"Do Tax Cuts Lead to Economic Growth?" by DAVID LEONHARDT at the NY Times
Do Tax Cuts Lead to Economic Growth?by DAVID LEONHARDT at the NY Times
http://www.nytimes.com/2012/09/16/opinion/sunday/do-tax-cuts-lead-to-economic-growth.html?hp
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Why not? The main economic argument for tax cuts is simple enough. In the short term, they put money in people’s pockets. Longer term, people will presumably work harder if they keep more of the next dollar they earn. They will work more hours or expand their small business. This argument dominates the political debate.
But tax cuts have other effects that receive less attention — and that can slow economic growth. Somebody who cares about hitting a specific income target, like $1 million, might work less hard after receiving a tax cut. And all else equal, tax cuts increase the deficit, as Mr. Bush’s did, which creates other economic problems.
When the top marginal rate was 70 percent or higher, as it was from 1940 to 1980, tax cuts really could make a big difference, notes Donald Marron, director of the highly regarded Tax Policy Center and another former Bush administration official. When the top rate is 35 percent, as it is today, a tax cut packs much less economic punch.
“At the level of taxes we’ve been at the last couple decades and the magnitude of the changes we’ve had, it’s hard to make the argument that tax rates have a big effect on economic growth,” Mr. Marron said. Similarly, a new report from the nonpartisan Congressional Research Service found that, over the past 65 years, changes in the top tax rate “do not appear correlated with economic growth.”
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The Bush tax cuts brought our national tax rates to its lowest level since the 1920s. The principal argument behind the cuts was that it would increase liquidity in the private sector and consequently, generate a higher level of economic activity. In addition, it would also allegedly provide the incentive for American money parked overseas to return home.
However, none of those things happened.
You know why? Because the theory has no economic merit, and is based neither on statistical nor empirical data. Instead, it originated during a dinner party in 1974 at the Two Continents Restaurant at the Washington Hotel in Washington, D.C. In attendance was Dick Cheney, Donald Rumsfeld and Prof. Arthur Laffer. What started as a campaign talking point eventually morphed into the Laffer Curve, now a central tenet in the GOP economic dogma.
