Posted by
ajhil on Monday, February 16, 2009 12:20:29 AM
Drip, Drip, Drip:
The Fallacies of Trickle Down Economics
How often have you heard the claim that Ronald Reagan’s tax cuts stimulated the economy so much that federal tax revenue actually increased? A dozen times? A hundred? It doesn’t matter. The assertion's false. In fact the decreases in marginal income tax rates that Reagan promoted caused such massive federal debt that Congress had to pass an even larger tax increase - the largest in American history up to that time - in order to prevent an economic meltdown. This tax hike was disguised as an increase in FICA withholding, which had a number of advantages. It allowed Reagan and the Republicans to continue promoting their economic fantasies. It boosted an ailing Social Security trust fund. Best of all from the viewpoint of conservatives, it benefited the wealthy at the expense of the the poor and middle class, for whom FICA is a larger fraction of total taxes.
Recently conservatives and libertarians have promoted a related myth: that tax cuts are the best way – indeed the only way – to stimulate the economy or to create jobs. Here’s a typical example of their reasoning:
“Economic growth requires four main factors: 1) a motivated, educated and trained workforce; 2) sufficient levels of capital equipment and technology; 3) a solid infrastructure and 4) a legal system and rule of law sufficient to enforce contracts. High tax rates reduce economic growth because they make it less profitable to work, save and invest.” - Tax Rebates Will Not Stimulate the Economy – Brian M. Riedl -http://www.heritage.org/press/commentary/ed011008c.cfm
What's missing from this analysis? In a word, demand! The four factors that Mr. Riedl identifies may be necessary for production of goods and services, but they do nothing to stimulate demand! What assurance is there that anyone will buy new goods and services, when these become available? The writer says nothing about this, apparently assuming that if goods and services are offered, consumers will magically appear in sufficient numbers, with sufficient resources, and with the desire to buy. Is there any guarantee that this will occur, because of a tax cut? Absolutely not, especially when the tax cut is slanted toward the wealthy!
This is the epitome of “supply side” economics, the reigning philosophy of the far right since the days of Ronald Reagan. It's doubled our national debt several times - most recently under George W. Bush - and propelled our economy into the worst recession since the 1930s. Tax cuts benefit primarily those who pay the most taxes – that is, the rich. By channeling the nation’s wealth into the coffers of those who are already well off, these policies have decimated the American middle class and cut the heart out of the vibrant economy that we enjoyed in the mid-twentieth century. When there aren’t enough buyers and not enough spending money to purchase goods and services, sales fall, inventories rise, businesses cut back, and the economy spirals downward. We're watching it happen right now!
Similar faulty reasoning is evident in the argument that tax cuts stimulate the creation of new jobs. Supply siders would have us believe that, when the wealthy receive a tax cut, they immediately run out and start new businesses or expand existing companies; but this violates basic business economics. Well run companies employ just enough workers to satisfy demand for their product. They expand, when changes in the marketplace create more demand than they can currently satisfy, and they don't require a tax cut in order to do it. They can borrow needed capital in the assurance that they will enjoy increased sales and therefore increased profits over the long term. On the other hand, if there's no market for the added productivity, it makes no sense for them to hire additional workers, even if they receive a cash windfall in the form of reduced taxes. They will lose that money and more, because they will be unable to sell the added goods or services that their larger workforce produces. The same applies to business start-ups.
Let's look at the other side of this coin. Republicans claim that increased taxes invariably lead businesses to lay off workers. This is absurd. Remember, an efficient business employs just enough workers to satisfy existing demand for its product. Suppose the CEO of this company business learns that it must pay a higher tax. He can accept a smaller profit or reduce dividends to shareholders. He can seek economies of one type or another to offset the added tax. But if he lays off workers, he will no longer be able to satisfy demand for his product. Sales will drop. Profit will drop. He will lose even more money! Businesses don't do this!
So much for theory. Let's examine the facts.
Republicans boast that Bush’s 2001 and 2003 tax cuts stimulated the economy. According to the Congressional Budget Office they did nothing of the sort! In fact, the CBO reports, 2007 should have produced a surplus; instead, thanks to those tax cuts, it produced a huge deficit. In the year 2000 (before Bush!) federal revenues amounted to 20.9% of the country's Gross Domestic Product. By 2005 this had fallen to 16.8%, lower than at any time since 1960. Half of that decrease was due to the Bush tax cuts!
How about job creation? During 25 of the first 31 months of Bush's administration, the country lost jobs! By the end of his second term, Bush had racked up the worst record in 34 years, creating less than a tenth as many new jobs as Bill Clinton had.
This is not to say that the Bush tax cuts helped no one. According to the CBO, families earning more than $1 million per year made out handsomely. On the other hand, middle income families saw their incomes fall (assuming they had any!) and most of them wound up paying higher taxes.
So the next time you hear someone holding forth about how wonderful tax cuts are, how they stimulate job creation, boost the economy, and make Americans bettter off, check you bank book. If you're raking in seven figures per annum, then clap that fellow on the back and say, "Right on, brother." But, if you're like the rest of us, maybe you should ask him why he's trying to pull the wool over your eyes.