In 2001, using reconciliation, the Bush administration enacted a series of “tax relief” initiatives that were set to expire by the last day in 2010. The peculiar expiration caveat was actually a loophole designed to understate the headline costs of the program to dampen the bill’s controversy.
This fall, Congress will face the contentious issue over whether or not to extend the Bush tax cuts. The Republicans favor the unconditional extension of all tax cuts, arguing that tax relief for the wealthy will encourage spending and stimulate demand. The Democrats make the opposite argument, supporting tax cuts only for Americans making below $250,000.
It is my contention that not only is the Republican strategy disingenuous in that tax cuts would add to the very deficit that Republicans couch as an existential evil, but that the strategy is also unsubstantiated by history, economic theory, or even reasonable argument.
First, tax cuts are not an effective means by which to stimulate the economy, relative to other measures. The Congressional Budget Office recently declared that the extension of Bush tax cuts would have a marginal impact on growth — producing a meager 10 to 40 cent increase in GDP for each dollar spent, and that if tax cuts were rescinded and the revenue was spent on state projects and unemployment benefits, the economic impact would be three times greater.
Because the benefits of Bush-era tax cuts go primarily to high-earners who are likely to either save their incomes or invest in tenuous financial instruments (remember Mortgage-Backed Securities?), it isn’t surprising that a tax extension for the super-rich lacks sound economic rationale.
Marginal Propensity to Consume, an economic metric that measures the percentage of one’s income that is likely to be spent rather than saved, adequately predicts the economic impact of one’s consumption patterns. The higher one’s MPC, the greater the likelihood that consumption will be directed towards goods and services that directly stimulate the local economy; the lower one’s MPC, the more likely that income will be saved or spent on goods produced abroad, diminishing the multiplier effect that could be achieved through local consumption.
Given the fact that the U.S. has one of the lowest income tax rates in the world and, according to the Wall Street Journal, private investors are still hoarding money to the tune of $10 trillion, it’s inconceivable to think that giving wealthy individuals even more money is somehow going to convince them to spend it.
A sober assessment of history also proves my point. In the 1980s, during the Reagan administration, the reduction in the marginal income tax from 70 to 28 percent coincided with a tripling of the national debt. One year after the tax cuts were implemented, the economy shrank 2.2 percent, at that time the worst performance since the Great Depression. The nonpartisan Center on Budget and Policy Priorities concluded that the reductions in income tax were followed by extremely slow growth in income tax receipts. One explanation for the peculiarly slow growth in income tax receipts was that Reagan’s economic policies had depressed wages to such a degree that people were forced into lower tax brackets, thereby decreasing government revenue beyond that which would have been expected. At the same time, job growth was tepid, unemployment was high, and productivity growth was slower than in the last 12 presidencies. In 1982, the economy descended into recession.
Those who still believed in the convoluted logic of trickle-down economics should have been silenced after the Clinton administration’s economic policies. In direct opposition to supply-siders, Clinton raised the top marginal tax rate from 31 percent to 39.6 percent. Contrary to the apocalyptic predictions forwarded from the Austrian school, the U.S. economy sustained the longest period of growth in U.S. history from 1992 to 2000. Clinton produced a historical high of 21 million new jobs; interest-rates fell by 40 percent, facilitating the greatest housing boom in history; inflation fell to 2.5 percent, halving the average of the previous 12 years; and the largest budget surplus in history, $128 billion, was created despite Reagan’s mammoth deficits.
Then, as if the absurdity of Reagonomics hadn’t yet been thoroughly repudiated, George W. Bush ran on the platform that Reagan’s tax policies hadn’t gone far enough. In Bush’s first year, he transformed a budget surplus to a deficit of $158 billion. By 2008, Bush’s policies produced a meager 1 million new jobs; unemployment sky-rocketed to 7.6 percent; the poverty-rate rose to 19 percent; household net worth fell 25.5 percent; and the U.S. Treasury reported that the national deficit was raised to $1,009.1 billion, according to Generally Accepted Accounting Principles.
Second, contrary to the proclamations of Senate Republican leader Mitch McConnell, allowing the tax cuts to expire for the super-rich would not affect small business. Less than 2 percent of small businesses fall in the income brackets that would be affected by the expiration of Bush-era tax cuts. Over 20,000 businesses within that 2 percent make income over $50 million. Not only can such businesses not be considered “small,” but it’s completely incoherent to suggest that these companies would radically change hiring decisions and consumption patterns based on a relatively small tax hike.
