Article

Problematic Conclusions

President Bush says economic growth under his watch makes all of us more prosperous. It's not, but it could with key tax reforms.

President Bush yesterday took credit for a federal budget deficit he claims he’s cut in half since 2004, primarily because a booming economy resulted in more tax receipts flowing into government coffers from increasingly prosperous Americans. If only that were the case.

The president’s happy talk about the budget deficit fails to mask the underlying realities of his poor fiscal stewardship of our government. And his rhetoric certainly fails to address the serious economic struggles that most Americans face today despite the president’s proud boast about an “economic expansion that’s now in its 37th straight month of growth.”

President Bush claims that his tax cuts have promoted investment in the economy, which in turn has fueled solid economic growth and robust job creation. “The theory was, was that if we can encourage entrepreneurship and investment and consumption by reducing taxes, it will cause the economy to recover from a recession, and a terrorist attack, corporate scandals, war, hurricanes — and it has,” the president claimed yesterday at a White House event. “The pro-growth policies have worked. Since August of 2003, this economy of ours has added more than 6.6 million new jobs. And the national unemployment rate is down to 4.6 percent.”

Well, not really. Business investment by U.S. companies since Bush took office has never reached the levels of the 1990s, and, in fact, is now slowing after briefly nearing levels seen in the previous decade. Early in this business cycle, which started in March 2001, business investment declined for nine consecutive quarters – the longest losing streak since World War II. The share of investment relative to gross domestic product fell from a high of 12.6 percent to a low of 9.8 percent.

After the long slide in the initial stages of this business cycle, investment did grow faster than GDP beginning in March 2003. By the end of 2005, investment equaled 10.2 percent of GDP. But since then investment growth has slipped again. Revised data show that business investment grew at a low rate of 4.4 percent in the second quarter of this year – the lowest growth rate since the first quarter of 2004. As a result, the year-on-year growth rate for the second quarter slowed to 7.2 percent in the second quarter, down from 7.4 percent in the first quarter of 2006.

So where are the record corporate profits (reflected in the 27% increase in corporate tax receipts, to $354 billion, unveiled by the president yesterday) going if not they are not being reinvested? About 10 percent of aggregate corporate earnings go towards ever-escalating executive compensation for chief executives, often regardless of performance. This Great CEO Guarantee diverts resources away from other uses, such as long-term corporate investment that is critical to the future competitiveness of our economy and job growth throughout the country.

Stock buybacks by big companies are also enriching the wealthiest among us, which combined with multimillion dollar CEO pay packages and a lower capital gains tax enacted by President Bush, helps explain why tax receipts from individuals jumped 13 percent to $1 trillion in fiscal 2006. As The Wall Street Journal noted today, the jump in individual income tax payments was “largely fueled by wealthy individuals, who benefited from higher salaries, bonuses and stock-market gains.”

Higher individual income tax receipts certainly weren’t flowing in from average workers or the broad American middle class. Factoring in inflation, hourly wages were only 0.9% higher, and weekly wages were almost identical in August 2006 and in March 2001. Wages were actually lower in August 2006 than in November 2001, when the recovery started. And despite the 2003 tax cut, job growth has averaged only 1.3% since that time—the lowest increase of any recovery of the same length. Monthly job growth since March 2001 has averaged an annualized 0.4%.

Indeed, economic risks since 2001 are up sharply for middle class families. President Bush wants Americans to believe his tax cuts benefit all Americans and contributes to sustainable, long-tern economic growth. It simply isn’t true.

But it could be. When the current Congress returns in November, and especially when a new Congress takes its place on Capitol Hill in January, its first order of business should be comprehensive tax reform, which would benefit most Americans and our economic prospects. Congress can ensure fairness and honor work by taxing each source of income according to a progressive rate structure—whether from dividends, capital gains, wages, or salaries—and restore simplicity to the tax code by reducing the number of income tax brackets from six to three at the rates of 15 percent, 25 percent, and 39.6 percent.

In tandem, we can ensure that about 70 percent of taxpayers earning under $200,000 a year earn a tax break. Check out the tax reform plan proposed by the Center for American Progress here and here.

Tax reform will take time, of course, which probably means congressional leaders will have to begin the effort when a new Congress convenes in January. But that doesn’t mean something can’t be done to help average Americans this year. When the current Congress returns for its final session in November it simply must vote to raise the minimum wage. And Congress should move swiftly on pension reform so that all Americans can enjoy the security of a comfortable retirement. To read about the Center’s pension plan reform proposals, please click here and here.

The Center for American Progress offers a range of economic policy prescriptions that progressives in America consider essential for the economic well-being of all of us and our country as a whole. And our Economic Mobility Intiative is one of a number of efforts we’ve launched to create a better economic future for American families. We’ve highlighted a number of these proposals in the hyperlinks embedded in our analysis of the president’s budget address yesterday that you’ve just read. To learn more about proposals, please go to the Domestic and Economy pages at www.americanprogress.org or talk with our experts.

Experts Available for Comment on these issues at the Center for American Progress include:

Budget / Tax Policy

John Irons
Scott Lilly

Matthew Miller
John Podesta
Gene Sperling

Christian Weller

Business / Industry

Derek Douglas
Susan Lee

Gene Sperling
Christian Weller

Economics

Derek Douglas
John Irons
Jonathan Jacoby
Susan Lee
Matthew Miller

Gene Sperling
Daniel Tarullo
Christian Weller

To contact one of our experts please call/e-mail Sean Gibbons, Director of Media Strategy, at 202-682-1611 or sgibbons@americanprogress.org.

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