Bush tax cut mythology
As the debate turns to economic stimulus, we’re starting to hear this: “Bush realized that the economy needed help, so he asked Congress to enact tax cuts to provide stimulus. And this turned the economy around.”
None of this is true.
When Paul Krugman refers to the administration’s proposed tax policy as the “Obama-McConnell Tax-Cut”, that phrase alone signals more than just a policy disagreement. It’s becoming a kind of short hand on the left for dissatisfaction with Barack Obama.
Krugman believes the current proposal will give the economy a “short-term boost”: Unfortunately, he also believes that a short-term boost is woefully inadequate to fix problems on the scale we are now experiencing.
So why in the world is anyone giving any credence to the insistence by Republican leaders that tax cuts, more tax cuts, and deeper tax cuts are the remedy to our economic woes?
Despite their political appeal, $500 per worker tax credits will do very little to actually boost the economy.
What impact did the Bush tax cuts have on economic growth?
The evidence is not favorable.
…Thus, there is little evidence to support that the Bush tax cuts had a significant effect on growth.
…An analogy with the government might be helpful in understanding why the tax cuts didn’t have a larger effect even though they were much better targeted than the 2001 tax cuts. When the government increases taxes, it can use the money for government investment (e.g. roads, electrical systems, bridges) or for government consumption (e.g. paper for a government office, gas to run a government vehicle, or a fireworks show to celebrate an important event). If the government uses the money for investment, and uses it wisely, the enhanced infrastructure allows us to increase our economic growth rate. But with consumption spending, e.g. an elaborate government fireworks show, there may be immediate benefits to those who watch and participate, but this type of spending doesn’t do anything to increase economic growth in the future.
Tax cuts, which send money in the other direction — from government to households — can be viewed similarly. A tax cut can be used to fund productive investment, e.g. to open a new business, or it can be used for consumption, e.g. for an elaborate private fireworks show or some other use that does nothing to enhance our long-run growth.
Hold that thought.
The Center for Budget and Policy Analysis estimates that allowing the payroll tax cut to revert to its previous rate would add nearly $400 to the 2012 taxes for a worker earning roughly $20,000 a year, $790 for those making $40,000, and more than $2,200 for employees with annual income of $123,000. “Failure to extend the payroll tax cut would harm workers in nearly every job and income category,” researchers at the Washington think-tank said in a recent report.
The benefit of the tax cut is fairly straightforward: Handed a little more money in their paycheck every two weeks, people tend to spend it. That boosts demand. Although the tentative deal in Washington only cuts the average employee’s tax bill by about $20 a week, that could help spur spending at a time the economy is picking up speed. The nation’s gross domestic product rose 2.8 percent in the fourth quarter, up from 1.8 percent in the previous period and the fastest pace since the second quarter of 2010. The unemployment rate also declined sharply in January to 8.3 percent, a three-year low. Other signs of life in recent months include resilient consumer spending, growth in factory output, and rising home construction.
So the Bush tax cuts that put more spending money in people’s pockets don’t help the economy but the Obama tax cuts that put more spending money in people’s pockets does help the economy.
I get it now.
This “payroll tax holiday” bled Social security of $110 billion last year and will bleed at least $143 billion from Social Security in 2012. Over ten years that would be $1.5 trillion not paid into Social Security.
And the left cheers this “coveted win” for Obama that accelerates the destruction of Social Security.
Remember this?
Now it’s a good thing when Obama kills Social Security.
DrJohn has been a health care professional for more than 30 years. In addition to clinical practice he has done extensive research and has published widely with over 70 original articles and abstracts in the peer-reviewed literature. DrJohn is well known in his field and has lectured on every continent except for Antarctica. He has been married to the same wonderful lady for over 30 years and has three kids- two sons, both of whom are attorneys and one daughter on her way into the field of education.
DrJohn was brought up with the concept that one can do well if one is prepared to work hard but nothing in life is guaranteed.
Except for liberals being foolish.
oh, worry not, drj… that money you think wasn’t paid into the SS Trust Fund by the payroll tax shortage did indeed get deposited. The legislation required the shortage be replaced from the general fund.
Since, of course, we have to borrow money since there’s not enough in the general fund to cover the US debt, that means we borrowed the necessary cash to replace the SS coffers, turned it into Treasury securities and dumped it right back into the general funds to be spent… again… by Congress.
Needless to say, the “pay go” figure cited by either party doesn’t include all the interest on the twice borrowed funds.
That’s why I opposed this dumb accounting shell game from the beginning. It’s a campaign dog and pony show, and it never should have happened to begin with… let alone be extended. Unfortunately, this was part of the deal the GOP negotiated with Obama during the lame duck month of Dec 2010, when they had just gained the majority. And also one of the reasons I became disgusted early with the new majority. They really screwed up that agreement right out of the gate.
The Bush tax cuts disproportionately put money into the pockets of the wealthiest. These are not the people whose spending most strongly affects the broadest range of businesses across America.
The prosperity of the average American business depends on the consumption of the average America consumer.
yada yada yada, Greg. Come up with some new material, would ya?
That simple observation still seems to me to be very much at the heart of the matter.
