No Economic Benefits

Justification for tax cuts continues to be that they will spur the economy. We have been hearing this argument for nearly six years now, but in the wake of the strongest economy in generations (the ‘90s) the succession of tax cuts since 2001 have apparently done little or nothing for the economy. A recent NY Times/CBS News shows that 28% of those polled approve of Bush’s handling of the economy. This is also reflected in the consumer confidence numbers, which are at the lowest point since last October and took the biggest one-time drop in 28 years.

Maybe it is true that cutting taxes can spur the economy. In fact, it makes sense that if less of a person’s paycheck is devoted to taxes they will spend more; however, there are a few flaws in the theory. First, this is a nation in debt and people realize that they cannot continue spending without consequences. As such, any extra money that is provided to the average person will go to debt reduction and not to the purchase of new products. This was seen with the $300 per taxpayer rebate that was distributed in 2001. When those checks were issued 46.2% of the people used it to pay off debt. The same would likely occur if the average American received a tax decrease: they would primarily use the money to pay off ever growing credit cards.

The second flaw in the theory is that the tax cuts that have been enacted have been skewed toward the top income brackets. The people at the top of the income scale do not need reduced taxes to have money accessible to spend in the economy. Rather they have disposable income and much of that money sits idly in the markets earning more money and not moving through the economy, which is necessary for economic benefits.

Moreover, when the first set of tax cuts were enacted and the discussion of making dividends tax free was occurring, businesses were not in need of money; therefore, encouraging investment in businesses was not necessary. Interest rates were extremely low and obtaining loans from banks, if extra money was necessary for infrastructure or capital improvements, were easily accessable. The fact that they did not access it and did not engage in capital improvements shows that they were not looking for additional money from stock investments or otherwise. Thus, the reductions in tax rates either were not designed or did not encourage actual investment in businesses.

The end result is that the Administration did not seek to spur the economy nor did it seek to encourage investment in businesses with the tax cuts from 2001 through today. Rather, the tax cuts have been nothing more than a give away to the rich. Nothing of significance has gone to the middle or lower classes and the upper class has not used the money for economic prosperity, just personal income gains.

The argument that the tax cuts were designed to spur the economy has been a myth and continues to be a myth. Further, no future tax cuts should be passed based upon this claim.