Tax-Cut/Prosperity Connection Pure Hooey

June 01, 2003

Dean Baker
Philadelphia Inquirer, June 1, 2003

Back in the 1980s, Jim Bakker and his wife Tammy Faye managed to make themselves very rich through their preaching. To the uninitiated, this couple’s pitch sounded pretty much like “send us money and the Lord will make you rich.” Apparently, large numbers of viewers sent these televangelists their money, since they managed to accumulate considerable wealth with this approach. It’s not clear that their followers did quite as well.

President Bush and other proponents of tax cuts for the wealthy seem to be following in the Bakkers’ footsteps. The basic story is that if we just give more tax cuts to the rich, then the economy will grow more rapidly, and we will all be rich. These folks claim that if we give the rich incentive to get even richer – through lower taxes – then they will work harder and save more, and we will all benefit.

You would have to take this one on faith, because there surely isn’t any evidence that lower taxes for the rich means more economic growth. The tax rate on the rich peaked in the ’50s and ’60s, which were also the decades in which the nation enjoyed its most rapid growth and widely shared prosperity. Tax rates on the rich were lowest in the ’80s, which also happened to be the slowest decade of growth in the postwar era. President Clinton raised taxes on the rich in 1993, and through the rest of the decade the economy saw its best period of growth since the ’60s.

This slice of history is not sufficient to prove that higher taxes on the rich lead to higher growth – but it does make it necessary to perform serious intellectual gymnastics in order to argue the opposite case. Of course since the rich have a disproportionate voice in our political system, there is no shortage of intellectual gymnasts who are prepared to perform such feats, in spite of the evidence.

Just to complete the picture, it is easy to tell a story as to why more tax cuts to the rich don’t necessarily lead to more growth. First, it is important to remember that the money for the tax cuts comes from somewhere. If the rich pay less in taxes, then it means that someone else must be paying more. Whatever amount of money we decide we need to run our government, the smaller the portion that comes from the rich, the greater the tax bite on the middle class or working poor. And, if we accept the argument that higher taxes on rich people reduce their incentives to work and contribute to economic growth – then higher taxes must also reduce incentives for middle-income and poor people.

It is also possible that we will cut forms of government spending that directly contribute to growth as a result of tax cuts for the wealthy. During our period of rapid growth in the ’50s and ’60s, the government spent large amounts of money to build up the infrastructure of highways and airports. It also vastly improved the nation’s education system, making college affordable to the middle class for the first time. In addition, the government funded research into computers and other cutting edge technologies, which had enormous payoffs in subsequent decades. If the government had instead given tax breaks to the rich in 1950, it probably would not have undertaken such an ambitious investment agenda.

There is one final reason – well known to economists – that more tax breaks to the rich might not help the economy. If you give them more money, they may do less: The rich may just retire early, satisfied that they had all the wealth they needed.

A long range of experts, from Douglas Holtz-Eakin, the current director of the Congressional Budget Office and former Bush advisor, to the investor Warren Buffet, have presented the case that cutting taxes for the wealthy will not increase growth. Lacking evidence, like the Bakkers, President Bush prefers that we accept his tax cut on faith.

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