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

[The Wizard]

complete and total drivel, BUT the case for making the cuts permanent.....

[patriciaruth]

First, a $330 billion tax cut sounds massive. But that's measured over ten years,

I thought it was all front loaded, and going to sunset in two or three years, which is why it is smaller.

[Cacophonous]

complete and total drivel, BUT the case for making the cuts permanent.....

I'm puzzled by this reaction; is it because the author's opinion does not march lockstep with that of President Bush? Even though he makes the case for a permanent tax cut, it's drivel?

Why must support for the President be of the complete and total sycphant variety? Why can't a fella say to the President (like Mr. Adkins is doing): "Mr. President, heaven knows I love a tax cut as much as the next guy, and God bless you for working to get one for us. But maybe you haven't entirely thought this through (I know you've a lot on your mind). Or maybe your advisors - also very busy people - haven't completely gone through this. For sustained economic growth, the American people need the assured stability of a permanent tax cut. The one-time shot in the arm is nice, but short-sighted."

Or would this be "complete and total drivel" as well?

And, as Mr. Adkins wrote, we haven't even discussed the spending yet.

[DB]

I think but I'm not sure that the $330B is over the duration of the bill, not ten years. That if in fact it were extended to ten years that it is closer ot the $750B Bush was originally asking for.

But...

I could be totally wrong as I haven't paid close attention to it.

[libertylover]

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

[DB]

It could work another way, especially for the capital gains tax reduction. Since people think the reduction could be short term there could be huge movements of capital assets to take advantage of the lower rates while they last. Those massive movements could both stimulate growth by unlocking capital assets to new uses while at the same time providing the government large tax receipts due to the large overall movement.

It alone could be a sharp kick in the pants for the US economy.

While many of the points of the article correct the analysis of the overall affect I think is much harder to judge.

[DB]

Sorry... Stick "are" between "article are correct"...

[patriciaruth]

I think you're right. I heard someone (Olympia Snowe?) complaining that it would be a trillion dollar cut if it doesn't sunset and is renewed.

[KeyWest]

Total drivel because he has his facts wrong right up front. The taxes sunset by 2007 and if made permanent, come out to over 760B in ten years, and that is just a guess by most. It could be over 1 trillion. Plus, just look at what has happened since the cut. Everything started moving up the day it was passed and not one penny of the tax cuts are in people's hands.

Perception is everything. If you think you will have more, you have more.

[whipitgood]

"1.6%, a mere deck chair off the Queen Mary."
Not sure how much the Queen Mary weighs, but that would have to be one hell of a big deck chair!

[Cacophonous]

Then I guess he did not make a good case for permanent tax cuts...

[alloysteel]

The tax cuts work. This is the message within the text. Just not the way they have been described and advertised as working.

The author rails on about the "temporary" nature of certain tax cuts. The taxing authority is being used as a fiscal policy, on a more personal level than the spending authority Congress grants to the President. The policy of putting more spending power in the hands of consumers, in essense giving the taxpayer a pay raise by reducing immediate tax liability, is intended to take the sting of deflation out of the economy, considered to be a basically much more severe problem for the economy than a mild inflation. More dollars will, on the short term, be chasing the same number of goods, causing a short-term increase in prices. This in turn stimulates the production of a greater number of goods, limiting the rate at which prices may increase, and tending to stablize prices. At least this is what I gleaned from college economics class. The continuing cycle of rising prices stimulating greater production may continue only up to a point, which is where the modulating factor of taxation steps in, withdrawing additional money from circulation. This is the reason why there is a "sunset" provision in certain of the tax rates. But because of the exigencies of politics, and the uncertainty of economics, the selection of these "sunset" dates is almost purely arbitrary. The hypothesis is, that if the conditions at the time justify maintaining or reducing the tax rate, that Congress in its wisdom will act accordingly. On the other hand, if inflation is a threat, letting the tax rates revert to the old higher rates is virtually automatic. A Democratic Congress, by its very nature, would opt for the lapse in the rate reduction legislation, and not act to extend the lower tax rates. This is the implicit danger of electing Democrats to majority control of Congress. Economic malaise will ensue, markets will be in chaos, and uncertainty will stalk the land.

'Tis a bold and clever plan on the part of the Republican majority in the House, who were the initiators of this legislation. But it was written in the White House.

[chasio649]

btt

[Drango]

The TAX cuts are a good start. Now congress has to work on the spending side of the equation...

[HankReardon]

Are you suggesting that taxation is deliberately used to alter the free market forces? Tariffs come to mind. But domestic free market? Come on people, let's believe in America!

[ReleaseTheHounds]

complete and total drivel

Yep... that sums up this piece -- the author fails to decipher the "tactics" from the "strategery"... Bush's $330 billion tax cut can't be simply divided by 10 and assumed to be $33 billion of tax cuts per year. About $250 billion of it shows up in the first 2-3 years. And by working on the margins (capital gains, dividends, and all the individual tax rates), it provides strong growth-oriented, investment oriented incentives. And the "strategery" of the sunsetting provisions means that the Fall 2004 election will feature a revisiting of the issue: "the Democrats want these Tax Cuts rescinded! They want to raise your taxes!" For people (voters) on the margin (at say the 10% marginal tax rate or enjoying the dividend tax cut), reversing those tax cuts will mean Tax Rate INCREASES of 50-100%! How well do you think that will play, Mr. Mondale?

Like you, I can see what the author intended but he didn't do a very good job of making his point.

[jscd3]

Since I have not actually read the tax law, perhaps someone here could answer a question that I have: what modifications - if any - have been made to the Alternative Minimum Tax?

Remember, I'm just asking, but it seems to me that if the AMT is not substantially adjusted, most all other tax reductions are going to be irrelevent for the 25% or more of tax payers that currentlt pay AMT.

If anyone has any insight on this, it would be appreciated.

[KC_for_Freedom]

Like you, I can see what the author intended but he didn't do a very good job of making his point.

I agree, his case that tax cuts don't reduce federal revenue was well made, when trying to give the democrat spin he waffled. First by argueing that the cut was only 33b per year, when it can be argued that the sunset provisions will never be allowed to take place if the economy still needs a boost. and Second by not informing us that the president asked for far higher cuts and was beaten back by the democrats and the left leaning senators still in the republican party.

[jmaroneps37]

First the tired and worn out fox stopped jumping; stopped trying to grab the grapes. Then as he walked away dejected and beaten, he looked over his shoulder and said "Ah they were sour anyway." These "conserveTer then Thou" guys kill me. They could never get themselves or any one they approved of elected so; they sit on the sidelines and carp with the rats. "W's doing this wrong. W's doing that wrong" This guy sounds a lot like lil billy crystol to me.