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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

July 9, 2012 at 10:00 AM

Tax cuts: The god that failed

Once upon a time, I believed the best way to “stick it to the rich” was to maintain relatively low marginal tax rates. This would encourage them to put capital to productive, job-creating uses rather that keeping it in tax shelters. It worked in the Kennedy tax cuts of the 1960s and it could be argued that it worked, to a degree, for Ronald Reagan. Part of George W. Bush’s initial argument for cutting taxes was also defensible: With surpluses forecast in the future after 2000, taxpayers should see some relief.

But as an economic proposition encouraging growth and, especially, the creation and retention of middle-class jobs and rising middle-class incomes, tax cuts have failed. The dogma that taxes must always go down, and 30 years of tax cuts in states, have proven especially toxic. What went wrong?

First, the economy changed. The very rich get a better return by investing in financial plays that are either esoteric gambling far removed from productive activity, or actually destroy jobs and businesses, as with many mergers. Also, outsourcing, offshoring, the rise of China and other low-cost countries draw investment, as opposed to ventures that create jobs for Americans. In a similar vein, “free trade” has made many losers, although the very rich are undeniably winners.

Thus, it’s not surprising that the Bush tax cuts, which heavily favored the very rich, failed to raise all boats. Indeed, the 2000s were one of the weakest decades for job creation since the Depression — certainly far worse than the 1990s, when Bill Clinton modestly raised taxes on the rich. Mr. Bush also led the country into two wars and signed the Medicare prescription drug benefit, none paid for. And all that extra capital helped inflate the worst asset bubble since the 1920s, with similar consequences.

President Obama now proposes to let the tax cuts for the rich expire — they would revert to Clinton-era levels (as opposed to, say, Eisenhower’s 90 percent). Most Americans would see their cuts extended under his plan. A huge fight is guaranteed. Behind this is a legitimate argument over the role of government, but we probably won’t have a serious conversation. A populous, complex, urbanized nation in the 21st century has different needs than the Gilded Age, even if one believes that was a great time for most Americans. Today our universities are ravaged, social compact frayed, infrastructure stuck in the last century — the anti-tax dogma represents a retrograde movement across the board. But tax subsidies for well-connected playerz, whether fossil fuels or defense, must continue. And why would we make Big Pharma bid to ensure lower prices for Medicare drugs?

There’s no free lunch. And no one can seriously argue that the Bush tax cuts for the richest produced an economic boom that served the common good or the national interest.

[UPDATE: Here’s a useful look at growth and tax rates, via the Washington Post. Interestingly, the U.S. had higher growth with higher tax rates.]

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