Additionally, the majority of “small businesses” making above $250,000 include authors, actors, athletes, hedge funds, and law firms, who employ few workers, don’t produce jobs for the low-skilled workers who need them, and are hardly “suffering” in today’s economic climate. President Barack Obama, for example, reported on his personal tax return the earnings he received from authoring his book as “small business” income, despite the fact that he earned ten times more through book sales than he did from his $400,000 Presidential salary. I would be impressed if anybody could forward an argument for why people like Obama or the directors of hedge funds (those poor, poor hedge funds), deserve any more tax relief beyond that which they already have.
If stimulating small businesses is the most important Republican initiative, than they might consider a policy that doesn’t omit 98 percent of small businesses.
Third, the amount of money lost in tax revenue through the unconditional extension of Bush tax cuts will contribute to an enormous national deficit. Despite the fact that Republicans use the national deficit as their primary justification for stubborn obstructionism in Congress, they nevertheless support the tax cuts for obviously political reasons. The nonpartisan Tax Policy Center produced data which suggests that the Republican’s plan would cost $680 billion in revenue over the next 10 years. It isn’t like this $680 billion in tax relief would go to the people who need in the most, either. Instead, the tax cuts would go primarily to those making above $500,000 — the richest one-tenth of 1 percent of all Americans.
Analysis by Glenn Hubbard, the former chair of Bush’s Council of Economic Advisers and Federal Reserve economist Eric Engen show that increased national debt will result in higher interest rates which will devastate the private investment needed for a strong recovery. A convincing graph produced by CBO Director Doug Elmendorf demonstrated that the Democrat’s plan of a partial tax cut extension is far more conducive to growth than a full extension through 2012. The relationship between Bush tax cuts and economic growth is negative according to nearly any statistical metric, and it can’t be assumed that this relationship will suddenly change if we just extend the tax cuts for a couple more years.
Fourth, I hazard a moral argument: from a utilitarian standpoint, tax cuts for the rich make zero sense, especially when considering the historical adversity experienced by the poor as a result of historically analogous policies. Economic theory and statistics can only approximate the economic consequences of implementing various policies, but they say nothing about whether or not those consequences are morally just. It’s irresponsible and academically dishonest, however, to argue for an economic policy without an explicit defense of its moral repercussions. To think that it’s somehow morally justified to adversely impact the welfare of an enormous number of low and middle class individuals solely on the argument that “it’s not the government’s money to take” is both untrue and repugnant.
The very existence of “money” relies on the government’s printing of dollar bills, and that’s to say nothing of public roads, an educated, immunized workforce, police protection, criminal justice system, or water and gas utilities, all of which underpin the very economic system that produces wealth in the first place. To be so arrogant as to think that one owns the entirety of their paycheck is to completely disregard the intricate, government-sustained, social system that created and preserves capitalism in the first place.
To suggest that rich people suffer more or even similarly to poor people is absurd. Ben Stein, contrary to what he might say, has never lived a day in his life where he was uncertain about whether or not he would have food to eat. The same cannot be said for 14.3 percent of Americans who live below the poverty line who would see the tax cut as an extra meal, rather than as a chance to make another million on securitized derivatives.
The Republicans can continue to be disingenuous — paradoxically hailing tax cuts as the solution to a gargantuan deficit, or they can at least try to fake competency by supporting economic strategies that aren’t contradicted by decades of historical and empirical evidence. Either we support a stimulus measure that is grounded in evidence, or we continue to postpone the inevitable decline of America’s economic leadership. I don’t know which path we will take, but I can assure you that our enemies support the path that weakens us the most. History has already made its point — will we listen?
— Evan DeFilippis, economics and political science junior
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Kjh2310 1 year, 7 months ago
Dear Evan,
When I flip to the opinion section each day of the OU Daily, I expect to see opinions of my fellow students, as a whole. I expect to see columns written that represent my university as a whole. I expect to see columns written by a liberal, and a conservative.
