WHY TAX CUTS WON'T WORK

CommonConservative.com ^ | 6/1/03 | Tom Adkins

[TomAdkinsCC]

WHY TAX CUTS WON'T WORK---Not so fast, folks!

by Tom Adkins .......CommonConservative.com 6/1/03

Debates are raging over the 330 billion dollar tax cut passed last week. Democrats squealing about the "cost" of the tax cuts. Republicans crow about the doubtless "boom" that will result. It's time someone threw a bucket of water on the rhetoric. They're both wrong. Here's why…

First, let's take on the Democrats claim that tax cuts "cost" revenue, with a little history. In 40 years, no tax cut (Kennedy, Reagan, Clinton 95, Bush II) has resulted in less treasury income. Never. With the exception of the miniscule 2001 cut (flat revenue so far), every cut dramatically boosted treasury revenue. And they all boosted economic growth, including Bush II, which arguably saved the economy from the Greenspan/9-11 mini-recession. (Five straight quarters of positive growth, a respectable 3% average). And every tax increase (Carter, Bush I, Clinton 93) slowed the economy and revenue growth. Remember, Clinton's retroactive tax hike barely gave us 1% growth for two years. Apparently, conservatives are right about the famous Laffer curve, which shows you can get the same tax receipts with two different tax rates, proving growth beats the cost of tax cuts.

But what about the conservative prediction that the latest tax cuts will boost the economy and send revenues soaring? Sorry, supply-siders, not this time. It's important to understand a few facts here. First, a $330 billion tax cut sounds massive. But that's measured over ten years, only $33 billion per year. Compared to a 2 trillion dollar budget? That's less that a 1.6% cut, a mere deck chair off the Queen Mary. Exactly how will that turn the ship around? And we're still fighting a war. But it gets worse.

The GOP front loaded the cuts, with sunset provisions. In other words, they end in 2-3 years and revert back to the current higher rates. Then, Republicans will dare Democrats to raise those taxes back up in the 2004 elections, gambling on a position play. If the economy is booming, they'll claim the tax cuts get credit, and we should do it again. If the economy is slow, they'll claim the larger cut was needed, and dare Democrats to demand higher taxes in an election year. Great politics. Bad economics.

The reason the last three tax cuts worked is because they were permanent. People knew they could buy a car, house, or invest money with a future tax rate that was predictable. And long-term tax predictability meant businesses could invest their new profits, expand, know the future net from their write-offs and profits and (drumroll, please) hire people. That's why the Kennedy, Reagan and Clinton 95 tax cuts worked so incredibly well, and the Bush I and Clinton 93 tax hikes crushed the economy.

On the other hand, consumers can't gamble on a large future purchase if tax cuts are temporary. If a family is debating a car purchase, they'll hesitate if the marriage penalty is lowered for only two years. How will they make a payment in year 3, 4 and 5? And businesses? They can't plan anything with only two years of certainty, especially with large-dollar equipment investments. In short, this small, temporary tax cut will lead to small, temporary results.

It seems as though Republicans folded without fighting all that much. They certainly didn't make the case as if their political lives depended on it, gambling that a smaller temporary tax cut will be successful in an election year without knowing what the interim brings. And Democrats are cheering their "victory" over the President while tacitly acknowledging tax cuts work, ignoring the obvious logic that a larger cut would work better. And Neocons will need additional revenue -and public support- to complete their vision of pre-emptively attacking our global enemies for national security. In a lame-duck second term, Presidents have far more latitude to conduct adventurous foreign policy. But not without money.

The irony is that higher growth and higher revenue is good for each party. Republicans would ratify their fiscal philosophy of lower taxes and staying atop the global food chain. Democrats would get more money to experiment with, possibly learning how to add some common sense to their compassion. But without permanent tax cuts, neither will reach their goals.

