Tax cuts, often championed by Democrats (when they want to take credit for economic growth), are Bad, Horrible, Awful Things again, because, well, Trump and Congress
are working on them.
As a fine example of a histrionic and economically illiterate analysis of the recently-proposed tax cuts, I give you the The Washington Post, that long-standing bastion of Austrian economic theory. How will the Post provide its readers with details around a policy that will impact the half of the country that actually pays taxes? Standing in as the sharp end of the Post’s analytic spear, the Post offers up Ruth Marcus, for the delightfully (and, one might guess, purposefully) limited take on the impacts of tax cuts and tax increases:
Yes, the economy grew robustly after John F. Kennedy proposed and Lyndon B. Johnson signed a tax cut in 1964 (the top rate went from 91 percent to 70 percent) and after Reagan cut taxes in 1981 (he later raised them, because of fears of the ballooning deficit). But the economy also grew robustly after Bill Clinton raised taxes in 1993 and anemically after George W. Bush cut taxes in 2001 and 2003.
What’s missing in Ruth’s cursory review of the economy, after tax cuts and tax increases, is telling. Clinton, for example, after raising taxes in 1993 (which included an increase in the taxable portion of Social Security benefits, because, y’know, he’s a dude of the people), signed an enormous tax cut in 1997, which spurred even larger and more consistent growth. These tax cuts are consistently attributed with spurring the growth in the 1990s – not the primary driver, but certainly a major contributor. From the study:
From 1993 until 1997, the economy grew at 3.3 percent per year.4 While solid, this growth was certainly not exceptional. During that same time, real wages declined, despite the perception that the 1990s were an era of unmitigated abundance.
It was not until after a 1997 tax cut, passed by Congress—a tax cut President Clinton resisted but ultimately signed—that the spectacular growth kicked in. While small in static revenue impact, the 1997 cuts included a reduction of the capital gains rate from 28 percent to 20 percent. This opened the capital floodgates necessary for entrepreneurs to develop, harness, and bring to market the wonders of the new information technologies. business investment skyrocketed after the tax cut,6 and the economy grew at an annualized rate of 4.4 percent—33 percent faster than after the Clinton tax hike—from 1997 through the end of the Clinton presidency. Real wages reversed their downward trend and grew 1.7 percent per year during the same time.
Oh, and as for George W. Bush’s tax cuts – I’d also like to add that something else happened in 2001 that dramatically affected the country, and the economy, but hey, tax cuts didn’t spur growth. I get it.
But because we’re having trouble finding people who are for tax increases, here’s the former tax-increaser himself, Bill Clinton, calling for a corporate tax cut rate, in 2011. Which runs kind of counter to Ruth’s argument above. But let’s let the Hayek (not Salma) – loving President call it in his own words.
“When I was president, we raised the corporate income-tax rates on corporations that made over $10 million [a year],” the former president told the Aspen Ideas Festival on Saturday evening.
“It made sense when I did it. It doesn’t make sense anymore — we’ve got an uncompetitive rate. We tax at 35 percent of income, although we only take about 23 percent. So we should cut the rate to 25 percent, or whatever’s competitive, and eliminate a lot of the deductions so that we still get a fair amount, and there’s not so much variance in what the corporations pay.
Bill’s point isn’t a new one. The US is at a competitive disadvantage with foreign corporations that pay a much lower rate
than the current 40% we’re sporting here in the US. In fact, if you stack us up with the EU, etc., the disparity becomes starkly clear:
Simply put, if you believe that the real engine for growth isn’t the government, but rather the people choosing what to do with their money, what to buy, invest in, or save, then you’re probably not a Democrat.
The sad fact is, though, that the other party, the Republicans, isn’t much better on this front, and have voted for massive spending increases, and have justified those increases in much the same way that Democrats do, which is that they try to pitch the spending to the groups that vote for them, to demonstrate the ways that spending benefits that specific group. In other words, they’re buying votes, with tax dollars.
As Ruth Marcus continues, though, apparently now we’re supposed to care about debt, when Republicans offer a way to improve the economy. I’m guessing Marcus’ track record as being a deficit or debt hawk was a weak one from 2008-2016:
Meanwhile, the national debt is 77 percent of the economy, the highest since the end of World War II. It is on track to exceed the entire gross domestic product by 2033. That is even without a $1.5 trillion tax cut, the amount envisioned in the just-passed budget resolutions.
The debt doubled in 8 years under Obama. It took 240 years to get to $9 trillion in debt or so, and in 8 years, that debt doubled. But even that misses the point – it’s not
the tax revenues we’re collecting that drives the debt, it’s the spending. The enormous gap between revenues and spending is startling – not just the gap, but how much more money we’re both collecting and spending.
Not one peep from Marcus about spending. Not one mention in her article about the enormous leap in federal spending. If the tax cut decreases revenues, which it should, of course the gap will widen. But is the problem revenues?
Or is it, eternally, the unshakeable belief that all spending is a net good, that people keeping more of the money they earn is bad, that rich people (who pay 97% of all income taxes collected) are bad, only those who would spend the money other people earn are inherently, and by default, good.
It’s this sort of acquiescence to a large, centralized, and politicized government that’s caused the deaths of tens of millions in the 20th century, and as the hoary governments of places like Venezuela demonstrate, the catastrophes will continue, no matter how many times the lesson is thrown in our faces.
That reality doesn’t change Marcus’ conclusion, though – that tax cuts are reckless.
Trump wants tax cuts — the biggest ever! — because he promised them. Republicans take tax cuts as a matter of faith; they are desperate for a legislative win, any win, to take to voters next year. So deficit-financed tax cuts may be a political imperative. As an economic matter, they are simply reckless.
No word yet on Marcus’ forthcoming article that might state why the spending is reckless, or the debt incurred under the last administration might also be reckless, and
how the biggest drivers of future economic disaster are Social Security, Medicare, and Medicaid, and their unfunded liabilities in the trillions. Those are not even
mentioned, en passant, in her article.
Maybe that was just an oversight in her article. Or maybe it was just reckless.