Considering my short time on campus, I have noticed some startling trends. The OU Daily's opinion section, although rightly titled, "opinion" as in one's own view of a topic, is very insightful, I feel as if the students of this university are not hearing both viewpoints. How can one make an educated decision when they are spoon-fed only one side of any story? That would be like MSNBC, or CNN running information that only make the left out to be right (lol, sarcastic tone).
I respect your opinion, and realize that you have every right to say what you want to say. That's what makes this country great. All I ask is that your paper mix it up a bit, maybe create counter arguments so the average student can see both sides of the story, and thus make an educated decision. Isn't that what democracy is about?
This is not an angry comment. This is a concerned comment. Doctrination treads on a very line. I would hate to think our beloved university newspaper would try to impress its views on to an impressionable public.
You can take my advice with a grain of sand if you like, it really doesn't matter. Because the views you have, although warranted, represent only a portion (an ever decreasing portion) of the American public. It's not a question of tax cuts anymore in this country. It's a question of integrity and honesty. It's a question of value. It's a question of whether our future will be ruled by an over oppressive central government, or by a small, yet effective and precise central government. It's a question of our will to succeed, on an individual level. Will we let someone else pay our bill? Or will we strive for the best, working hard for our family and our ourselves. If we do this, the whole benefits. That's the beauty of America, with the individual work of every single person, our country can accomplish things unheard of.
Once again, I respect your opinion, and think you have valid points, yet, I believe students should see the other side as well.
Many great things can be accomplished if we compromise, something our counterparts in Washington have yet to do.
I hope this comment finds you in a great place. Thank you for the attention.
God Bless
Kale Hunter Biochemistry freshman
Achilles 1 year, 7 months ago
"In direct opposition to supply-siders, Clinton raised the top marginal tax rate from 31 percent to 39.6 percent. Contrary to the apocalyptic predictions forwarded from the Austrian school, the U.S. economy sustained the longest period of growth in U.S. history from 1992 to 2000."
If the implication here is that the Clinton era tax rates were responsible for the boom years of late 90s, why not go back to the same tax rates for everybody again? My point is there were several other factors (dot com bubbles, lower defense spending and so on) besides those tax rates that were responsible for those boom years.
"The nonpartisan Tax Policy Center produced data which suggests that the Republican’s plan would cost $680 billion in revenue over the next 10 years." True, but also keep in mind that the same data (produced by the Treasury Department actually) also shows that extending all of Bush tax cuts would cost the government $3.7 trillion in lost revenue over 10 years. In other words, retaining just the "non-rich" provisions of Bush tax cuts, as favored by President Obama, would cost far more- $3 trillion over 10 years.
With the federal government projected to borrow about $10 trillion over the next 10 years, tax cuts for anybody is a luxury the country can no longer afford. In a mischievous way, I'm hoping President Obama will insist on extending just the "non-rich" provisions and the Republicans will insist on all-or-nothing extension, thereby leading to a gridlock and we'll be back to pre-Bush era tax rates again.
Flips88 1 year, 7 months ago
God Evan, how dare you indoctrinate us with facts and empirical studies!
The flip side would argue that the tax cuts give more capital to those that provide jobs and would thereby stimulate job growth, which as was mentioned above appears patently false. Moreover, some argue that taxing the rich even more is wrong because they clearly work harder than other individuals and deserve to see the fruits of their labor. To that I would point out that of the top 10 members of the Forbes 400, 4 of them have the last name Walton. They are the children of Sam Walton, founder of Walmart, and they have $24 billion, $20.1 billion, $20 billion, and $19.7 billion respectively. They didn't do a damn thing to earn that money other than be the fastest sperm one could argue. Quit acting like the hyper-rich are victims. So what if they lose a few million extra dollars in taxes, they still are astronomically better off than the super majority of humanity.
