Tax cuts do not improve the economy; nor do they ever increase government revenues

When conservative claim that tax cuts improve the economy and increase tax revenues they are either 1) fantasizing or 2) lying. The difference between the two positions depend on how economically educated the person making the claim is.

The Center on Budget and Policy Priorities released Its report, EVIDENCE SHOWS THAT TAX CUTS LOSE REVENUE. (.pdf file)

The claim that tax cuts “pay for themselves” — i.e., cause so much economic growth that revenues rise faster than they would have without the tax cut — has been made repeatedly in recent years and is one of the many tax policy issues that is likely to receive renewed attention in light of the upcoming election. As explained briefly below, this claim is false. The evidence shows clearly that tax cuts lose revenue.1

The 2001 and 2003 tax cuts have not paid for themselves. There is no evidence that the tax cuts caused any increase in economic growth, let alone growth sufficient to offset their cost. In fact, the 2001-2007 economic expansion was among the weakest since World War II with regard to overall economic growth. 2 Moreover, revenue growth was very poor during 2001-2007. Real percapita revenues fell deeply in 2001, 2002, and 2003 and have since risen to barely 2 percent above their 2001 level. Over the course of other postwar economic expansions, they grew by an average of 12 percent.3

Previous tax cuts didn’t pay for themselves either. In 1981, when Congress substantially lowered marginal income tax rates on the well-off, supporters claimed the cuts would boost economic growth. In 1990 and 1993, when Congress raised marginal income tax rates on the welloff, opponents claimed the increases would harm the economy.

In fact, the economy grew at about the same rate in the 1990s, following tax increases, as in the 1980s, following a large tax cut.4 And revenues grew twice as fast in the in the 1990s (3.5 percent in real per-capita terms) as in the 1980s (1.5 percent).5

Capital gains rate cuts, like other tax cuts, lower revenue in the long run. Especially when a capital gains cut is temporary, like the 2003 cut, investors have a strong incentive to realize their capital gains before the old, higher rate returns. This can cause a short-term increase in revenues, as happened after 2003. (Capital gains realizations also went up after 2003 because of the increase in the U.S. stock market. The capital gains tax cut cannot take credit for the stock market recovery, though, since European stocks performed just as well as U.S. stocks during this period.6)

Over the long run, however, there is virtually no evidence that cutting capital gains taxes spurs nearly enough economic growth to pay for itself. As the Congressional Budget Office recently stated, the “best estimates of taxpayers’ response to changes in the capital gains tax rates do not suggest a large revenue increase from additional realizations of capital gains — and certainly not an increase large enough to offset the losses from lower rates.”7

Deficit-financed tax cuts carry significant costs that are likely to outweigh any short-term boost in economic growth. Deficit-financed tax cuts can stimulate an economy in recession and temporarily improve growth. In the long run, however, the resulting deficits lower national savings and are a drag on the economy. Brookings Institution economist William Gale and now-CBO director Peter Orszag concluded that the 2001 and 2003 tax cuts are “likely to reduce, not increase, national income in the long term” because of their effect in swelling the deficit.8

Given the evidence, economists across the political spectrum reject the notion that tax cuts pay for themselves.

In sum, the idea that tax cuts pay for themselves sounds too good to be true because it is too good to be true. Tax cuts lose revenue, and when they are deficit financed, they can also contribute to poorer economic performance over the long term.

The references can be found in the original pdf document.

What this is saying is that giving up tax money to boost the economy simply doesn't work. The money goes primarily to the wealthy or to large businesses which are not short of capital anyway. If they need more money it is easy to borrow it or sell stock.

Now at the moment, there is too little money available to consumers to buy goods and services, so jobs are not being created. That lack of job creation means that consumption is lowered.

There are two ways to make the economy grow. One is to provide more money directly to consumers like the stimulus package last Spring. That had some effect, but it was a quick hiccup that rapidly dissipated. Another stimulus, one that would be more long lasting, was recommended by Robert Reich:

A Second Stimulus: Much Bigger Than the First, and Focused on Infrastructure

It will soon dawn on Congress (although it may never dawn on the White House) that we need a much larger second stimulus package than is now being contemplated in order to give the economy the jump-start it needs and fill in for consumers who can't and won't spend more. My guess is that this second stimulus plan, including infrastructure, will ultimately reach $200 billion or more.