And we haven't even addressed wasteful spending. But if an American Congress can't grasp a minor tax cut, you can bet they'll endlessly debate how much the taxpayers fork up to keep their political oxen in the barn, away from the gore. ==========================================

Tom Adkins is the Publisher of CommonConservative.com, and a frequent guest on Fox, CNN, CN8

[Arthur Wildfire! March]

...That's less that a 1.6% cut...

When a 5 percent growth rate is unheard of, then a 1.6 percent boost is nothing to sneeze at. Comparing the tax cut with the average growth rate of industrialized nations, it might not be a Reaganesque kind of boom, but God willing, it will tip the scales at a time when other nations keep raising taxes.

[TomAdkinsCC]

RESPONSE TO QUESTIONS

FIRST- let me assure everyone that the economy will grow about 3-4% in the second quarter. Revenue will follow. That will have nothing to do with tax cuts, however, which won't have taken effect yet. (we conservatives will claim it does, however. And we should, just to screw the Democrats)
But the tax cuts will have nothing to do with that growth.

SECOND- let me also assure everyone that permanent tax cuts always work. Incidentally, Clinton's '95 capital gains tax cut, from 28% to 20%, was that famous "tax cut for the rich", which sparked the economic boom of the late 90s, and actually saw the rich (and everyone else who invested) pay more taxes on our new wealth. Again, no complaints. That's how it's SUPPOSED to work- the economy grows, and a lower rate on higher growth should yield more revenue AND more growth.

THIRD- The temporary effect will not be subtle. Businesses, particularly, will not spend long-term without assurance of permanance. That is a fact. Any CEO who goes into debt, then loses the tax break will cost his company millions. He will lose his job, if not his company.

LESSON FOR EVERYONE- Remember the S&L crisis? Reagan conceeded the change in the depreciation schedule to Democrats, as a compromise to get our desperately needed lower tax rates. But when depreciation dropped from 30% to 3%, commercial real estate lost up to 80% of its value, leaving owners stuck with worthless real estate, and banks stuck with worthless loans. If a someone had purchased a mall or an apartment complex ten years earlier, how could they have seen such a devastating move?
Sure, some incidences were cause by fraud and such, but the vast majority of failures were from innocents who could have never known they would lose their depreciation, and thus an immense value of their real estate business holdings disappeared. NOBODY saw that comning, but it led to the greatest bank crisis since the Depression.
The same will apply here. Businesses WILL NOT make long term purchases until they KNOW the cuts are permanant. Thus, any purchases that will work in 2-4 years will be made. But anything that takes 5-10 years to recoup will NOT be made. And businesses DO NOT trust congress. If your job was to control your company's multi-million dollar investments...would you?

Anyone who does not see this aspect automatically excudes himself from being qualified to disagree. The point is that obvious. Especially to those of us in the business world, who do this for a living.

Yes, let's happily take our tax cuts, and push the Congress to make them permanant. And I think Rove's political move was brilliant. But at the same time, remember it is ALWAYS great to fool your enemy...but ALWAYS stupid to fool yourself.

Your favorite millonaire businessman...

Tom Adkins
Publisher- CommonConservative.com

[agitator]

Tom neglected to plug his weekly radio show on Radio FreeRepublic so I'm going to shamelessly do it for him!

His show can  be heard live every Tuesday at 10pm ET, 7pm PT and the archives of his previous shows can be found here.

The call-in # is 1-866-RADIOFR or 1-866-723-4637. Feel free to call in on Tuesdays from 10-11pm ET!

[justshutupandtakeit]

I don't believe the collapse of the S&Ls was the result of the tax code changes. Most of the collapses were in Texas and Oklahoma and were related to the collapse of the price of oil. That is what undermined the S&Ls, not cuts in the tax code.

Had that caused the problem the failures would have been spread out across the country not regionalized.

It is not clear what depreciation change you were referring too at any rate.

[discostu]

There's no such thing as a permanent tax cut. The tax picture gets jiggied every year in the budget, if anything these "sunseted" tax cuts are more permanent because there's a window when they're not allowed to mess with that part.