And Evan, you may look into summary line for those students that think reading paragraphs is just too much to ask of them. May I suggest: "tl;dr: Reaganomics blow. If you think their cool, realize that Sean Hannity lies to you every night"
impatient_with_ignorance 1 year, 7 months ago
First, this is an extraordinarily fine article: filled with facts to support its assertions, highly informed, and clearly written. While Kale (above) makes one fair point (Evan's view is only one side of an argument), I think it's unfair to expect Evan to do ALL the work, and present the other side also. Kale, why don't you present the other side? Engage the facts in Evan's argument. You express a preference for "a small, yet effective and precise central government." Define that. Tell us EXACTLY what programs you would cut, and how much. Since all OU students are at a taxpayer-subsidized state university, should a small and precise government cut the federal stimulus money that bailed out state education expenses during the last year? Should college students pay the full cost of their education? Should government-guaranteed student loans and Pell grants be eliminated? Achilles' comment is more informed and begins to present the true fiscal conservative view (read: NOT the current view of the Republican party, FOX News, or the Tea Party -- whose real position is tax cuts for those who are already extremely wealthy, deficits be damned). By making his point, Achilles demonstrates that both Evan and Obama are proposing a moderate, somewhat centrist position. The only problem with Achilles' hoped-for deadlock, all-the-taxcuts expire, is that the economy is extremely weak and in a prolonged jobless recovery that seems stagnant and in danger of slipping back into recession. Raising taxes on everyone runs the risk of repeating FDR's mis-guided 1937 effort to balance the budget, pushing the fragile recovery from the depths of depression back into a severe recession.
evandefilippis 1 year, 7 months ago
@Kjh2310, this is an opinion column, not an encyclopedia. It's not wrong, nor is it undesirable, for people to be opinionated, so long as those opinions are in someway grounded in reality. The entire point of this article was to expose that sometimes opinions are disingenuous and ungrounded in reality, and that such opinions need to be humiliated and thoroughly repudiated.
If opinion and fervor are expunged from intellectual discussion and replaced with a sloppy emulation of 'objectivity', we cannot expect people who hold extreme beliefs to even consider changing their minds. The democratization of truth, the idea that there are two sides to every argument, no matter how much evidence falls disproportionately on one side or the other, is both dangerous and misguided.
Jefferson, for example, was a proponent of intensely ridiculing positions that lacked strong rationale-- "Ridicule is the only weapon which can be used against unintelligible propositions. Ideas must be distinct before reason can act upon them."
I do not disagree with the importance of democracy or multiple viewpoints-- I'm a debater after all, I just encourage other people to write responses that clash with my claims.
You have to understand how frustrating it is to spend a lot of time and effort into my columns hoping-- pleading, even-- for intellectual discussion. Instead I see comments like yours which skirt discussion altogether and chastise me, an Opinion Columnist, for not being Wikipedia.
Though I would greatly enjoy discussing both sides, I feel that I would do a disservice to traditional conservatism, so I encourage someone with passion and merited argument to have a reasoned debate with me.
evandefilippis 1 year, 7 months ago
@Achilles,
I accept your argument about other factors being responsible for Clinton's economic success, which is almost certainly true.
My blurb about Clinton was only to state that, contrary to the predictions made by people like Newt Gingrich, the economy grew in spite of tax increases. Gingrich said definitively that despite other optimistic economic indicators, the tax hike would overwhelm all of them and hamper growth-- the opposite happened.
Even if Clinton can't be held responsible for the whole of economic growth, he should also be given credit for appointing Alan Greenspan as chair of the Fed. Clinton hired Greenspan despite his ultra-conservative background (libertarian under Ford and Reagan administration), and Greenspan turned out to masterfully negotiate interest rates to facilitate an economic boom.
Also, do you have evidence to support your claim about Republican's permanent tax extension being more costly than Democrat's partial extension?
Take a look at the graph I cited in the article, which seems to suggest the opposite: http://voices.washingtonpost.com/ezra-klein/assets_c/2010/09/cbotaxcutseconomy-thumb-454x270-26215.png
Also, as impatient_with_ignorance mentioned, repealing the tax cuts altogether may prolong the recovery and damage the job prospects of the very people who need it the most
Achilles 1 year, 7 months ago
@Evan
Here's the the Treasury Department study I cited to make my points:
http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=2785
The data shows:
This is what the Republicans want. They want to extend the tax cuts for everybody -deficits and debts be damned- resulting in lost revenue of about $3.7 trillion over 10 years.
This is the amount of money Democrats are counting on to raise over 10 years by letting the Bush tax cuts for the rich expire.
This is what President Obama and Democrats want (I'm sure all Republicans too if this is the only choice), thus robbing the Treasury of a projected $3 trillion in extra revenue over 10 years.
