Kal ZoneBlog

Do tax cuts work?

September 25, 2010

David Cay Johnston, in an article on Tax.com, examines the question of how the Bush tax cuts worked out for the U.S. economy. Not so well, it turns out.

Total income was $2.74 trillion less during the eight Bush years than if incomes had stayed at 2000 levels.

Although the wealthiest segment of the population did far better, people on average earned less. By this aggregate standard, it is clear that the Bush tax cuts, as an economic policy, were a failure.

The conservative story line, of course, is that people always do better when the government takes less of their money in taxes. More money in your pocket, right? Unless as a result of these policies you are out of work, or taking forced fuloughs or pay cuts, or trying to pay for a medical crisis.

So why do tax cuts not actually work? Several reasons:

Johnston's article is worth a careful read. The ideology of cutting taxes has become a political sacred cow, with even Democrats fearful of challenging the notion that taxes can only go down. Or the notion that a failure to renew "temporary" tax cuts amounts to "raising taxes". (See, for example, Governor Schwarzenegger's attack on his predecessor for ending a "temporary" reduction in vehicle license fees.)

The conventional wisdom is that taxes can only go down, never up. The only problem, as Johnston makes clear, is that it doesn't work — it hurts the economy. If you disagree, read his article and let me know what is wrong with his argument.

Yes, taxes are painful, and a tax cut may provide a nice windfall. But in the long run, people are better off if the economy as a whole is functioning at full capacity and providing better jobs. Which would you rather have, a job that paid $3,512 more a year, or a couple hundred dollar tax cut at your present salary? That is the tradeoff Johnston describes in his article.

Robert Reich, on his blog, covers many of these same issues.

You might also want to check out David Cay Johnston's book Perfectly Legal, in which he describes the inner workings of the IRS and the byzantine federal tax code. You might be surprised at how the tax burden is distributed — who pays and who does not, and how the tax system has been rigged to enable "perfectly legal" ways to shift the tax burden onto someone else's shoulders.

Copyright © Kalle Nemvalts except as noted. Original content on this site is licensed under the Creative Commons CC BY-NC-SA 4.0 License. The Creative Commons license does not cover commercial reuse or adaptation, which must be negotiated separately.