Tax Cuts: The B.S. and the Facts

[one...two...tree 2,762]

By Larry Beinhart

The Myth

Do tax cuts stimulate the economy?

Yes. Tax cuts allow people to keep more of their own money. Therefore, they have more to invest and spend into the economy, and they have more money to start business and create jobs, therefore also helping to stimulate the economy. -- Yahoo Answers

I think when people take a look back at this moment in our economic history, they'll recognize tax cuts work. They have made a difference. -- George W. Bush

The Realities

The brute facts are these:

• Large income tax cuts are followed by a bubble and then a crash.
• High income taxes correlate with economic growth.
• Income tax increases are followed by economic growth.
• Moderate income tax cuts are followed by a flat economy.
• All of this is especially true as applied to the top tax rates, the amount paid on income that exceeds the highest bracket.

The Three Great Tax Cuts: Boom, Bubble, Crash

1. Hoover

During World War I, the top marginal tax rate went up to 73 percent -- not the highest ever, but pretty high.

In 1922, a series of rate cuts began. Down to 56 percent, 46 percent, and finally, in 1925, it went down to 25 percent.

The stock market took off. There was a boom. But the boom was a bubble.

It was followed by the Great Crash of 1929.

There were bank failures and the Great Depression.

2. Reagan

From Franklin Roosevelt's second term all the way through to Jimmy Carter -- from 1936 until 1982 -- the top rate was in the 70 to 92 percent range.

Then along came Reagan in 1981. In 1982, he cut that down to 50 percent.

The economy went into "the worst recession since the Great Depression."

His supporters argued that it was all Carter's fault and that the new policies would take time to work. The tax cuts stayed in place. In 1987, there was another round of tax cuts. They took the top rate down to 38.5 percent. It would stimulate the economy!

There was a boom. But it was a bubble.

Then, in October 1987, there was a crash -- the worst since '29. It was called Black Monday.

Much of the bubble money had gone into -- ohmigod! -- real estate.

Suddenly there were bank failures! More than during the Great Depression. There was a Savings & Loan crisis! There had to be a bailout.

3. Bush II

George Bush came into office with the healthiest, post powerful economy in American history.

He immediately cut taxes. The top marginal rate went down from 39 percent to 35 percent. He also cut capital gains taxes and inheritance taxes. A recession immediately ensued. But he persisted.

Eventually, the economy began to grow.

Employment didn't grow very much. Median income went down. The stock market was pretty flat. But the financial sector -- and only the sector -- grew.

Which should have made it obvious to someone, that it was … a bubble.

There was a crash.

Bank failures. A bailout.

The three worst economic disasters in American history follow the exact same pattern: tax cuts, boom, bubble, crash.

High Taxes Correlate with Strong Economic Growth

The four periods of greatest economic growth in American history, by pretty much any measure, are:

• World War II (1941-45): top tax rate varied from 88 to 94 percent
• Post-war under Truman and Eisenhower: top rate bounced around from 81 to 92 percent
• Clinton years: Clinton raised Bush's top rate of 31 percent to 37 percent and then to 39 percent
• First two Roosevelt administrations (1933-40). When Roosevelt came into office, Hoover had already raised the tax rate in 1932 from 25 percent to 63 percent. Roosevelt raised it again in 1936 to 79 percent.

A lot of ink, sweat and ranting have gone into proving that the New Deal did not end the Great Depression. Nonetheless, the economy grew 58 percent from the time Roosevelt came into office and when the United States entered the war.

Some of that anti-New Deal rhetoric also claims that the recovery began under Hoover. Perhaps, but to say so is also to say that it began with tax hikes.

Likewise, many right-wing critics insist that the Clinton boom actually started under Bush the First. It is necessary to remember that Bush the First also raised taxes (from 28 percent to 31 percent) and was soundly thrashed by the conservatives for doing so. Stephen Moore of the Cato Institute called it "The Crime of the Century" and explained at length how it had brought ruin to America.

Tax Increases Are Followed by Economic Growth

Three of the four high-growth periods cited above followed significant tax hikes.

The fourth, the Truman-Eisenhower years, began with a top tax rate of 91 percent -- it couldn't get much higher.

Moderate Tax Increases Are Followed by Flat Growth

John F. Kennedy is generally credited with starting the tax cut craze.

He proposed it, but, as with all his ideas, it was Lyndon Johnson who actually got it enacted. The top rate was cut from 91 percent to 77 percent, then to 70 percent, on all income over $200,000 for a single person and over $400,000 for a married couple.

That's where it stayed, through Nixon, Ford and Carter.

The Dow Jones average was pretty much the same when that period ended as when it began. Median personal income stayed roughly the same.

These are the brute facts.

I call them that because there doesn't appear to be any theory to explain them.

A noted conservative (a sane one, not William Kristol) recently wrote to me in a private e-mail exchange on this subject:

"I am unaware of any (or many) respectable economists (maybe I've missed some) who have suggested that higher taxes have proved to be a formula for better economic growth."

