," and explained, at length how it had brought ruin to America.
TAX INCREASES ARE FOLLOWED BY ECONOMIC GROWTH
Three of the four high growth periods cited above followed significant tax hikes.
The fourth, the Truman-Eisenhower years, began with a top tax rate of top rate of 91% and it couldn't get much higher.
MODERATE TAX CUTS ARE FOLLOWED BY A FLAT ECONOMY
John F Kennedy is generally credited with starting the tax cut craze.
He proposed it. But, as with all his ideas, it was Lyndon Johnson who actually got it enacted. The top rate was cut from 91% to 77%, then to 70%, on all income over $200,000 for a single person, $400,000 for a married couple.
That's where it stayed, through Nixon, Ford and Carter.
The Dow Jones average was pretty much the same when that period ended as when it began. Median personal income stayed roughly the same.
These are the brute facts.
I call them that because there doesn't appear to be any theory to explain them.
Quite to the contrary. There are lots of theories that claim that tax cuts stimulate the economy.
Here a simplistic version, but they all run along these lines.
Q: How do tax cuts affect the economy?
A: Tax cuts improve the economy by giving the people more spending power and higher consumer confidence which leads to them spending more of all of their income which leads to more jobs, more business investment in more efficient technologies, and ultimately higher GDP growth.
They are very convincing.
One constant in American political life is that the American people believe tax hikes are bad for the economy. The latest Rasmussen Reports telephone survey found that 60% of voters hold that view while just 14% believe that raising taxes is good for the economy.
A noted conservative (a sane one, not William Kristol) recently wrote to me in a private email exchange on this subject:
"I am unaware of any (or many) respectable economists (maybe I've missed some) who have suggested that higher taxes have proved to be a formula for better economic growth."
Actually, neither am I.
Even now, in the midst of the Bush disaster, I constantly see and hear tax cuts, particularly at the top, described as "pro-growth." So I went and looked at the numbers, tax rates, tax cuts, tax hikes, and placed them alongside job growth, the Dow Jones, growth in the GDP, and median income.
The brute facts.
The brute facts say the opposite of the myth.
The belief in tax cuts is a subset of the belief in Free Markets, with a capital F & M, which is a theological belief.
How do we distinguish a theological ideas from a scientific (or rational) one?
According to Karl Popper, the great thinkers in the philosophy of science, a scientific idea has to be capable of being refuted. There has to be some theoretical test that could come out the wrong way which would then say the theory is wrong.
On that basis, Popper rejected Marxism and Freudianism, along with religious theology, because no matter how many times they didn't work, there was always some explanation that said that the theory was right and if you just looked at the facts in some other way, you could make up some story that said your theory was still right.
The quintessence of theological thinking goes like this. The Preacher says, "The world will end next Saturday night! The Bible says it must be so." Everyone in the congregation wakes up safe and sound on Sunday morning. They head off to church and believe whatever he says in that sermon too.
In science, we come up with a hypothesis. Then we set up an experiment. We see what happens.
Economics is complex. It takes place in the real world where many factors are at play and we can't control for them all. Still, we've had four major tax cuts since 1913. None of them have led significant, sustained growth. Two them were followed by instant recessions (Reagan and Bush) and three of them, when they were sustained, were followed by bubbles which were then followed by the three worst crashes and sets of bank failures in modern times.
It's time to throw out the theory. Accept the facts. Come up with new ideas to fit them.
Larry Beinhart is the author of Wag the Dog, The Librarian, and Fog Facts: Searching for Truth in the Land of Spin. All available at nationbooks.org
His new novel is: SALVATION BOULEVARD. Website: http://www.larrybeinhart.com
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