How well did tax cuts work last time?

It’s been established over and over again that massive tax cuts do not stimulate the economy.  Even the Congressional Research Service released a study in September of this year confirming that tax cuts do not stimulate the economy.

The Atlantic Wire has a great article out talking about the last time we were told that tax cuts were the answer…

Click to make large.

As Congress attempts to negotiate a way to cut the budget deficit and avoid a fiscal cliff, it’s worth remembering that one sticking point of the negotiations was supposed to eliminate the deficit problem entirely: the Bush tax cuts. On April 27, 2001, the conservative Heritage Foundation published the above chart, forecasting the effects of then-President George W. Bush’s then-proposed tax cuts — a chart that is, in retrospect, pretty hilarious. Pass the Bush tax cuts, the conservative non-profit predicted, and the future would be awesome. The tax cuts would so stimulate the economy that the government would start bringing in extra money starting in 2008. Alas, in real life, the Bush tax cuts led to huge budget deficits, and 2008 was, as you may also remember, the year of the financial crisis.

We were promised, by groups like the Heritage Foundation, incredible federal revenue.

Turns out that didn’t exactly happen.  The nice part about the internet is that when you make predictions that turn out to be the complete, absolute opposite of what happened, we can dig them up.

The Bush tax cuts were also supposed to leave the wealthy with more money, which they would use to expand their companies and create jobs.  We were promised at the time that cutting taxes for the rich would produce unprecedented job growth.

That also didn’t happen.  But hey!  When we cut taxes for the wealthy, they got rich!  It’s strange, when you don’t take as much of their money in taxes, they wind up with more money.

This is probably why  wealth disparity around the time of the Bush tax cuts skyrocketed.

And bear in mind, the Bush tax cuts have not expired, and the GOP wants to extend them.

Republicans continue to say they are open to raising revenue, but they want to do it without raising tax rates. “I’m willing to generate revenue,” Sen. Lindsey Graham said Sunday. “It’s fair to ask my party to put revenue on the table. We’re below historic averages… I will not raise tax rates to do it.” Whatever the reason for holding onto this technicality — that limiting deductions and closing loopholes is not the same thing as raising taxes — it is not based on recent evidence of what effect the Bush tax rates have on the economy.

When are people going to catch wise that the GOP is not looking out for almost every American by implementing policies which, throughout history, have made the rich more rich to the detriment of the workers in their companies?

As far as the Bush tax cuts go, and as far as any additional tax breaks for the wealthy go, let the fuckers die and listen to Warren Buffet: tax the wealthy at least at something close to what the rest of us pay.  It worked for Clinton.

  • smrnda

    There are lots of reasons why tax cuts on top don’t work. First, economic expansion is fueled by consumer demand. If I’m in the 1% and you give me a tax break, I have more money without having to *do* anything to get it. However, I’m only going to hire people to do work if there are other people out there, with money, who will be consumers.

    One way that I might try to make money in that case (since nothing is being done to give the vast majority of consumers more money) is that I might buy businesses, and decide to ‘cut costs’ by demanding more work out of fewer workers, or more work for less money. This means even less consumer demand as more and more wealthy people decide to squeeze more and more workers for more and more profit.

    This is the basic contradiction – the demand for low wages but the need for ever increasing levels of consumer spending. Once rich people have too much money, there isn’t enough spending power everywhere else to get the economy moving. One that that might work is to say, hire lots of government workers since you can hire people like teachers and teachers are likely to be found in every city, town and village. You get more people with money in their pockets spending actual money in local economies.

    Also, there are times where cutting taxes *might* actually increase revenue, but those would have to be really well-thought out, strategic tax cuts or incentives meant to target industries that could take off if they had a slightly higher margin.

    I don’t understand how anybody can be a believer in the GOPs tax plans, outside of deliberate and willful ignorance. Their ‘good old days’ had higher marginal tax rates than the present.

  • iknklast

    I’ve always thought it might be the case that, when tax rates are higher, the wealthy will plug a lot more money back into their business, because that gives them deductions and keeps their rate lower. If the rates are lower, there is less motivation to invest in the business. Investing in the businesswould be a better way to grow the economy than plugging money into the paper games that are played on Wall Street, which only benefit the players (if them).