Actually, I am too.

Even now, in the midst of the Bush disaster, I constantly see and hear tax cuts, particularly at the top, described as "pro-growth." So I went and looked at the numbers -- tax rates, tax cuts and tax hikes -- and placed them alongside job growth, the Dow Jones, growth in the GDP and median income.

The brute facts say the opposite of the myth.

The belief in tax cuts is a subset of the belief in Free Markets, with a capital F & M, which is a theological belief.

How do we distinguish a theological idea from a scientific (or rational) one?

According to Karl Popper, the great thinkers in the philosophy of science, a scientific idea has to be capable of being refuted. There has to be some theoretical test that could come out the wrong way, which would then say the theory is wrong.

On that basis, Popper rejected Marxism and Freudianism, along with religious theology, because no matter how many times they didn't work, there was always some explanation that said that the theory was right and if you just looked at the facts in some other way; you could make up some story that said your theory was still right.

The quintessence of theological thinking goes like this. The preacher says, "The world will end next Saturday night! The Bible says it must be so." Everyone in the congregation wakes up safe and sound on Sunday morning. They head off to church and believe whatever he says in that sermon, too.

In science, we come up with a hypothesis. Then we set up an experiment. We see what happens.

Economics is complex. It takes place in the real world where many factors are at play and we can't control for them all. Still, none of the major tax cuts since 1913 have led to significant, sustained growth. Two them were followed by instant recessions (Reagan and Bush), and three of them, when they were sustained, were followed by bubbles which were then followed by the three worst crashes and sets of bank failures in modern times.

It's time to throw out the theory, accept the facts, and come up with new ideas.

Coming: Part II: Why High Taxes Create a Healthier Economy and Low Taxes Don't

Larry Beinhart is the author of "Wag the Dog," "The Librarian," and "Fog Facts: Searching for Truth in the Land of Spin." His latest book is Salvation Boulevard. Responses can be sent to beinhart@earthlink.net.

http://www.alternet.org/workplace/106410/t..._and_the_facts/

[payxibka 10,045]

While a particular tax policy might be on a Presidential agenda.. A President has no authority to do so without the support of Congress.

[Ban Hammer 13,352]

While a particular tax policy might be on a Presidential agenda.. A President has no authority to do so without the support of Congress.

don't get in the way of blaming bush!

[mawilson 2,133]

Coming: Part II: Why High Taxes Create a Healthier Economy and Low Taxes Don't

Part II - High taxes - coming to a home near you!

LOL

[Ban Hammer 13,352]

Coming: Part II: Why High Taxes Create a Healthier Economy and Low Taxes Don't

Part II - High taxes - coming to a home near you!

LOL

sounds like we're being prepped, eh?

[mawilson 2,133]

Coming: Part II: Why High Taxes Create a Healthier Economy and Low Taxes Don't

Part II - High taxes - coming to a home near you!

LOL

sounds like we're being prepped, eh?

Sounds and smells like bullsh1t.

"High taxes create a healthy economy" is right up there with "I'm from the government and I'm here to help you."

[Ban Hammer 13,352]

Coming: Part II: Why High Taxes Create a Healthier Economy and Low Taxes Don't

Part II - High taxes - coming to a home near you!

LOL

sounds like we're being prepped, eh?

Sounds and smells like bullsh1t.

"High taxes create a healthy economy" is right up there with "I'm from the government and I'm here to help you."

i thought the same. it sounds like someone is trying to sell high taxes.

[mawilson 2,133]

Coming: Part II: Why High Taxes Create a Healthier Economy and Low Taxes Don't

Part II - High taxes - coming to a home near you!

LOL

sounds like we're being prepped, eh?

Sounds and smells like bullsh1t.

"High taxes create a healthy economy" is right up there with "I'm from the government and I'm here to help you."

i thought the same. it sounds like someone is trying to sell high taxes.

I looked up this "Larry Beinhart". Here's what he wrote in an article titled "Americans With

Disabilities: The Reality-Challenged":

Even if you think of Cheney as an evil, authoritarian, crypto-fascist puppet master, or if you think of Bush as a smiling, dry alcoholic with sadistic tendencies, the question remains, why would they pursue policies that were pretty obviously doomed to failure? Whatever their ambitions are and however ruthless they are and however amoral we might think they are, surely, successes would have been better for them than failures. It's not hard to be reality-challenged. The reality-challenged people are running the government. They convinced virtually all of our media that their view of the world was real. They got plenty of voters to vote for them. It was a disability that crossed party lines. Nobody stood up for reality. We've had to wait for reality to stand up for itself. Which it's doing.

What do you think, Charles? Can we trust this guy on the economy? I think we can - he's not biased at all!

Edited November 12, 2008 by mawilson

[Hilarious Clinton 452]

Lower taxes and balance the budget.