@Greg: It’s too bad the “simplest observation” seems just beyond your intellectual reach.
@Greg: Greg
$2.1 trillion of those tax cuts went to those making under 250K while 700 billion went to those over $250K.
Repeal of the Bush tax cuts would be expected to recover $70 billion a year for the next ten years- with a projected deficit of over a trillion dollars each year. Yet the left wing whackjobs think that that $70 billion will fix everything.
@Greg: This assertion is still true, regardless of how many people want to make fun of it or label it as old news.
Perhaps that is because you take the simpleton’s “simple”, but erroneous, observation that all taxes are equal. Because of the accounting and use of the payroll tax, it bears no resemblance to modifications in income taxes, and creates a different amount of debt/interest because of the borrowing from the general funds – twice.
So the debate for the more informed is actually about the type of tax, and it’s effect on the revenue/interest/debt. And in that case, there are tax reforms that are more wise than others.
As far as the income tax/Bush tax cuts… my suggestion is if you want to whine about the “lost revenue”, then you’d better start whining to your hero in the WH. The total anticipated revenue not absconded from taxpayers because of the Bush tax policies was something like $560 bil annually. Of that, the evil wealthy you hate so much had about $80 bil of that total amount.
To put that into context, that just might cover running Sebelius’ HHS for a year, pre O’healthcare implementation.
What Obama has constantly advocated was increasing the revenue by that $80 bil, still resulting in a “lost revenue” for $480 bil. Needless to say, if you’re looking for revenue, ignoring 86% of the the money not collected for those tax policies is one dumb move.
But an even dumber move is raising taxes for anyone in a prolonged recession. And that’s why you and libzero aren’t influential politicians. You think too narrowly, and based on emotions, not economic history.
Like I said.. you BDS types really need a new dog and pony show. Your own guy doesn’t want to get rid of the largest amount of the taxes in the Bush policy. And this effectively drives your argument into the toilet.
I might add that those rosy quoted revenue numbers were based on the more prolific economy during the pre housing/banking crash. Today’s anticipated revenues would not measure up to the same snuff. Fact is, despite most types of policies, revenue intake has always hovered around the same point with little fluctuation… about 18% of the GDP. Meaning, so that a simpleton can understand, you can’t draw blood from a turnip.
@MataHarley:
As the 50% rate is failing for the British government…reported today.
http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/9097219/50p-tax-rate-failing-to-boost-revenues.html
Yep. It’s regrettable that will all expire at once, isn’t it? Of course, that will be a significant step in the direction of fiscal responsibility, and one that it won’t necessarily be politically easy to reverse.
Wyatt Emerich of The Cleveland Current analyzes disposable income and economic benefits among several key income classes and comes to the stunning (and verifiable) conclusion that “a one-parent family of three making $14,500 a year (minimum wage) has more disposable income than a family making $60,000 a year.” And that excludes benefits from Supplemental Security Income disability checks.
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/Money%20Earned.jpg
More here.
@Greg: Actually, Greg, it wasn’t disproportionate. It was totally proportionate to what each household paid INTO the treasury. They got back a proportionate amount of THEIR OWN money. As a wealth-distributionist, you would see it in a twisted, “unfair” way, wouldn’t you? And, as much as the liberal media would try to spin it, tax cuts DO stimulate the economy. This has been demonstrated beyond a doubt in my lifetime.
Mata, I don’t know if you can embed this or not: (Props to Ace)
If it’s not embedded, I doubt Greg will look at it.
Done, Aqua… Mata
Anyone else remember the unfunded prescription drug benefit, unfunded Bush tax cuts, unfunded wars? Anyone else remember the economic collapse? Before we piss all over Obama we need to look at the hypocrisy of the Republicans as well. I was attacked here often about saying we need to pay our bills… (back then it was “Bush derangement syndrome” to point out this careless spending) and of course this was before the collapse which only made matters much worse.
There is a lot of arguing about this and that, but we need to pay our bills . If the congress spends money then they need to collect that amount (taxes fees etc) and more to pay off the debt. This issue is not just Bush and Obama, it is the congress and the national debate as well.
Not having a tax policy that is in sync with spending is ridiculous and damages our economic stability and national security.
Hey blast, while you’re on your BDS litany, do you remember the unfunded Social Security entitlement? The unfunded Medicare/Medicaid entitlement? The unfunded O’healthcare entitlement?
Just giving you a reality check that the nation’s problems did not begin in 2001.
Mata, You were one of the big supporters of deficit spending during Bush’s presidency, so I am not surprised you are still sticking up for him. Many of those posts were deleted because of Mike’s America leaving this site, but you still don’t get it. The government needs to pay its bills.
blast, would you be confusing my support for both the Afghanistan and Iraq wars on the basis of national security for deficit spending? And how much of our debt/spending is for defense again? 27% or less?
Entitlements? Over 65%?
Sorry… your numbers don’t fly. In fact were the entitlements not there at all, both wars would have constituted but a drop in the bucket, as well as representing the only power of the three (defense, govt run retirement plans, govt run health care) that is Constitutionally mandated.
None of my comments, nor Mike’s America’s comments were deleted from this site.