Editorial: The myth of tax cuts

When politicians say they will cut taxes and give Americans the hard-earned dollars they’ve earned rather than fuel higher government spending, most American voters stand up and cheer — even though that very policy measure is against their personal interests.

In one of the great rhetorical shams of the past 40 years, Republicans have been very adept at turning this political talking point to their advantage, when the effect of the policy is to benefit the wealthy while shafting the poor and middle class. The sick irony is that the voters who are being disenfranchised by these policies, often praise the politicians and conservative talk-show hosts for their God-and-country values.

It is happening again in this election cycle. Politicians of all stripes are winning political points by calling on extending the Bush tax cuts for another year at least, if not permanently, even though economists from almost every political persuasion say that such cuts are the least effective way to stimulate the economy. Specifically, they say that tax cuts to the wealthiest 2 percent do very little good at all, because the people in that income level invest in job growth when the economy is expanding, not when it is on the decline or stalled.

The non-partisan Congressional Budget Office recently analyzed the short-term impact of 11 policy options and, according to a recent story in the New York Times, found that extending the tax cuts was the least effective way to stimulate the economy and create jobs, adding that extending the tax cuts for the highest wage earners  (over $250,000 for a household) would have the smallest “bang for the buck.”

Even though that makes perfect sense, too many voters choose to ignore that basic economic assumption and fall lockstep behind the “megaphonic” pied pipers who suggest tax cuts stimulate the economy and reduce the deficit.

Nothing could be further from the truth.

First, tax cuts add to the national deficit. Ever since former President Ronald Reagan pushed his tax cut agenda, the revenue side of the equation has not grown as much as the deficit side. (A rapidly growing national debt in Reagan’s second term is why he reversed his earlier stance and raised taxes to reduce the deficit.) A rising national debt increases interest expenses, of course, which used to be one of the things that true fiscal conservatives railed against.

Second, tax cuts for the middle class and lower class does stimulate consumer spending, but is not as effective other measures to create job growth. Targeted tax cuts, on the other hand, can have a more positive effect, particularly, if those tax cuts are used to stimulate growth in specific economic sectors. President Obama’s proposal is to extend the tax cuts to every household earning less than $250,000 per year (or individuals earning less than $200,000), plus it targets specific tax cuts aimed at stimulating small business growth.

Here are some other facts to consider:

Proponents of tax cuts for the wealthiest 2 percent suggest that $250,000 annually isn’t all that much. Maybe not to some, but it places those earners in the top 2.1 percent in the nation. The more important number to note is that the real median household income for Americans in 2008 was $50,303 — a fifth as much as the lowest of those in the top 2.1 percent.

Extending the Bush tax cuts for everyone will cost the federal government $2.78 trillion over the next decade. Ending the tax cuts for those with incomes over $250,000 would net $700 billion over the next decade — reducing the loss of revenue by 25 percent. Over the past decade, the Bush tax cuts have cost the government about $1.7 trillion.

Furthermore, tax cuts, unless accompanied by spending cuts (which is rarely the case), increase the national debt and budget deficits, rather than reduce them, says Edward Kleinbard, a law professor a the University of Southern California, who is also a former chief of staff of the bipartisan Joint Committee on Taxation.

“The thought that tax cuts pay for themselves or that tax cuts alone can turn around this economy is magical thinking,” Kleinbard said in a recent New York Times story. “The debate has become so unrealistic it makes you want to scream.”

Knowing these things, does anything really think the super rich think tax cuts for them are necessary or even helpful, or is the strategy a political ploy to attract rich donors to give to Republican candidates? If so, does that not widen the economic gulf between the American people?

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