Unless I'm completely misinterpreting the data (feel free to correct me in that case), the Treasury analysis shows that the cost of extending "everybody but the rich" portions of Bush tax cuts is far greater($3 trillion vs $0.7 trillion) than just the rich portions.
In summary, I was making the point that the country simply can't afford to retain any of Bush cuts given our serious fiscal situation. As the old saying goes, there's no such thing as free lunch. That said, given the dismal situation of the U.S. economy at the moment, I could grudgingly accept TEMPORARY (perhaps 2-3 years) extension of some or all portions of Bush tax cuts (but NOT the estate tax). Permanent extension of all (GOP way) or some parts (Dem way) would be ruinous for this country.
Just to touch on the subject raised by Flip88, I can't believe the Democrats didn't reinstate the estate tax once President Obama took office. Unless I'm mistaken, they didn't even try. If one of the Walton siblings kicks the bucket tomorrow, his/her heirs will pay no estate tax!
blueinared 1 year, 7 months ago
Why are there two pictures of the author? Double scary
evandefilippis 1 year, 7 months ago
@Achilles,
I think you may be confused. Obama's plan would NOT ONLY let the tax-cuts for the super-rich expire, but he would also raise the income tax above the 2001 level on the second-to-highest and highest income bracket.
More specifically, Obama's plan includes the following: (1) Raise the top tax rate in 2011 from 35 percent to 39.6 percent. (2) Increase the 33 percent tax rate to 36 percent and change the thresholds for that tax bracket in 2011.
This would have the net-effect of a tax increase for one-sixth of those in the top quintile and one-fourth of those in the top 1 percent.
SOURCE: http://www.taxpolicycenter.org/taxtopics/2010_budget_high-income.cfm
Therefore, I think your number 2 argument: "Net Revenue gain from repealing only those provisions affecting upper-income taxpayers for 10 years = $680 billion", is a misinterpretation of the graph. The actual chart that you linked me to in which it shows a revenue INCREASE is actually just the description of "Upper-Income Tax Provisions", which are those provisions that I mentioned above. If you look at the subpoints under the "Upper-Income Tax Provisions" category, you'll see "Reinstate 39.6 tax rate" , "Reinstate 36 percent rate for high-income", etc., which are the aforementioned Obama's provisions. Therefore, the chart is suggesting just what I claimed in the article, that Obama's provisions, which amount to a tax hike on the super-rich, would obviously increase governmental revenue beyond the Republican's plan.
You can even think about this logically: how could governmental revenue INCREASE if everybody across the board got a permanent tax cut, as in the Republican plan?
Here's my reading of the graph:
(1) The total cost for permanently extending 2001 and 2003 tax cuts (Republican Plan): $3675.7 billion
(2) Total revenue saved by implementing Obama's aforementioned provisions: $679.6 billion
(3) The total cost of the Republican plan + Obama's provisions: $2996 billion
Democrat's plan is clearly still substantially lower than Republican's plan-- and that's without factoring in that Democrats only support the extension of tax cuts for Americans making under $250,000 UNTIL 2012. The graph assumes permanent extension which isn't congruent with the Democrat's policies.
HT307 1 year, 6 months ago
Evan
the reagan tax cuts provided the push that began the greatest peace time expansion of the economy ever. that is a fact. Allowing people to keep more of their own money is the goal.
The extremely rich, like the Waltons mentioned by a fellow poster above, do not have any real income to speak of. Their income is from passive investments that are taxed at a much lower rate than the highest income tax bracket. they really could not care about income tax brackets, etc... they are going to pay the same taxes no matter what.
While I suspect many of the people who are posting do not have a real job yet, when you finally do you will soon realize how much of YOUR money is simply taken from you. and the fact is that the person who will give that job is more likely than not someone you would consider to be rich.
I also am confident that almost everyone who takes the time and makes the effort to get a degree is not planning on a minimum wage job/career. Guess what, the more you make, the more they take.
The true winning formula is to decrease taxes and at the same time DECREASE SPENDING, in particular on the so called entitlement programs. Then we as a nation are being productive and efficient at the same time.
Everyone needs to look at Europe (in particular France, Greece and the UK) to see what our future is if we dont go back to the conservative principles that allowed this country to become the leader of the world