The Big Republican Lie on Tax Cuts
by theyoungturks, Wed Oct 06, 2010 at 06:12:26 AM EDT
Republicans have repeated the lie that tax cuts are always good for the economy so often that all of Washington seems absolutely convinced that it's true. The conventional wisdom is so established on this that all a Republican has to say is, "Everyone knows you don't raise taxes in the middle of a recession ..." Or in good times or in mediocre times or ever. All tax cuts are always good.
Republicans add another layer of absurdity to this as they say that tax cuts always lead to more revenue for the federal government because of supply-side economics. The economy expands, people make more money and the government collects more in taxes even though it takes a smaller percentage. Great theory - how about if we cut taxes down to 1%? Would the government still get more revenue?
The question isn't whether tax cuts or tax increases are always the right answer. The question is at what level of taxes to do we stimulate the economy, collect enough revenue to run a functioning government and let people keep as much of their income as we can. No one, not even the world's biggest liberal, wants to pay more in taxes personally. We just want to find the right balance so that everyone wins.
When you look to see what that right level is in our history, what you find is very interesting. In our glory years between 1945-1965 (these are the years that the Republicans dream of going back to), the top marginal tax rate fluctuated between 77% and 94%. I was stunned when I first learned that. People's heads would explode if you suggested those levels now. Yet, it worked for us for decades as we built the great American middle class and our manufacturing base.
The second interesting fact is what happens when we have historically low taxes. From 1925 to1931, the highest marginal tax rate was as low as it has almost ever been - between 24-25%. And between 2003-2010, the highest marginal tax rate was also at one of its lowest points - 35%. So, what happened when we had these really low tax rates? The Great Depression and the Great Recession.
In fact, when you look at when the economy takes off and when it slows down, it almost perfectly matches the fluctuation of our tax rates. Except the correlation is the exact opposite of conventional wisdom - the economy crashes after tax cuts and takes off after tax increases.
Now, conservative critics will scream that correlation does not equal causation. Yes, but it's pretty good evidence. And you have no counter evidence. If you see that every time someone jumps out of a building, they come crashing down. You can argue about causation all you want, but my guess is you're not going to jump out of the building.
Yet we do. We have been religiously cutting taxes since 1980. How has that worked out for us? We've had median wages stagnating, manufacturing disappearing and now enormous unemployment. If tax cuts are so great, why did our economy get pulverized after Bush passed the two largest tax cuts in history?
Of course, the reality is that America has been sold this bag of goods by the very people who stand to benefit the most from cutting taxes to the rich - the rich. And it has worked for them. Since 1980, the average after-tax income for the top 1% of this country has risen by 281%. The average household in the top 1% saw their wealth go up by a whopping, unbelievable $973,100. See, the tax cuts worked for somebody. The people who pushed for them. Mission accomplished!
At this point, you have to be curious as to why the economy goes up when we raise taxes, especially at rates that seem to defy common sense. I was a Reagan Republican growing up because the top tax bracket of 70% seemed crazy to me and he brought that down. I thought a rate that high couldn't possibly be the right balance.
But now that I am a small business owner I get it. You see if taxes are low, like 20%, as a partner in my small business I am motivated to take out our profits as income for myself. Let's say my share of the business led to $100,000 in profits. If taxes are 20%, I pay $20,000 and keep $80,000. I can live with that split.
But what happens when taxes are high? If I have to pay 60%, then I'm left with only $40,000 and the government takes $60,000. That sucks. I don't want to "lose" all that money. So, what do I do instead? I re-invest it in the business, so I don't have to pay taxes!
If at the end of the year, my tax bill is zero, then I pay zero. Instead, by plowing the profits back into the business I help to grow it and make it even more profitable down the road. I might even hire more people with the extra money I kept in the business because that's a lot better option than just handing it over to the government.
So, higher taxes don't lead to more investment and higher employment because I'm a liberal who likes to give away my money to the government. They lead to those good results for the exact opposite reason - because I don't want to give away my money to the government.
Logic, you can't beat it. Unless of course you have a lot of money and you just buy off the whole system. And that's where we stand now, with the truth turned on its head. But the next time someone claims tax cuts help the economy, don't let them get away with that bald-faced lie.
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