I Guess Tax Cuts Stimulate the Economy After All
Conservatives have been pounding their fists and screaming for decades that tax cuts stimulate the economy. With lower taxes, investors and business owners can provide more capital for new ventures and engage in more hiring, because they know less of their profits will be confiscated to pay for things like solar panels at the White House.
Tax cuts don’t revive the economy the second they’re passed—no one, not even Rick Santelli, ever said they did. They don’t do so a few weeks later; they don’t always do so in time for the next election. But eventually they do.
Tax cuts trim government revenue temporarily, but soon increased growth from lower tax rates results in net revenue increases.
In contrast, tax increases—which is what the impending reversal of the 2001 and 2003 Bush tax cuts would amount to—shrink the economy by decreasing hiring and investment. Regarding the Bush tax cuts, that’d be a combined tax increase to the tune of half a trillion dollars over the next decade. (Pop quiz: If Rhode Island and Massachusetts’ tax structures were switched, would John Kerry still take the trouble to dock his yacht in another state, even though it would cost him half a million dollars a year in taxes?)
It’s really not that complicated.
Imagine that you run a lemonade stand and make $100 profit a day, and the Obama administration taxes you at 50%, for a government revenue total of $50.
Now imagine that the incoming Christie administration slashes that rate to 20%. Instead of worrying about paying your bills and staying afloat, and resenting the government’s punishing your entrepreneurship, you hire more workers and eventually expand to five franchises. At $20 in taxes per stand, you are now sending twice as much revenue to the government as before.
Leftists refuse to see the economy as dynamic and capable of expansion; they view it as a fixed pot that must be redistributed from oppressors to oppressed.
The 1990s were prosperous, not because Bill Clinton was a laissez-faire capitalist extraordinaire—though he was forced into the role of pseudo-free-marketer by Republican Congressional majorities after 1994—but because of the cumulative effect of Reagan’s policies throughout the 1980s. Reagan campaigned on the idea of permanent tax rates across the board and enacted them while in office; they remain largely in effect to this day. The degree of certainty, stability, and flexibility that this consistent posture afforded investors and business owners over the next two decades should not be underestimated.
Reagan steadfastly resisted the call of Congressional Democrats and some Republicans to ramp up government spending during the early 80s recession. Under his administration, deficit as a percentage of GDP never rose above 6.0%. By 1987 it was down to 3.2%.
In contrast, the Office of Management and Budget expects the deficit-GDP ratio to be 10.0% in 2010 under Obama, and to barely decline in 2011.
During his presidential campaign, Obama was not shy about promising to let Bush’s tax cuts expire in 2011 if elected. When Charles Gibson asked Obama why he would support an increase in capital gains taxes, even though raising them in the 1980s decreased government revenue and lowering them in the 1990s and 2000s increased government revenue, Obama insisted he would do it “for purposes of fairness.” In other words, Obama feels obligated to make rich people suffer for the sin of being productive, even if that means poor people will suffer in the long run.
In the spring of 2009, Obama and Congressional Democrats passed their poorly designed, massively irresponsible stimulus spending bill. Before passage, Obama warned that without the $787 (now $862) billion bill, the unemployment rate might rise to 8.0%.
When unemployment hit 10.0% in 2010, Obama’s new tagline became, “Yes, but it’s not 12 or 13, or 15.”
Democrats’ halting efforts to offer targeted tax cuts to special interest groups as part of the stimulus bill were not convincing. Giving a tax break to a “green” company that wouldn’t survive on its own does not create the wealth that a tax break for an independent, self-sufficient, productive company would.
Now that it’s become obvious to everyone except Paul Krugman that runaway government spending does not mysteriously create wealth, Federal Reserve Chairman Ben Bernanke has been caught admitting to the House Financial Services Committee last Thursday, 18 months after the stimulus bill has had a chance to work but failed, “Extending the Bush tax cuts will strengthen the economy.”
Bernanke was quick to walk back his statement and claim that extending the tax cuts is just one way to stimulate the economy. (One way that works, he did not say in so many words, but give him credit for letting the genie out of the bottle.)
Since the end of last Thursday, the Dow Jones has rallied some 200 points to 10,500, after have troughed earlier in the week at just above 10,000.
Last month Obama economic advisor Christina Romer and her husband published a paper in The American Economic Review demonstrating that tax hikes hurt economic growth. Their article included the following takeaway: “Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly 3 percent. The effect is highly significant.”
Over the weekend, Republican senators revived the idea of extending the Bush tax cuts. Now even some Democratic senators are talking up the idea, including Evan Bayh, Kent Conrad, and Ben Nelson.
So I guess tax cuts stimulate the economy after all, according to our liberal president’s Federal Reserve chairman, his economic advisor, and multiple Democratic senators. It used to be newsworthy when we discovered that Obama’s associates and cabinet nominees were terrorists, communists, and Maoists. Lately the scoop seems to be that a few of his cronies, if allowed to speak freely, occasionally have some sane ideas about how to run the country.