In two previous articles, “Maintain Tax Cuts for the Rich? Americans Don’t Seem to Buy the Conservative Argument” and the “Efficacy of Tax Cuts Is now Questioned” I laid out two basic premises. One was that a majority of the American people did not buy into the conservative argument that tax cuts had to be maintained for the richest among us. The second was that the use of tax cuts in this type of economic downturn had been called into question by some very prominent economists and that those same economists just happen to be on the right side of the political spectrum. The notion that tax cuts are of little use in this particular economic environment received further support last week with the publishing of the findings of the nonpartisan Congressional Budget Office from which the following conclusions were drawn: ” The concept of lower taxes is so appealing to voters that many embrace them as an economic cure-all… But economic research suggests that tax cuts, though difficult for politicians to resist in election season, have limited ability to bolster the flagging economy because they are essentially a supply-side remedy for a problem caused by lack of demand.
The nonpartisan Congressional Budget Office this year analyzed the short-term effects of 11 policy options and found that extending the tax cuts would be the least effective way to spur the economy and reduce unemployment. The report added that tax cuts for high earners would have the smallest “bang for the buck,” because wealthy Americans were more likely to save their money than spend it….Neither of those options, though, would do as much to stimulate the economy as offering direct payments to the unemployed and Social Security recipients or reducing the payroll taxes of workers, the study found…So while the decision on whether to extend the tax cuts will have a lasting impact on the deficit and on how the nation’s tax burden is distributed, economists and tax experts say it is unlikely to offer much immediate relief for high unemployment and sluggish growth… It may have some small impact along the margins, but firms don’t hire based on tax breaks; they hire based on demand,” said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center. “So a lot of the tax breaks are likely to be rewarding people and companies for what they were going to do anyway.”
As a footnote to the above, it’s also of note that another prominent conservative has come to criticize the notion that tax cuts would be economically effective today. David Frum, a former Bush speechwriter and Fellow at the ultra conservative American Enterprise Institute, in an interview on NPR’s Marketplace said the following:” The recession began when all the Bush tax cuts were fully in effect. And yet, it’s suggested that re-enacting the tax cuts will somehow cure the crisis that those same tax cuts failed to prevent.” Don’t get me wrong, Frum is not endorsing the Obama Administration or its economic policies, not by a long shot. What he is saying, that is relevant to my premise is that those who are banking on tax cuts to pull us out of the current predicament are sadly mistaken as to their usefulness. Many would argue that tax cuts can only work if they are coupled with spending cuts, but to think that the government could reign in spending in the midst of this type of downturn requires a quantum leap of faith that would come with the notion that removing one of the only simulative elements remaining in the economy would somehow not cause the recession to worsen. This point was further underlined recently on Meet the Press. When pressed by moderator David Gregory, the Republican Minority leader, Mitch McConnell, declined to commit to spending cuts if the GOP took control of Capitol Hill. The bottom line is this: those on the far right fringe who parrot 18th and 19th Century economic concepts seem to strangely factor out the social chaos that would result from an ideology that was better suited for the world of Charles Dickens than the globalized world of today. The Republicans who hope to capture Capitol Hill in a few short weeks know this as well that’s why they are reluctant to go on the record and say otherwise.
A corollary argument that is used to support the extension of tax cuts to those families earning over $250,000.00/year is that idea that if this tax break is eliminated, that job creation will suffer. Here again there seems to be little in the way of empirical evidence to support this claim. A recent article; “Tax Increases Would Hit Few Small Businesses”; summarized the findings of the IRS and it’s Joint Committee on Taxation as follows: “Despite that emotional appeal, Internal Revenue Service statistics indicate that only 3 percent of small businesses would be subject to the higher tax, and many studies of previous tax increases suggest that it would have minimal impact on hiring… According to the Joint Committee on Taxation, 97 percent of all businesses owners do not earn enough to be subject to the higher rates, which would be levied on income of over $200,000 for individuals and $250,000 for families…But much of the research over the last two decades has found that increases in top tax rates can lead to an increase in the formation of small businesses, as wealthy individuals apparently begin start-ups to avail themselves of the more generous tax breaks offered to businesses… Higher taxes may lead individuals to seek self-employment because the opportunities for tax evasion and avoidance are greater,” according to a report released this month by the nonpartisan Congressional Research Service, which surveyed more than 20 studies on the effects of taxes on hiring.”
Thus it seems that the hue and cry about the dangers to job creation at the level of small business may in fact be greatly exaggerated after all, yet one more political football flying about amidst all of the misconceptions that relate to the issues of tax policy and it’s applicability in the midst of the worst downturn since the 1930s. It’s important to note that I am not against tax cuts per se; it’s just that they are not and never have been a cure all too economic ills. That said; the monotonous reiteration of the sanctity of tax cuts in this particular environment seems to amount to nothing more than the political posturing of those who are at a loss for good ideas as to what we need to do to repair the damage done over the past thirty years of deregulation and bubble economics.
With regard to the fact that most Americans don’t support extending tax cuts to the wealthiest, the latest New York times/CBS poll supports what the last Gallup Poll showed: “The poll found that 53 percent of Americans say Mr. Obama’s proposal to increase taxes on households earning $250,000 or more is a good idea, and 38 percent say it is a bad idea.” Thus once again as was previously pointed out, the disappointment and anxiety of rank and file Americans does not translate into empathy for the woes of the most fortunate among us.
Steven J. Gulitti
9/20/10