[HankReardon]

I would not consider China to being a Free Market. Tarrifs effect this Free Market.

[BenLurkin]

Granted we should cut spending. Heck, we should eliminate some entire Federal Departments and Agencies.

In the meantime let's get our money back. Let's cut off the blood flow to the cancer of big government.

[whipitgood]

Tom,
My concern is this: There are many, many in the US who are unemployed. Many more are just barely 'making ends meet' every month. If taxes go up, and these people are faced with the choice between paying their taxes and buying food for their kids, what will they do? If taxes stay the same, they will be faced with the same choice. If taxes go down, they might just have some room to 'breathe' and it will be a great message from those who levy taxes that government at least 'feels their pain' and maybe, just maybe, can use their influence in a positive way. Seems to me that any intelligent politician (assuming that there are some, of course!!) would be able to understand the economic situation in the US and act accordingly.

[Enduring Freedom]

Giving moronic Liberals ammunition to use against cutting exorbitant taxes.

Conservatives like this are worse than useless.

By self-destructing in his navel-gazing analysis, he proves that Hitler was the greatest leader.

What a maroon.

[TomAdkinsCC]

TO EVERYONE

Put up or shut up.

Call in to my internet radio show and we'll see who is right.

Ask tough questions, and don't be a wuss.
But don't be a butt-head, or I'll just cut you off and make fun of you.

http://www.theotherradionetwork.com/srv1.asx
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Toll free call in line - 866-RADIOFR (723-4637)

Tom Adkins

[Dianna]

Supply side economics is way oversold at the rates we are talking about here (the Kennedy cut and the Reagan cut were when rates were much higher, and the guy's assertions in that regard upon full examination don't really pan out),

Yes, the rates were much higher during Reagan and Kennedy, but weren't the deductions MUCH higher then also? Does this help close the gap?

Funny thing is that, aside from my mother (who is politically aware), NO ONE else I know even knew that the cut had been passed! Certainly none of them had any idea rebate checks were coming out. Within 10 minutes of making them aware of the rebate, they had a plan for spending the money :)

[el_texicano]

My choice of where to start the cuts is the National Endowments for the Arts, NPR...let them compete in the free market like everybody else.

[Mr. K]

YES YES!! ONLY TAX INCREASES HAVE EVER WORKED !! EAH YEAH THAT's THE TICKET

[scottlang]

ONe problem with the tax cuts, Over half of the money my wife and I will be getting back from this tax cut this year will go to pay my INCREASED local and state taxes. What is left will not cover our grocery budget for a month.

[Protagoras]

I don't remember the Clinton '95 tax cut.

This one will be forgotten just as fast.

[XBob]

In all my 40 years of working, mostly I cringed with each 'tax cut', as normally that meant my takehome pay went down. Only once, on one year, during Reagan, did my pay check actually go up after a 'tax cut'. I got a $1.34 per month increase in my take home pay. All the other 'tax cuts', my take home pay always went down.

[discostu]

The "nice" part of graduated income tax is that there are always certain cusp points that lose (generally because they move the lines around so you wind up in a higher bracket and even though both your old and new brackets went down the bracket move negated any positive for you). There are also certain cusp points that win, both of Bush's cuts have been very good to me and I'm hoping this new one makes it a trend.

[GregoryFul]

Com'on, the people you describe aren't paying taxes!

[whipitgood]

Are you serious?
If you own property, you pay taxes every month. If you buy anything, you pay taxes. Pay your phone bill, more taxes. These DO NOT end if you lose your job. But try not paying them and see what happens.

[HankReardon]

Same here, during years of prosperity local and stae gov. took in more money then they needed, they used this money to expand the government. When the economy slow down, the revenues stream decreased and they could no longer support the larger government. they could use the lower revenues against the projected gov spending of the prosperous years to make the case to raise taxes. The ideal time for tax cuts is when the governments begin to have a surplus! We may prevent a recession like this, but we have career people in government who think they are successful when the government takes in more money and spends it to increase their business, the government.