Ideology, Not Economics, May Be At Core of Tax Policy
Tax cuts are good and tax hikes are bad for the economy. Or is it tax cuts are bad and tax hikes are good?
One of Washington’s most enduring policy dialectics is alive and well as Democrats and Republicans court midterm-electionvotersin the face of mystifyingly weak job marketand threatening budget deficit.
Yet, for all of the political noise about the Reagan or Bush tax cuts, or the Clinton or Obama tax hikes, it may be hard to make a convincing case for either approach..
“I really don’t think you can,” says Dean Baker, co-director of the Center for Economic And Policy Analysis. “It’s really marginal.”
Baker’s analysis is rare for its candor and neutrality about a policy debate where cause and effect is usually one-sided and often over-simplified. Most participants can't recommend one school of thought without castigating the other.
The conventional wisdom of tax-cut proponents, best known as supply-siders, is that they free up capital, sparking both spending and investment, which leads to higher economic growth and job creation, thus raising government tax receipts. Tax hikes, however, have the opposite effect.
Meanwhile, members of the tax-hike school say they allow the government to redistribute income, which spurs spending, and raises tax receipts, a plus for the budget balance and lower interest rates. Tax cuts, however, are more often giveaways to the wealthy and/.or corporations—failing to trickle down or through the overall economy--and only aggravate the budget deficit by lowering tax revenue.
Yet for all of the intricacy of the arguments, the results are hardly crystal clear, based on GDP, payroll, budget and tax receipt data over the past 35 years.
Taxing Matters: Economic-Fiscal Snapshot
|President||GDP||Payrolls||Tax Receipts||Budget Deficit|
|Clinton||3.9%||2.3 million||19.2%||-1.2% **|
What’s more, overlooked in the debate is that the composition, size, duration and timing of such tax initiatives is also a important determining factor in their effectiveness.
"[Tax cuts] have to be big and well directed," says Christian Weller, a pubic policy specialist at the University of Massachusetts and Center for American Progress.
In some cases even the biggest and best plans get lost in the economic shuffle.
“There's other macro factors skewing the numbers,” adds Weller. "War, inflation, oil prices.”
Take oil prices, for example. The Carter, Reagan and Bush I presidencies were all marked by oil shocks. Prices were relentlessly high for much of Bush II's secondterm and historically low during the majority of the of the Clinton administration. The high/low between the two periods was roughly $149 vs. $11 a barrel.
More than anything, the policy debate has been shaped by the tax reform efforts of President Ronald Reagan in the 1980s, the first income-tax cuts since the Kennedy administration, when the top tax rate went from 90 percent to 70 percent.
Together, two separate acts (1981 and 1986) reduced 15 income-tax brackets into four, with the top one going from 70 percent to 28 percent, and the lowest one from 11 percent to 15 percent. The reform package also closed loopholes deductions and shelters, as well as expanded the alternative minimum tax.
At the same time, the Reagan administration funded a massive military buildup, which exceeded 6 percent of GDP in several years.
During the two-term Reagan presidency and one term of President George H.W Bush that followed, GDP growth averaged 3.40 percent, with only one-year having an out-sized gain (7.2 percent in 1984). Job growth averaged 1.8 million a year. By comparison, the numbers for the preceding Carter administration were 3.25 percent and 2.0 million.
Tax receipts averaged 20.82 percent of GDP under Carter, vs. 18.19 percent with Reagan. The budget deficit as a percentage of GDP averaged 2.42 percent under Carter and 4.22 percent under Reagan.
“These tax cuts are not as pure as we want to think,” says Weller. “In the Reagan years...you lowered rates and closed loopholes...so the effective tax rate doesn't change that much.”
Reagan also wound up taking back pieces of the 1981 income-tax cuts to address the budget deficit and later raised corporate taxes and closed loopholes, as well as those on gasoline.