    I don’t know if this is the case; it’s just a hunch I have, and it would be interesting to test it out. I’m not an economist, I’m a botanist, so I’m not the best person to do that. I can philosophize the concept, but testing it? Only if it photosynthesizes;-)

    • RuQu

      The relevant bits of tax here are:

      Corporate tax rate: The tax on corporate profits
      Dividend tax rate: The tax on shareholder income from distribution of profits
      Capital Gains tax rate: The tax you pay when you sell an investment for a gain
      Note that the Dividend tax rate is actually double-taxation. The corporation gets taxed, and then the shareholder gets taxed again.

      A corporation can take its profits and hold onto them as “retained earnings” or pay them out to shareholders. If they hold onto them, they can use that money to buy new capital, ie land, hardware, etc. Doing so increases the value of stock, because it increases the capital that you own a share of. If the company was to decide to go out of business and sell everything, you would get your share of the money that way.

      As should be obvious by now, a high dividend rate with a lower capital gains rate strongly encourages reinvestment. A low dividend rate encourages paying money out to shareholders. Reinvestment is generally better for the economy as it drives demand for intermediate purchases, ie buying machines for a factory spreads those “retained earnings” out to the machinery manufacturer, while dividends put money in the pockets of shareholders. This does little to drive demand as the poor rarely own stock and the wealthy tend to already have the purchasing power to satisfy all of their needs and most of their wants, so additional money is less likely to recirculate.

  • b00ger

    JT, I feel I must correct you on what might seem to be a minor issue, but is really a symptom of the larger problem. The Federal Deficit is not synonymous with the economy. In fact, they are almost opposite. What is good for the economy is often very bad for the deficit. Simply put, tax cuts DO stimulate the economy. Especially cuts of regressive taxes like Payroll taxes or sales taxes. The put more money into the hands of consumers who are then encouraged to spend more. Tax cuts DO NOT decrease the federal deficit, however, they tend to have quite the opposite effect. Tax cuts on the 1% tend to not stimulate the economy because those folks can spend as much as they want anyway.

    • eric

      A tax cut given to 1% of the population will (at best) encourage 1% of the population to spend more. If you really want the majority of American consumers to spend more, you have to target your tax cuts at the incomes of the majority of American consumers.
      Second, seven states have zero, nada, zilch state income tax. If income tax was really an economic brake, you’d expect them to be doing better than the other 43. They don’t. They don’t do markedly worse either; its a mixed bag. But since the conservatve position depends on arguing that there is an (inverse) correlation between income tax and economic prosperity, “no correlation observed” is almost as fatal to their position as “the opposite correlation observed.”

      • RuQu

        No income tax states have to raise revenues in other ways. One would have to demonstrate that lower tax burden states don’t outperform higher tax burden states to prove that.

        Of course, CA with the 8th largest GDP in the world if it was independent, the largest GDP of any US state (almost double the next two of TX and NY), the 12th highest GDP per capita despite one of the largest immigrant populations, etc does pretty well economically despite having the 6th highest tax burden. The state budget is a terrible mess, but you can’t argue that its economy is not a powerhouse despite a high tax burden.

        On the 1% stimulating the economy, the problem is that the wealthiest 1% already have the ability to purchase anything they desire. The poorest 1%, however, cannot even afford everything they need. Giving money to the poor means that money absolutely will be spent. Giving it to the rich brings no such guarantee.

  • RuQu

    One thing people often fail to look at, and that remarkably never got brought up during the election, is the effect of poverty on tax collection. The poor were not mentioned once during the debates.

    What are the fiscal impacts of poverty? As Romney so conveniently pointed out, 47% of Americans don’t pay income taxes. As an article Drburger reposted on WWJTD pointed out, most of those are actually in programs the vast majority support: elderly living off of savings and social security, soldiers in combat zones, the working poor, etc. We also have safety net programs that pay out to the poor, resulting in a net negative to the government for every poor person.

    By imposing tax and regulatory policies that discourage inequality, you cut down on social safety net spending, which is good for the deficit. By lifting people out of poverty, you broaden the tax base and increase consumer spending power, which is good for the deficit and the economy, respectively.

    Additionally, by lifting people out of poverty, through anti-income-inequality measures, you empower consumers to actually drive the market. Why does Walmart dominate? Largely because so many people are so poor they can’t afford to choose to shop somewhere else. They might prefer that American made dining set that will last 5x as long as the particle board crap from Walmart, but it costs 3x as much and they simply can’t afford it, even though it is a better purchase in the long-term. This poverty-driven focus on short-term purchase of disposable goods then drives the market and we see more and more of these goods, despite the overall negative cost to society and the environment.

    A great many of our problems, perhaps even most of them, are, if you look close enough, tied to income inequality.