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Economic History Shows Clearly That Tax Cuts for Rich Hurt the Economy

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Right-wing politicians and pundits carry on repeatedly about how wrong it would be to raise taxes on the rich in a time of economic downturn. Wrong.

Just because you repeat something over and over doesn't make it true. In fact, there is a body of empirical, historical evidence that proves clearly that tax cuts for the rich not only do nothing to spur economic growth -- they actually do substantial damage to the prospects for economic growth.

First let's look at the proposition that high taxes on the wealthy stifle economic growth. In the last century, marginal tax rates on the rich were their highest during World War II -- when the wealthy were called upon to help finance the war effort. During World War II, the tax bite on wealthy Americans was close to punitive (the highest bracket was 91 percent). But that didn't hurt the economy; far from it. By war's end, Americans were rolling in cash. The average weekly pay rose 83 percent between 1940 and 1945. Many families had their first discretionary income.

In fact, this period -- and the expansionary fiscal policy that helped finance the war -- led to the longest sustained period of growth in American history and created the American middle class.

Or we can turn to the tax policy of the Clinton administration. In 1993, President Bill Clinton proposed a budget that raised taxes on the rich. Republicans predicted that its passage would lead to economic doom. They argued that the Clinton tax increase on the rich would lead to economic stagnation and unemployment. Instead, of course, the Clinton administration created 22.5 million jobs, of which 20.7 million -- or 92 percent -- were in the private sector. His economic policy eliminated the federal deficit and left his successor -- George Bush -- with budget surpluses projected as far as the eye could see.

So history tells us pretty clearly that increased taxes for the rich don't hinder economic growth. Now let's look at historical evidence that the opposite proposition is true -- whether tax cuts for the rich actually promote economic growth.

To see the fallacy in that argument all you have to do is go back to the Bush administration. For eight years, George Bush and the Republicans lowered taxes for the wealthy and cut back the regulation of big corporations and Wall Street -- all based on the premise that these two policies would benefit the economy.

The results are there for everyone to see.

The New York Times reported last year that, "For the first time since the Depression, the American economy has added virtually no jobs in the private sector over a 10-year period. The total number of jobs has grown a bit, but that is only because of government hiring."

In fact, in the eight years when George Bush and the Republicans in Congress passed two massive tax cuts, we saw a massive, secular decline in the creation of private sector jobs.

Of course it won't surprise anyone that this decline was led by the reduction of American manufacturing jobs. There was a decline of 3.7 percent in overall manufacturing jobs in the United States over the last decade ending in 2009.

Remember that we're talking here about no increase whatsoever in private sector jobs -- zero increase in actual jobs -- even as the population of the United States has grown. Economists tell us that the economy must create 150,000 new jobs each month just to stay even with population growth.

In fact, there is absolutely no evidence in the economic history of the last century that tax cuts for the rich increase economic growth. But there is evidence that they actually hurt prospects for economic growth -- both in the short and long run.

Tax cuts for the wealthy function to reduce economic growth in two specific ways:

First, they amplify the tendency of income and wealth to concentrate in a small segment of the population. Throughout the entire period of Republican rule, all of the economic growth was siphoned off to the top two percent. Real wages stagnated, and continued growth in the Gross Domestic Product was fueled -- for a time -- by an expanding credit bubble that ultimately burst.

The problem is that to be sustained over time, economic growth must be widely shared. Otherwise, demand for new products and services stagnates; there is no incentive for businesses to invest, and economic growth itself stalls.

Fundamentally, economic growth is about the development of processes and technologies that increase productivity. But these do not occur when wealth is concentrated and labor prices are cheap. They occur when new growth is shared and wages are high.

A high-wage economy leads to major long-term economic dividends because:

  • It incentivizes companies to invest in higher-productivity technologies that increase overall productivity and provide real economic growth.
  • It creates customers with spending power to drive economic growth. There is a natural tendency of market economies to use low-cost labor and increase profits. That's good for each company's bottom line, but it kills off the goose that lays the golden egg by reducing the buying power of its ultimate customers -- the people who work for all the companies in the economy combined.

Cutting taxes for the wealthy simply transfers more and more wealth into the hands of fewer and fewer people and helps fuel an economic imbalance that causes an economy to stall.

Second, tax cuts for the rich starve the public sector of funds that are necessary to assure long-term growth. Tax-cut activist Grover Norquist was quite explicit when he championed the Bush tax cuts that he intended to deprive government of resources so it could be "drowned in a bathtub."

