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Busting the Tax-Cuts Myth

October 6th, 2010 Leave a comment Go to comments

A blog post about tax policy? Snooze.

I know—I’ve been sitting on this one for a long time because this kind of stuff always bores me to death unless I hear it from someone who can actually make it entertaining. I’ll do my best to make this an informative and enjoyable read, but I have to give credit to Cenk Uygur of The Young Turks for maintaining my attention long enough to get this argument through to me.

So let’s start with a fun little anecdote. Let’s say you’re a megalomaniacal owner of a giant corporation that manufactures something. It doesn’t really matter what it is, but let’s go with fish-flops:

fishflop

Fish-Flop Inc. is enormously successful, raking in millions of dollars a year in profit. You’ve got fish-flop factories all over America employing thousands of workers. You may be an evil greedy bastard, but you’re having a positive impact on the economy both by contributing to the total GDP and providing American workers with a decent wage that allows them to go out and spend money on other consumer goods.

Even though you take home millions of dollars a year and live quite comfortably, you could always use a little more, so you use some of your wealth to lobby the government to cut your taxes. Let’s say you were paying 50%, but your lobbying efforts were successful and that got lowered to 30%. So if you were averaging $10 million a year in profits and were giving $5 million back to the government, now you get to keep $7 million for yourself.

Now you’ve got more money than you know what to do with. You spend as much of it on luxury goods and services as you can, letting your wealth trickle-down to the clothing designers, fancy hotel owners, and private-jet manufacturers of the world, but you’re still sitting on a huge pile of cash at the end of the day. You put that to the side so that your dimwitted spoiled children can inherit it one day and use it to make up for the fact that they never learned to do anything for themselves—now they’ll be able to continue paying people to do things for them, and that wealth will trickle down to the financial consultants, travel agents, and limousine drivers of the world.

And since you’ve got so much extra money, why not get your fish-flop factories to downsize a little bit—lay off some workers here and there to save on labor and drive that net-income of yours right up to $8 million. After all, your kids are pretty stupid. They’re going to need a lot of inheritance money. In fact, you might want to go easy on the spending as well. Your wealth has done enough trickling down already.

But wait—there’s trouble brewing! A democrat has been elected to the White House and democratic majorities now control both houses of congress. Not only that, but these are real democrats—ones you and your friends haven’t bought. Ones who are actually concerned about the middle class and the country’s education and infrastructure and are willing to use your money to cover the cost of improving these things.

Massive tax-increases are slammed on the wealthiest Americans, and that means you. Suddenly you’re required to pay a whopping 70% of your gross income, meaning you only get to keep $3 million a year and give the rest to Uncle Sam.

No way are you going to fork $7 million over to the government and only keep a paltry $3 million for yourself. You’ll show them—you’re going to take most of that $10 million your business is making and put it right back into Fish Flop Inc. You’re going to hire more workers and build more factories. You’re going to develop newer and better fish-flops that even more people will want to buy. If all goes well, you’ll double your gross income in which case you’ll be able to keep $6 million for yourself.

It occurs to you that when you die, the government is going to take a huge chunk out of your kids’ inheritance anyway, so perhaps hoarding money isn’t the best strategy. In fact, maybe you should stop spoiling your kids and make them go out in the real world and learn how to make money on their own. You know the expression: “Give a man a pair of fish-flops and he’ll be walking around in style for a day. Teach a man to make his own fish-flops and he’s set for life.”

This little story is a counter-narrative to the prevailing wisdom that cutting taxes for the rich is a cure-all for the economy. The wealthiest Americans, we are told, are the “job creators”. Cut their taxes and they’ll have more money to invest in their businesses, which means more workers will get hired and more people will have more money to spend on consumer goods and the economy improves all around. Direct more wealth to the top and more will trickle-down to the bottom.

This is such a simple argument that almost everybody accepts it without question. Nobody even considers that things might be more complicated than that. That allowing the rich to keep more of their money might be a dis-incentive to invest in their business because they’re making plenty of money already. That the money they do get to keep usually only goes to industries that cater to the wealthy and not to all businesses equally. That with a big enough hoard of money to sit on, wealthy families can settle comfortably into a worry-free lifestyle of which their kids will never have to know anything different.

More importantly, the idea that raising taxes on the wealthy actually increases their incentive to put more money into their businesses is highly counter-intuitive, but it’s logical when you think about it. If more of your wealth is tied up in your business and less is sitting in your bank account, you’re going to want to grow that business.

Of course you shouldn’t trust anecdotal evidence and thought-experiments. Just consider the facts. This is a graph showing the marginal tax-rates for the wealthiest Americans over the last 80 years plotted alongside changes in national GDP:

marginalGrowth

Of course correlation doesn’t equal causation, but one thing that’s clear is that lower tax rates do not automatically equal economic growth and higher tax rates do not automatically equal economic decline. Just look at the period when taxes were at their highest: between 1951 and 1963. This is often thought of as the Golden Age of America, the time of the greatest middle-class prosperity, and the numbers bear that out: the economy grew by an average annual rate of 3.71%. But during the last decade, when taxes were extremely low, average growth has been a mere 1.71%

In the upcoming mid-term elections, republicans are running on the same old platform of tax cuts across the board, especially for the wealthy. One of their biggest memes is that we can’t possibly afford to repeal the Bush tax-cuts for the wealthiest 2% because the economy just can’t afford it. Well, think about Fish Flop Inc. and consider the following facts (also courtesy of The Young Turks):

During the 8 years of the Bush presidency, total national income was $2.74 trillion less than the 2000 levels. Of course a lot of that had to do with the economic crash at the end, but even if you limit it to 2003-2007, it’s still less than the 2000 levels by $951 billion. Bush cost the economy a total of $1.8 trillion in his 8 years as president, and if you include the effects of his policies extending into 2010, that number rises to $2.3 trillion.

Yeah, those tax-cuts worked wonders for the economy and we obviously need to keep them in place, right?

One more fact to leave you with: One out of every eight dollars in tax-cuts brought to you by the Bush administration went to the wealthiest 0.1% of Americans. Not just the top 2% or the top 1%, but to the wealthiest one-tenth of one percent.

These are supposedly the “job-creators” right? How many jobs were created thanks to that? How many more people were hired to make fish-flops and other valuable merchandise? Did that top one one-thousandth of Americans use their extra income to hire new workers, or did they just add it to their already massive pile?

The next time you see a republican politician on TV imploring us to make the Bush tax-rates permanent or risk the destruction of America as we know it, feel free to laugh.

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