Think Again: Tax Cuts: The Faith and the Facts
SOURCE: AP/Cliff Owen
If there’s one thing that unites conservative politicians, it’s the economic value to all of society of tax cuts that disproportionately benefit the wealthy, such as those passed in 2001 and 2003 under President George W. Bush. Most coverage of this issue treats the benefits of the tax cuts as an open question or a mere philosophical difference, rather than one that can be answered by evidence. Following a rather lengthy Google search in an attempt to find an answer to this question, I finally happened upon an About.com site, which, borrowing from an article in Smart Money, asks, “Why Do Conservatives Support the Bush Tax Cuts?” The answer:
Conservatives believe extending the tax cuts is key to fostering job growth and healing a wounded U.S. economy. … Clearly, the cuts benefited the wealthy, but if they were allowed to expire the subsequent tax burdens would be felt by everyone—from corporations to working families.
In fact, while the arguments in favor of tax cuts for the wealthy have been known to change over time, the bottom line never does. When Sen. Jim DeMint (R-SC) introduced a stimulus plan authored by the Heritage Foundation back in 2009, it consisted entirely of making the Bush tax cuts permanent and adding tax breaks for corporations and wealthy Americans. If it had been enacted, the plan would have cost roughly three times what the stimulus package—then under consideration in Congress, and later passed—was estimated to cost over a period of 10 years. Even Sen. DeMint found it necessary to admit at the time that his plan was “not innovative or particularly clever. In fact, it’s only eleven pages.”
At the time, the nonpartisan Congressional Budget Office analyzed the short-term effects of 11 potential options for improving the employment picture and calculated that retaining the Bush tax cuts for the wealthy offered the least powerful “bang for the buck,” owing to the fact that people without money spend it, while people who have money tend to save it. But Sen. DeMint and his fellow conservatives still stuck with their plan.
It is an article of faith for conservative politicians that not only do tax cuts trickle down to the rest of us but that they also increase revenue. As Senate Minority Leader Mitch McConnell (R-KY) told one reporter in July 2010, “There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy.”
But not even conservative economists pretend this is true anymore. Just ask them:
- Greg Mankiw, President Bush’s chair of the Council of Economic Advisers from 2003 to 2005 and the lead economist for the Romney campaign: “Some supply-siders like to claim that the distortionary effect of taxes is so large that increasing tax rates reduces tax revenue. Like most economists, I don’t find that conclusion credible for most tax hikes.”
- Andrew Samwick, chief economist under President Bush at the Council from 2004 to 2005: “No thoughtful person believes that this possible offset [from the Bush tax cuts] more than compensated for the first effect for these tax cuts. Not a single one.”
- Ed Lazear, President Bush’s chair of the council in 2007: “I certainly would not claim that tax cuts pay for themselves.”
- Hank Paulson, President George W. Bush’s Treasury Secretary: “As a general rule, I don’t believe that tax cuts pay for themselves.”
Those were the conclusions of these top conservative economists who have studied the question. Now we also have the evidence. Under the headline, “How Awesome the Bush Tax Cuts Were Supposed to Be (but Weren’t),” the Atlantic Wire offers up some ridiculous Heritage charts that read as dark humor (or perhaps parody) today. In fact, contrary to all the comically rosy predictions, two things actually did happen:
- The Bush tax cuts led to huge budget deficits.
- Although Heritage predicted a lower unemployment rate if the Bush tax cuts passed, the unemployment rate has remained significantly higher than predicted.
Moreover, as the investment banker Steven Rattner pointed out in a recent New York Times op-ed titled “More Chips For Tax Reform,” not only are our tax rates for the wealthiest Americans awfully generous compared to other democratic nations, but so too are our “absurdly low rate on those forms of income—just 15 percent—that yielded Mitt Romney’s embarrassingly small tax payments.” This too is based on the faulty theory that investment income should somehow be taxed at a lower rate than wages—so Warren Buffett can claim a lower rate on his billions than his secretary does on her thousands.
Rattner believes we can push these rates all the way up “to 28 percent, right where it was during the strong recovery of Bill Clinton’s first term, and grab hold of a total of $300 billion of new revenues over the next decade.” Despite the howls of outrage that one can predict from the rentier class, Rattner observes, “During my 30 years on Wall Street, taxes on ‘unearned income’ have bounced up and down with regularity, and I’ve never detected any change in the appetite for hard work and accumulating wealth on the part of myself or any of my fellow capitalists.”
Ditto what Rattner terms “the indefensibly low 15 percent tax rate on the famous ‘carried interest,’ the fee received by private equity and certain hedge fund investors.” Here too, Rattner, who admits to being a “beneficiary of the carried interest loophole,” describes seeing “firsthand the lack of any difference between the work involved in generating a carried interest and the work done by millions of other professionals who are taxed at the full 35 percent rate.”
And, speaking of Buffett, America’s most successful investor also contributed an op-ed to The Times, and added that when presented with a deal, he finds it difficult to imagine a savvy investor who might reply with the following:
‘Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.’ Only in Grover Norquist’s imagination does such a response exist.
Between 1951 and 1954, when the capital gains rate was 25 percent and marginal rates on dividends reached 91 percent in extreme cases, I sold securities and did pretty well. In the years from 1956 to 1969, the top marginal rate fell modestly, but was still a lofty 70 percent—and the tax rate on capital gains inched up to 27.5 percent. I was managing funds for investors then. Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered.
This conclusion was reinforced by a study by the Congressional Research Service, which offered up the following conclusion:
The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. (The entire report can be found here.)
When we read about these questions in the mainstream media, we find that journalists have often taken the conservative case on faith. But we’ve done the experiment, and it’s over. It’s far from clear that the conservatives themselves ever even believed it. After all, can it be mere coincidence that the very same people who fund conservative arguments via campaign contributions and other means are the primary beneficiaries of the tax cuts conservatives offer? In the world of the mainstream media, this remains an open question. In the real world, however, not so much.
Eric Alterman is a Senior Fellow at the Center for American Progress and a CUNY distinguished professor of English and journalism at Brooklyn College. He is also “The Liberal Media” columnist for The Nation. His most recent book is The Cause: The Fight for American Liberalism from Franklin Roosevelt to Barack Obama.
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