Cutting Taxes - Does it Work?

By Levi Anthony - Posted 5/19/2011

It seems as if every time a Republican or conservative politician open his or her mouth about how to fix the economy, only two words come out – tax cuts. They consistently argue that the most effective way to cut the huge federal budget deficit and grow the economy is through tax cuts.

This idea that the best way to stimulate economic activity and create jobs is to cut taxes has been around for about 30 years now. It became popular starting with the Republican president, Ronald Reagan, in 1980. Cutting taxes is at the heart of the free market philosophy. On paper, the theory doesn’t sound bad at all. It is sometimes called supply side or trickle-down economics.

According to this view, when you cut taxes for businesses and the wealthy, this puts more money in their pockets. They will then use this extra money to expand their businesses or create new ones which then leads to more jobs. With more people working and businesses making higher profits the government will be able to collect more revenue which it can use to provide more services for everyone. So everyone benefits or as they say, a rising tide lifts all boats. Still better, as the rich becomes richer some of it will “trickle down” to the rest of us. Conversely, you should not raise taxes on the rich because this would act as a disincentive for them to invest and create jobs.

So if this is such a great theory, why did George Bush Sr., when running against Reagan for the Republican nomination in 1980, called it “voodoo economics?” Because after 30 years, most of us are still waiting for our trickle. The rising tide seemed to have missed our boats.

Today, despite the overwhelming evidence that tax cuts don’t work, the theory still dominate conservative thinking. No amount of evidence will convince them. Instead of creating jobs, tax cuts end up creating some horrible consequences for all of us. It exacerbates income inequality, creates massive budget deficits, increases the national debt and deprives the government of badly needed revenue.

Let’s look at how huge tax cuts led to massive budget deficit.

 

Look carefully at the graph. When Bill Clinton took over the government from President Bush Sr in 1992, the deficit was over $300 million. A major cause of this deficit was the tax cuts President Reagan gave to the rich earlier.

Contrary to tax cut proponents, between 1992 – 2000, President Clinton raised taxes and the economy boomed during the period. Clinton not only erased the deficit but when he handed over his office to President George Bush in 2001, he gave him the government’s bank book with nearly $300 million in surplus.

Like Reagan before him, President Bush accepted the tax cut theory and instituted another round of massive tax cuts that mainly benefitted the rich. As a result, the Clinton surplus evaporated within the first two years of the Bush Administration.

In addition to the tax give-away, President Bush foolishly involved the country in two wars without the money to pay for them. Consequently, for the rest of the Bush years, the deficit increased every single year (see second chart). The Bush presidency ended in 2008 with the worst economic disaster since the Great Depression.

In light of this evidence, it is hard to understand why anyone would still advocate tax cuts as a viable policy. Based on our experience over the past 30 years, tax cuts only worsen the budget deficit and deprive the government of badly needed revenue. President Obama and the Democrats should end them. Today, Republicans and conservatives say they are deeply concerned about the huge federal budget deficit yet they continue to advocate for policies which would only worsen it.

 




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