Sunday, October 26, 2008

Tax Cuts and Trickle-down

My favorite TV show and one that I look forward to every Friday night during the roughly 26 weeks a year it is on is Real Time with Bill Maher . For me, the show alone is worth the subscription to HBO. Although Maher is unabashedly liberal along with most of his guests, he does have his share of conservative guests to provide some opposing views even if that means the conservative guest will often be ganged up on by everybody else including the liberal studio audience. But this sure beats most of the conservative radio and TV shows that give little or no voice whatsoever to liberals.

His 10/24/08 show featured as the conservative guest,
Arthur Laffer. Few people may remember Laffer today but during the Reagan presidential years, he had a lot of visibility as the public face behind supply-side economics and tax cuts along with the trickle-down effect which holds that providing tax cuts to businesses and the wealthy eventually results in more revenue for the government and more prosperity for everybody else. Critics have derisively called this a recycling of the the horse-and-sparrow theory from the 1890s: If you feed the horse enough oats, some will pass through to the road for the sparrows.

Maher had Laffer on the defensive right away by mentioning a
TV appearance where he made an informal bet with a former financial advisor to Ron Paul on CNBC in August of 2006 that the economy would not go into a recession in 2007 or 2008. The bet that he lost was for one penny and his honor. During that 2006 show, he claimed that "the US economy has never been in better shape and wealth has risen" and that "monetary policy is spectacular."

But what was most interesting was Laffer admitting in the show that not all tax cuts are good. According to his theory illustrated by the
Laffer Curve:

1. If tax rates are too high then lowering them will stimulate the economy and result in more tax revenue.

2. But if tax rates are cut too low, then the result is simply less tax revenue leading to deficits.
So the problem is that most mainstream Republicans heard the first part but conveniently ignored the second part.

Although George H.W. Bush called Reagan’s tax cut plan
"voodoo economics" during their 1980 primary battle, Reagan won and got to implement his tax cuts. The result was the largest US deficit in history up to that time.

Bill Clinton’s modest tax increases resulted not only balancing the budget but produced a budget surplus by the end of his second term. And while some naysayers believe a budget surplus is bad because the government has too much of the taxpayers’ money, the surplus could have gone to either retiring some of the national debt or helping to keep Social Security solvent for when the baby boomers retire.

But we never got to find out since his successor, George W. Bush brought tax cuts back with a vengeance even while fighting an expensive (and questionable) war in Iraq. The result was turning a surplus into the largest US deficit in history surpassing that of Reagan's.

Even worse, the Bush tax cuts not only failed to generate enough revenue to run the government but these cuts which primarily benefited the wealthy have shown little evidence of any promised trickle-down effect. So while the wealthy have done quite well, thank you, the gap between the rich and all the others has appreciably widened and the middle and lower classes are struggling more and more to just stay afloat in an economy where jobs are evaporating.

So now we have Republican John McCain’s proposed solution to this sick economy — make the Bush tax cuts permanent while continuing the Iraq War to “victory” and cutting spending by eliminating ‘earmarks’ even though the total amount of these in the fiscal year 2008 budget
amounted to about $16 billion compared to the latest estimated 2008 deficit of $455 billion while promising (according to his website) a balanced budget by 2013. Incredible!

Back in 1789, it was Benjamin Franklin who wrote…in this world nothing can be said to be certain, except death and taxes.

Especially when viewed in this way, it’s no wonder that taxes are so disliked by everybody. Republican conservatives love to use the phrase “tax and spend liberals” and accuse liberals of “redistributing the wealth” with their programs. But whatever happened to Republican fiscal conservatives believing in balancing the budget? As much as they may hate taxes, they are necessary to pay for the government services we want or need. If a government program is something we really want or need, we should be willing to raise the taxes to pay for it. Running large deficits normally means that the shorfall has to be borrowed adding to the national debt which means that the bill is simply passed along to future generations to pay. But isn’t this just another more insidious way of redistributing the wealth?

Tax cuts to the exclusion of any other sane thinking like balancing the budget was not only the way during Reagan’s term, but is still the backbone of Republican Party economic policies today. The results of George W. Bush’s tax cuts along with their support by Republican John McCain (along with the opposition by Democrat Barack Obama) today form one of the most important policy differences for voters to choose from. But with the economy presently in shambles, it’s fair to ask ourselves before stepping into the voting booth, How are those Republican economic policies working for you so far?

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