Historically, tax cuts for the rich have been used -- quite intentionally -- to create deficits that make it politically difficult for government to do three things that are critical to sustaining growth over the long run:

  • Tax cuts for the rich shortchange investments in education that are the major engine of most long-term increases in productivity, and hence real economic growth. Education is the major factor that makes the workforce more productive. It underlies all of the scientific discoveries and technological advancement that boost productivity. America's commitment to universal public education is responsible -- more than any other single factor -- for our economic success over the last century. And more than any other factor, the massive growth of the Chinese economy is rooted in the exponential increased level of its people's education. The Chinese are turning out more graduate engineers each year than the rest of the industrial world combined. Starving our schools and universities will do more damage to our long-term economic prospects than anything else we could do. Yet it is a direct consequence of tax cuts for the rich.
  • Tax cuts for the rich restrict government's ability to invest in new public infrastructure that is another major factor in assuring long-term growth. Roads, rail lines, airports, sewer and water systems, sanitation, public health -- all of these are critical foundations for economic success. Yet over the Bush years, all of them were starved for cash -- both by Bush's wars and by his tax cuts for the rich.
  • The deficits created by tax cuts for the rich make it politically difficult for the government to engage in precisely the kind of economic fiscal stimulus that is necessary to offset the reduced levels of economic demand that occur during recessions. When Barack Obama became president he was confronted with a three trillion dollar deficit in economic demand that left massive portions of our plant and equipment -- and millions of workers idle -- producing nothing to contribute to our gross domestic product. Unfortunately, he also inherited a budget deficit that had been exploded by eight years of tax cuts for the rich -- and ultimately by the recession itself.

Obama convinced Congress to pass a $730 billion stimulus package that saved 3.5 million jobs. What was needed to seriously jumpstart private sector economic growth was more than twice that amount. But Republicans were able to use the deficit -- that had resulted from eight years of tax cuts for the rich and two wars -- as a reason to limit the size of that stimulus. That turned out to be good politics for the Republicans, since it helped keep millions of people unemployed, who then blamed the Democrats for failing to put them back to work. But it was terrible for the economy and for our collective well-being as a nation.

And just in case you hear someone say that a dollar spent on tax cuts to the rich is a good way to stimulate the economy, here's a fact from Mark Zandi, chief economist for Moody's.com, who was also an economic adviser to John McCain:

For every dollar spent on making the Bush tax cuts permanent, you get $.29 of increase in the GDP. For every dollar spent to extend unemployment benefits you get $1.64 increase in the GDP. In other words, a dollar spent on unemployment compensation gets 5.6 times more boost to the GDP than a tax cut for the rich.

The reason is simple. When you're in a recession, the problem is that demand is too low, so spending that increases demand really boosts the economy, since it creates demand that entices businesses to hire people who then spend more money and create more jobs -- and so on.

But when you give tax breaks to the rich, they don't spend most of those breaks like a family that needs unemployment. They save and invest a substantial portion. But in a recession you don't need more savings or investment, you need more demand.

  • Finally, the deficits caused by tax cuts for the rich not only prevent the government from doing what's necessary in times of recession to restart economic growth. In times of prosperity, they cause deficits that put pressure on interest rates and choke off private sector investment. In other words, they tend to damage the economy at pretty much any time in the economic cycle.

Of course tax cuts for the rich are particularly outrageous right now -- when middle-class incomes have stagnated for decades and the percentage of wealth controlled by the top two percent of the population is higher than anytime since pre-depression 1928.

But that's exactly what those "deficit hawks" in the Republican Party are proposing. After running around the country for months campaigning about "runaway deficits" they propose to borrow $700 billion additional dollars to finance more tax cuts for the rich. And at the same time, last week the Republicans voted in the House to block extension of unemployment benefits that really would boost economic growth. They are happy to borrow more money to make their rich patrons richer -- but they refuse to borrow any money to provide unemployment benefits that not only allow middle-class families who have lost their jobs through no fault of their own to keep their heads above water, but actually do turbocharged the economy...

The Republican proposal to make the rich richer is just plain wrong. If they succeed, the price will be paid by our children, who must pay the debt. But it will also be paid by all of us today in the form of lost goods and services that will never be created because so many people who are willing and able to work can't find jobs.

Robert Creamer is a long-time political organizer and strategist, and author of the book: Stand Up Straight: How Progressives Can Win, available on Amazon.com.

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