Politics & Media
Aug 16, 2010, 06:02AM

If Wishing Made It So

Cutting taxes does not increase revenues, no matter how badly Republicans prefer otherwise.

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Casey Serin

There are 315,000 millionaires in America hoping that Congress will extend the Bush tax cuts. If the tax cuts are approved, those millionaires will be almost $36 billion richer and the treasury that much poorer.

The numbers are from the non-profit Joint Committee on Taxation via The Washington Post and the battle over tax cuts is a classic election-year standoff between Democrats and Republicans. Democrats want to keep the tax cuts for families earning $250,000 or less and individuals making $200,000. Under that plan, 98 percent of Americans would continue the tax cut.

Republicans want to preserve the tax cuts, which expire at the end of the year, for everyone, regardless of income, including those 315,000 millionaires. As incongruous as it may sound, it’s usually Republicans who indiscriminately and with a straight face accuse Democrats of class warfare.

There’s a durable fable among the yammering anti-government class that is convinced, like the ancient alchemists who believed they could transform lead into gold, that cutting taxes increases revenue. They’re full of it.

Their argument is that tax cuts for the rich will produce money that will be used to create jobs. The reverse of the coin is that additional money through extended tax benefits for the rich will just sit there and do nothing. Simply put, the poor spend their money because they need the essentials to live. The rich don’t spend money because they already have everything. They are more likely to invest in Bolivian tin mines or shelter their money. That’s why they have tax lawyers and accountants. The very rich indirectly control the tax code through the corporations they run that hire lobbyists who influence members of Congress by arranging campaign contributions.

It is argued that the income tax is fair because it is progressive and that the sales tax is regressive because it hits the poor the hardest. But in a perverse way, the sales tax is more progressive than the income tax because everybody pays it and nobody can dodge it.

Even David Stockman, President Ronald Reagan’s onetime budget director and the illegitimate father of supply-side economics, opposes extending tax cuts for the rich, as does Alan Greenspan, the former Federal Reserve director, who’s partly responsible for America’s crash-and-burn economy. Greenspan presided over the shift of capital from markets to housing by manipulating interest rates.

Money in motion is the key to economic growth. Small businesses can’t develop or grow without capital. Nor can people buy houses without loans. And right now, money is stagnating. The nation’s five largest banks are hoarding nearly 60 percent of the nation’s wealth and refuse to lend it, preferring instead to invest it in government bonds to further increase their wealth and contribute to government debt which they helped create in the first place. The stimulus helped to prop up the economy and so did the $26 billion extension of unemployment and job benefits.

The anti-government cohort was done in by the simple fact that applying the market force solution to every economic problem, large or small, simply didn’t work. The final proof is that government, by necessity in many cases, is not only the first risk taker but also the final solution. America is now paying dearly for near total deregulation of many of its institutions and the tepid attempt at re-regulation.

The anti-tax, anti-government crowd refuses to accept the unassailable argument that less is not more. It’s still less. Want proof?
Gov. Parris Glendening cut the Maryland income tax as an election year gift to himself and what followed contributed to a $2 billion deficit that had to be repaired with an increase in the sales tax.

President Reagan cut taxes and drove America into one of the largest deficits on record until President George W. Bush cut taxes twice and plunged America into an even greater debt and deficit, leaving behind an estimated $400 billion unpaid tab for President Barack Obama.

It’s true that government cut taxes but didn’t cut a proportionate amount of spending. But that’s another story and not a part of the cut taxes/increase revenues equation. Today, 41 cents of every dollar that government spends is borrowed money—from the banks taxpayers bailed out, from Japan, China and Great Britain. Banks are borrowing money from the Federal Reserve at zero percent interest and lending it back to the government at 3.5 percent interest on long-term T-bills.

By contrast, America enjoyed eight years of prosperity and budget surpluses under President Bill Clinton even though he raised taxes and closed tax loopholes in 1993.

Similarly, at the height of the 1930s depression, President Franklin Roosevelt raised taxes on the wealthy, at the time those making $25,000 or more, to as high as 90 percent to help balance the budget and pay for New Deal social programs. And President Herbert Hoover raised taxes to try and lift America out of the depression. In neither case did the tax hikes work.
In fact, what Americans are witnessing today proves that the old reverse English is truer than not. Recessionary times require massive government spending to keep the economy afloat. These days, reminiscent of the disastrous Jimmy Carter years, even the bail-outs require bail-outs. Unemployment is up and hovering at around 10 percent, with 30 million Americans out of work or looking for jobs. A good percentage of mortgages are under water and many houses are devalued below their mortgaged amount. Inflation is near zero when ideally it should be at around three percent. Savings are up because consumers are frightened and socking money away instead of spending it. The trade deficit is staggering, with China keeping its currency artificially low, and the markets are volatile.

What the anti-tax, anti-government crowd refuses to accept is the simple premise that when government gets tax money it spends it on all manner of programs and projects that provide employment for a healthy cross-section of the population. In Maryland, 26 percent of the workforce is employed by some level of government—local, state and federal. Not to mention the largesse dolled out to the private sector. The Board of Public Works awards nearly $4 billion a year in contracts to private vendors and contractors which, in turn, helps to create or preserve jobs.

There are three studies—one by the Congressional Budget Office and two by the Center on Budget and Fiscal policy Priorities—chock full of graphs, charts and squiggles that dispute and demolish the loopy notion that cutting taxes will get the nation out of the hole and reinvigorate the economy. It simply isn’t so.

The CBPP study demonstrates that there was no increase in economic growth following the 2001 and 2003 tax cuts of the Bush years. In fact, what little growth there was did not offset the cost of the tax cuts. From 2001 to 2007, the U.S. economy showed the weakest growth of any comparable period since World War II, despite the cuts, according to the study.

Real per capita revenues fell sharply in 2001, 2002 and 2003 and have since risen to barely two percent above the 2001 level, according to the CBPP study. In fact, growth following tax cuts was about the same as growth following tax increases. The second CBPP study further disputes the notion that tax cuts produce more revenue. “CBO studies show that the tax cuts have been the single largest contributor to the reemergence of substantial budget deficits in recent years.”

The CBO study concluded that following the two Bush tax cuts “individual income taxes dropped precipitously, falling to 7.0 percent of the GDP by 2004, the lowest level in more than 50 years.”

There you have it from the experts. And the experts say there’s no way, even if Republican Congressional leaders Rep. John Boehner (Ohio) and Sen. Mitch McConnell (KY) and the Tea Party disagree, that cutting taxes increases revenues.


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