[one...two...tree 2,762]

I looked up this "Larry Beinhart". Here's what he wrote in an article titled "Americans With

Disabilities: The Reality-Challenged":

Even if you think of Cheney as an evil, authoritarian, crypto-fascist puppet master, or if you think of Bush as a smiling, dry alcoholic with sadistic tendencies, the question remains, why would they pursue policies that were pretty obviously doomed to failure? Whatever their ambitions are and however ruthless they are and however amoral we might think they are, surely, successes would have been better for them than failures. It's not hard to be reality-challenged. The reality-challenged people are running the government. They convinced virtually all of our media that their view of the world was real. They got plenty of voters to vote for them. It was a disability that crossed party lines. Nobody stood up for reality. We've had to wait for reality to stand up for itself. Which it's doing.

What do you think, Charles? Can we trust this guy on the economy? I think we can - he's not biased at all!

What does this have to do with the argument he made in the OP?

FWIW:

Larry Beinhart is an American author. He is best known as the author of the political and detective novel American Hero, which was adapted for the political-parody film Wag the Dog. No One Rides for Free (1986) received the 1987 Edgar Award for Best First Novel. His most recent book, Fog Facts, examines why some important even striking truths are overlooked by the media and the culture at large.

Beinhart spent two years in Oxford, England, where he was a Raymond Chandler Fulbright Fellow in Detective and Crime Fiction Writing at Wadham College. An avid skier and sometime instructor at Hunter Mountain in New York State, Beinhart spent one winter in St Anton, Austria researching Foreign Exchange and parts of several winters skiing in Verbier, Switzerland.

http://en.wikipedia.org/wiki/Larry_Beinhart

Edited November 12, 2008 by Mister Fancypants

[Ban Hammer 13,352]

Coming: Part II: Why High Taxes Create a Healthier Economy and Low Taxes Don't

Part II - High taxes - coming to a home near you!

LOL

sounds like we're being prepped, eh?

Sounds and smells like bullsh1t.

"High taxes create a healthy economy" is right up there with "I'm from the government and I'm here to help you."

i thought the same. it sounds like someone is trying to sell high taxes.

I looked up this "Larry Beinhart". Here's what he wrote in an article titled "Americans With

Disabilities: The Reality-Challenged":

Even if you think of Cheney as an evil, authoritarian, crypto-fascist puppet master, or if you think of Bush as a smiling, dry alcoholic with sadistic tendencies, the question remains, why would they pursue policies that were pretty obviously doomed to failure? Whatever their ambitions are and however ruthless they are and however amoral we might think they are, surely, successes would have been better for them than failures. It's not hard to be reality-challenged. The reality-challenged people are running the government. They convinced virtually all of our media that their view of the world was real. They got plenty of voters to vote for them. It was a disability that crossed party lines. Nobody stood up for reality. We've had to wait for reality to stand up for itself. Which it's doing.

What do you think, Charles? Can we trust this guy on the economy? I think we can - he's not biased at all!

i'd think that higher taxes allows for more government spending, but that assumes that the higher taxes are used for government spending to boost the economy (and there's a surplus, not debt). although some may tout raising taxes to pay off the debt, consumer spending is low and raising taxes will drive that even lower.

in short, right now ain't the time for higher taxes.

[dalegg 143]

So what in the world is Obama thinking about lowering taxes to 95% of us?

[one...two...tree 2,762]

i'd think that higher taxes allows for more government spending, but that assumes that the higher taxes are used for government spending to boost the economy (and there's a surplus, not debt). although some may tout raising taxes to pay off the debt, consumer spending is low and raising taxes will drive that even lower.

in short, right now ain't the time for higher taxes.

Nice post, Charles! ...but what you are arguing against isn't accurate. The Middle Class will get a moderate tax cut and for those making over 250g's a year, their tax rates will return to the rates they were under Clinton. Nothing more, nothing less.

[Ban Hammer 13,352]

i'd think that higher taxes allows for more government spending, but that assumes that the higher taxes are used for government spending to boost the economy (and there's a surplus, not debt). although some may tout raising taxes to pay off the debt, consumer spending is low and raising taxes will drive that even lower.

in short, right now ain't the time for higher taxes.

Nice post, Charles! ...but what you are arguing against isn't accurate. The Middle Class will get a moderate tax cut and for those making over 250g's a year, their tax rates will return to the rates they were under Clinton. Nothing more, nothing less.

so it's said. however, the threat of higher taxes makes even the middle class watch their spending. need i remind you of:

"In Germany, they came first for the Communists, And I didn’t speak up because I wasn’t a Communist;

And then they came for the trade unionists, And I didn’t speak up because I wasn’t a trade unionist;

And then they came for the Jews, And I didn’t speak up because I wasn’t a Jew;

And then . . . they came for me . . . And by that time there was no one left to speak up."

[mawilson 2,133]

What does this have to do with the argument he made in the OP?

I'm questioning the author's credibility.

Isn't that what you liberals do when someone posts a Fox News article?