Which stimulates the economy: tax cuts or spending?

February 20, 2009 at 5:42 pm (Uncategorized) (, , , , , , , )

Here’s what one of the biggest tax cuts in U.S. history is going to do: A single person making less than $75,000 a year will take home an additional $400 per year under the federal plan passed by Congress, and a couple making less than $150,000 would get $800. This means that the average American will take home an extra $25 in each paycheck. Anybody who thinks this is the sort of “stimulation” that will pull our economy out of its vertical nose-dive is either nuts or being held hostage by their own ideology. Basically, when Obama agreed to add in more tax cuts in order to gain Republican support for the bill (which he never got), he was taking much needed tax revenue from the Treasury and decreasing the amount he was spending on the infrastructure. That is the portion of the bill that will go to repairing our Third World-like infrastructure, including bridges, highways and schools and, in the process, create millions of jobs in the private sector. Government workers will not be doing that work. These will be citizens who would be out of work, not paying taxes, and on government assistance without the program.

Some may recall that last year the government sent out fat rebate checks to tax payers. Families got nearly twice what the tax cuts will net them. Those rebates did NOT go back into the economy, as the wishful thinkers in the Bush administration predicted. For all intents and purposes, the money may as well have been flushed down the toilet because it had no detectable impact on the economy. None.

There are many people who believe with all their heart that giving big tax breaks to corporations and the wealthy will result in expansion of businesses and more jobs. It’s a good theory, but it isn’t borne out by the facts. If anything, we’ve seen in the last 8 years that major corporations taking advantage of de-regulation and tax breaks have chosen to do exactly the opposite by laying off workers, restructuring, moving off-shore, and paying exorbitant bonuses to executives. In the meantime, over the last 15 years wages in the private sector have not gone up. It has been as if we were all background characters in Oliver Stone’s film, “Wall Street”. But, at least Gordon Gecko was good at what he did. The people running our big corporations, especially in the auto industry, do not appear to be cut from the same cloth as Lee Iococca. The Peter Principle is in full swing in corporate America.

The bottom line is that the ideology of the Republican Party, which is that government cannot be a solution to our biggest problems, ignores the severity of our predicament while showing zero compassion for those who are suffering most in this downturn. I don’t think they actually believe tax cuts will do anything more than give them a campaign slogan in the next election. It’s what they’re against that counts here. They honestly believe that the private sector can police itself and make the right decisions for America. They think that making the rich richer will ultimately raise up the bottom 95% of the country because rich people are the heart and soul of our economy (forget that wages haven’t gone up in this country for the last 15 years). They harp on the concept that only the private sector can create real wealth, when the country’s economy has just struck an iceberg. To clarify the situation for them, the stimulus bill was never intended to create wealth. It is intended to keep our nation afloat. A very small percentage of the population is worried about creating wealth right now. The rest of us are going to remember the way the Republican Party has handled this process.

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5 Comments

  1. Man Overboard said,

    Tax cuts do. Tax cuts = spending. Only it is we who spend it. Anyone who thinks the government is better at spending their money than they are is welcome to make a donation to the treasury. I’ll keep my money thank you very much.

    • johnrj08 said,

      History does not bear out your comment. Again, when tax-payers got their rebate checks last year, none of that money had any measurable impact on the economy at all. It was as if they had never been mailed. The Bush tax-cuts, which were enabled by the surplus left by the Clinton administration, did nothing but make the rich a little richer, while wages went unchanged and the national debt quintupled. Few if any of those wealthy people paying lower taxes raised anybody’s salary or hired any more employees. In fact, nearly 80% of the economic growth during the Bush administration did NOT come in the private sector at all. It was all government. The bottom line is that even one of the largest tax cuts in U.S. history will only result in an extra $25 per paycheck for the average American. That’s a joke, given what we’re facing.

  2. Man Overboard said,

    I guess you weren’t watching when the Bush tax cuts stop the recession after 9/11. Now were you watching when Regan’s tax cuts cleaned up Carter’s mess. Both times tax xuts INCREASED government revenue! Take less, end up with more. It works.

  3. johnrj08 said,

    I guess you weren’t old enough to understand what really happened. What stopped the relatively mild recession after 9/11 was NOT tax cuts. It was easy credit (interest rates dropped to their lowest in 30 years), and a huge growth in government. Tax cuts do no good if they’re not recycled back into the economy. What happened was the beginning of the real estate bubble and the fake expansion of the economy, PLUS the quintupling of the national debt. Reagan’s tax cuts probably weren’t necessary, and they also increased the national debt and deficit to the point that George H. W. Bush had to renege on his solemn “read my lips” promise not to raise taxes. At least that Bush understood that you couldn’t bankrupt the government over an irrational attachment to ideology.

  4. johnrj08 said,

    In terms of how they impacted the recession, Reagan’s tax cuts are over-rated in their stimulative effect on the economy. His Economic Recovery Tax Act of 1981 came at the head of a nasty recession and did nothing to end that slowdown. In fact, as a result of the 1980-82 recession, The Tax Equity and Fiscal Responsibility Act of 1982 instituted a 3-year, $100 billion tax hike—the largest tax increase since World War II. This was a Reagan tax hike. In response to out of control, double-digit inflation, Paul Volcker finally got control of the money supply by raising interest rates. Then, in 1982, after more banks had failed than during the Great Depression, the economic recovery was enabled by increased deficit spending and lowering of interest rates by the Fed. George H. W. Bush tried to continue with Reagan’s economic policies during his administration because they were popular with voters, then had to renege on his promise not to raise taxes. The bottom line is that predictions about the way tax cuts encourage growth and discourage tax avoidance are all guesses, and no real connection has been made between economic recoveries and lowering of taxes. In a healthy economy, they probably do provide some stimulus. Tax cuts routinely do not result in incremental savings for individual tax-payers. As I pointed out earlier, the current tax cut is one of the biggest in U.S. history and the average American will only take home an additional $25/paycheck. I agree that corporate tax rates are high and that they’ve driven some companies off shore. However, I would include very specific conditions to any lowering of those rates to ensure that they have the desired effect on OUR economy, and not someone else’s.

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