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Do tax cuts for the rich help stimulate the economy?

Thu, Jan 19, 2012

For conservatives, the answer to this question is a resounding “yes.” Accordingly, rich people are the “job creators.” If we put more money in their pockets by cutting taxes, quite magically they invest it in job creation enterprises. On the other hand, taxes levied on the richest Americans reduce the supply of capital for job creation. This is the basic premise of “supply side” economics popularized in the 1980’s by President Ronald Reagan. At the time, it was not a new idea; it was just another name for “trickle-down” economics.

Are tax cuts an efficient way to create jobs?

Back in the late 1970’s, my car broke down in very bad weather on my way home from work. I left my car with a mechanic at a gas station and, seeing my plight, one of the customers offered me a ride to the train station. On the way to the station, I learned that he owned a successful business in town. He told me that he was planning to buy two new cars next week for his business explaining that: “The cars that I have are okay but I might as well buy some new ones now; otherwise, the government will get the money.” He explained that he preferred to invest more in his business rather than pay more taxes to the government. He could write off the cars as a business expense. At the time, the pre-Reagan income tax rate for wealthy individuals was much higher. The top income tax rate was 70 percent (today it is only 35 percent). In effect, the high tax rate on the “job creators” was an incentive to invest.

Tax cuts for the wealthy might increase investment, but where? Giving hundreds of billions in tax cuts to the rich does not ensure any investment in the domestic economy. The money may be used to invest in overseas business expansion. It may be used to speculate on commodities such as oil and wheat futures, driving up consumer prices. It may be invested in gold or land speculation. There is absolutely no guarantee (or proof) that any of the money will be invested in jobs for the domestic economy. In fact, lower taxes are an incentive for conspicuous consumption by the rich. The money may be used to purchase a bigger yacht on the French Rivera, a winter retreat in the Caribbean or a chalet in the Alps. It may result in buying jewelry or other such high-end consumer goods. Tax cuts to the rich, in effect, amount to throwing money into the wind, hoping that it lands in the right spot.

Instead of supply-side Reaganomics, what we need is demand-side economics. The so-called “job creators” do not create employment out of the kindness of their hearts. They invest only if there is a demand for the products that they sell. Higher demand will pull us out of the current economic morass. Under demand-side economics, government policies seek to ensure a fair distribution of wealth through labor, trade and tax policies. A strong union movement results in a high wages economy and creates demand for goods. “Fair trade” agreements provide environmental and labor protection for U.S. workers, unlike the “free trade” agreements such as NAFTA that have undermined wages. Money in the pockets of the working class and lower middle-class are almost exclusively spent in the U.S. economy to pay bills for transportation, housing, clothing, food and other consumer products. In other words, government policies should seek to shift wealth downward and stimulate the domestic economy. Tax cuts for lower income people in a deep recession create demand and spark investment. Business people, especially the small shop owners, profit from the trickle-up effect of demand-side policies.

Prior to the Civil War, a planter aristocracy based on slave labor controlled all aspects of life in the Southern states. About 10,000 families owned the best lands and most of the slaves. These planter aristocrats modeled themselves after the nobility of medieval Europe. They controlled Southern political institutions. Taxes were kept low; there were few public schools. The wealthy planter could afford to hire tutors or send their children to private schools. Why would they want to tax themselves to send yeoman white farmers to school? Educating slaves was, of course, illegal. Hence, there was no public education system in the South prior to the Civil War. In fact, most Confederate soldier enlistees were illiterate, signing their names with an X.
Does this sound familiar?

Over the last 30 years, the New Deal era has been largely undermined by Reaganomics. Since 1980, the top income tax bracket has been cut in half from 70 percent to 35 percent. The capital gains tax has been significantly reduced and the estate tax has been slashed from 55 percent down to 35 percent. In fact, the estate tax was temporarily eliminated in 2010. Today, the top one percent of income earners receives over 23.4 percent of the national income. Extending tax cuts for the top income earners has contributed to the creation of a modern day aristocracy of corporate wealth. Meanwhile, Medicare, Social Security and Medicaid are under attack in order to keep taxes low for the corporate elite. Today, like the old South, there is an aristocracy of wealth undermining labor, controlling the media and destroying American democratic institutions.

Written by Tom Suhrbur,
StreetWise Contributor

Featured in the January 11 – January 17, 2012 Issue of StreetWise Magazine.

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One Response to “Do tax cuts for the rich help stimulate the economy?”

  1. Winston Evans says:

    Hear, hear!! This is argument is sharp, but unfortunately is unlikely to burst the monstrous, mythic bubble of Right-wing propaganda-fed conventional wisdom that has grown like a tumor around the erroneous concept of Reaganite ‘supply-side/trickle-down’ economics. Sadly, that, and the well-heeled lobbyists who bribe many in Congress, particularly the House, to vote in favor of the oligarchs and against the interest of labor (AKA The People), will continue to erode the advances made by The New Deal and sabotage the best intentions of so-called Liberal Administrations ever since, including the provisions of President Obama’s Affordable Care Act.

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