Why the Tax Cuts Didn't Work

[On the Road]

Just in case you needed more ammunition on the tax cuts:

The Weak Recovery

As we all know, Bush pushed through two massive tax cuts -- "the largest tax relief in history," according to the Bush campaign. Yet the current recovery is among the weakest in history, as illustrated in the previous post. Shouldn't the largest tax cuts in history have had more effect? How could such massive tax cuts have such little impact on the economy?

The answer is that it matters a great deal exactly how you cut taxes. Some tax cuts have bigger effects on the economy than others, for a given dollar amount of taxes cut. And clearly, the specific types of taxes cut by the Bush administration had just about the smallest bang for the buck imaginable.

Why? There are several ways in which those tax cuts were terribly designed to stimulate the economy. I won't go into all of them here, but let me address a couple of ways. First of all, the lion's share of the tax cuts went to the richest housholds. Since the marginal propensity to save is so much higher among high-income households than lower and middle-income households, this meant that a large proportion of the tax cut was simply saved, adding no demand to the US economy.... Much of the tax cut's 2003 effect was lumped into the third quarter of 2003. According to the BEA, the 2003 tax cut, which took effect in July of 2003, reduced personal income taxes by nearly $100 bn in the third quarter of 2003 compared to the same quarter a year earlier.... he majority of that tax giveback was saved, not spent.

----snip

http://angrybear.blogspot.com/2004/09/why-bushs-tax-cuts-failed.html

[The_Casual_Observer]

1. The reagan tax cuts didn't work either

Rich people simply spend the money at Sothebys and Christies buying old violins and paintings. The money is not reinvested in business, as has been demonstrated currently.

[On the Road]

2. Yes, and Even When They Did Stimulate Businesses to Invest,

part of that investment was in purchases from foreign suppliers. Another part was in capitalized software which often has the result of increasing productivity and reducing jobs further.

It's a different world now. Under WTO and automation, capital investment does not equate to employment.

[SupplySideLiberal]

9. Employment gains come later

part of that investment was in purchases from foreign suppliers. Another part was in capitalized software which often has the result of increasing productivity and reducing jobs further.

It's a different world now. Under WTO and automation, capital investment does not equate to employment.

Great points that do show investment doesn't equate to immediate increases in domestic employment.

However, those foreign purchases create jobs overseas, in some cases in needy Third World countries. And foreign economic growth enables other countries to import our goods, eventually, which supports domestic employment.

Increasing productivity reduces obsolete jobs, but consumers are better off with cheaper and/or better products and services. And the businesses that are more productive with software, etc. will deploy the money saved in furthering their business in other ways. That will eventually create jobs.

I think it's totally true that supply side tax cuts do not produce immediate bumps in employment, but, longer term, economic growth does lead to higher employment.

[zbdent]

3. Most "trickle-down economics" proponents use the analogy of

watering the lawn - spread the "water" (money) over a wide area, and the entire lawn flourishes (kinda like a good summer rain).

Then, of course, when they apply "trickle-down economics", the way they do it is like watering the fruit of a tree . . . or pouring the water into a river.

[Spider Jerusalem]

4. More like pissing into a hole in the ground. (n/t)

[Yavin4]

5. Bush's Tax Cuts Were Never Designed To Stimulate The Economy

His tax cuts were designed to alleviate the wealthy from ever paying any federal taxes at all. Thus, putting the entire tax burden on the middle and working classes in America with the intention that these classes would rebel against paying this huge burden thereby demanding an end to Social Security and Medicare.

The right wing is expert at turning around popular support for federal social spending programs and getting people to vote against their own interests. On welfare, the right wing was able to rally the entire nation against anti-poverty programs by racializing the issue. They were successful because they were able to sell the notion that only African-American people were getting help from these programs that White Americans were paying for. Once this mis-perception became reality, anti-poverty programs were doomed.

On SS and Medicare, they couldn't racialize the programs because the overwhelming majority of the recipients were White Americans. So, they have to bankrupt the programs through repealing the federal tax code on the wealthy.

[IrishDemocrat]

10. Bush will be doing more than tax cuts

Bush plans on essentially eliminating the IRS or privatizing it to make it "more efficient." That's BS. Without the IRS or rpivatizing it, Bush and his buddies can get away with anything. As for teh tax cuts, they were BS. Reagan did an excellent job at turning even Union members on his side by demonizing welfare. This is true in once stongly Democratic areas such as Northeast Philadelphia (my home), the Lehigh Valley, and parts of SW Pennsylvania. People are oblivious to the implications of "tax cuts."

[AP]

11. They also achieve the same end as destroying SS and Medicare: guaranteed

wealth for the wealthy, and permanent poverty for the poor.

The rich don't want to have to work to maintain their power so they make sure the other classes can't challenge their hegemony. How to do that? Remove any program that would promote social mobility.

[cornfedyank]

6. deficit spending is a tax increase on posterity.

attack on the left
attack on the right
prepare for the counter-attack.

[Cary]

7. Read Krugman

He makes the most sense of anyone on this. The tax cuts started as a political ploy to take out Forbes in the primary before the 2000 campaign.

Later the rationale shifted to be a righteous refund of the surplus. Only after the election did they become "economic stimulous."

This shifting of rationales is a consistent characteristic of this administration, which is capitalizing on the radical conservative hatred of our country. The wing nuts hate the way our nation has been run over the past 60 years even though it's made us the most successful, prosperous nation the world has ever known.

Krugman's explanation of this is brilliant. I've tried to confront pukes with it, and they have ignored me. In fact they hate me.}(

8. read my website

Circular credit interdependencies...

[Randall_Burns]

12. Tax cuts and stimulis

Something that I dont' think has been worked out well in economics is how taxes vary in how they affect productivity. Even conservatives like Friedman admit this is the case-but the details haven't been worked out to the point there is any real kind of consensus.

My own sense:
Bush tended to grant tax relief to the most monopolistic, oligarchic aspects of the US economy-and left taxes on working people in place for the most part. Also he made up the difference in pure borrowing-so everyone knows that eventually we'll see tax increases-which tends to reduce any stimulatory effect.

[mhr]

13. Marginal Propensity To Consume Explains Everything

If one wants to stimulate a consumer economy like the US, tax decreases should be targeted at the lower and middle income groups.

Why, quite simple. The probability that a dollar given to this group will be spent and then circulate in the economy is much greater than the same dollar given to the ultra-wealthy.

In other words, if a dollar is given to someone that has deferred needs, they will most likely spend that dollar to meet that need - car maintenance, school clothes, home repair, etc.

If you give a dollar to the ultra-wealthy they have no incentive to spend that dollar since they have no deferred needs by definition.

The investment argument is also used to justify giving tax decreases to the ultra-wealthy. However, were is it writ that the ultra-wealthy will actually do anything other than save the money because they really have no need to invest or spend more. By definition, their current income sources meet there needs or they would not be ultra-wealthy.

Hence, based on the marginal propensity to consume and the bogus "trickle down" investment argument, providing tax decreases for wealthy people to stimulate a consumer economy is a red hearing.

Case closed.

[Mr2005]

14. cuz the tax cut is not for middle class people ,, just for the rich ppl