This would both create jobs and rebuild the worn down infrastructure that the tax cuts over the last two or more decades has let wear out. Just rebuilding bridges is a desperate need in America. And the rebuilt infrastructure will help private businesses operate at lower costs.

But the real point is that general tax cuts are the worst possible answer to the current economic problems. They don't work and they damage America.

Conservative America - where wealth and power is rewarded instead of work

Work hard and you will be rewarded in America. We still get taught that in school - but under the Reagan Revolution you will only get part of the reward for your work. The rest is siphoned off and redistributed to the wealthy and the powerful. That's what is meant by the statistics showing greater disparity between the wealthy and the superwealthy and the rest of us. It's not better educated workers getting paid more in the global economy for economic reasons. It's the power-based redistribution of income upwards from the workers who produce the wealth to the wealthy and powerful who define the rules of who gets the rewards.

Part of this results from the changes in tax codes that make the middle class pay a larger percentage of their income after family support than is true for the wealthy and especially the superwealthy. But even more comes from the redistribution of power away from workers and from the government to the investors and top management class. The Reagan Revolution is building a Latin-American style plutocracy in America by shifting power from the workers and their government to the wealthy and the superrich.

This is bad economics in the first place since it rewards position and class rather than effort, but it also has social consequences as the connection between effort and the reward for that effort is severed.

For all the conservative rant that America should be a nation based on "free enterprise" what has happened in America since the 1960's is that people get wealthy primarily by getting a government contract or a government-protected monopoly. The ideal of the American economy used to be that the people who did the productive work that created wealth were rewarded more for their productivity than were the managers who organized the work, and the investors who merely contributed money to the enterprise were the least rewarded because their effort was the least productive. That's the ideal of a middle class nation. It is the skills and efforts of the middle class that actually produce more and better goods and services, and the efforts of those who merely reorganize those productive efforts should not be rewarded more than the efforts of those who actually do the final productive work of wealth creation.

How do you get the most wealth creation and greatest productivity from a society with a modern economy embedded in it? You provide the greatest reward to those who do the real work rather than to the managers, investors and politicians.

In the last thirty years especially American has changed. The rewards for productive effort have been distributed away from those who actually create the final goods and services towards those with the power and money to decide who gets rewarded and who does not. David Cay Johnston's new book Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill) provides numerous examples of how our society now rewards wealth, power and position rather than productive effort.

Contrary to the fictions the Reagan conservatives keep spouting, this redistribution of wealth from the workers and families up to the very wealthy is a political function, not an economic one. Every time a big-box store like Wal-Mart or Costco arranges with local governments to not have to pay local taxes for a decade or more to locate a story in a community, they gain an economic advantage over the local stores which still have to pay those taxes. I used to trade at two local hardware stores where I got good service and advice along with the hardware, tools and parts I needed, but home Depot and Lowe's opened up, cut the prices because of the tax benefits the County gave them, and sucked up the business that had gone to my local hardware stores.

I'm not getting lower prices because now I have to drive ten miles instead of two, and park half a mile from the big box store in a dangerous anonymous parking lot instead of right in front of my local store. I also can't find anyone who can help me figure out how to deal with my plumbing or lawn problem. And oddly enough, the amount of product that Home Depot and Lowe's make is roughly the same as the amount of tax incentive they got the County commissioners court to give them to open in the first place. That money is sucked out of my community into the pockets of those wealthy and powerful enough to get the special government privileges that makes the big-box business model profitable in the first place. So Our community is poorer, we have fewer total jobs and the ones we have pay less than when we had local hardware stores, and the only winners have been the wealthy and politically connected investors. Welcome to the Reagan Revolution - the revolution in which plutocrats, investors and top managers of big business conglomerates are disproportionately rewarded because of the positions they occupy instead of the actual wealth they personally produce.

Rick Perlstein quotes Tom Geoghegan who describes the social and economic results of this failed economic structure in See You in Court: How the Right Made America a Lawsuit Nation :

It took ten years—almost all of the 1990s—for the median family income to get to the same level that it was, in real terms, in 1989. But in 1999, when we got to the same income level we had in 1989, the "median" family had to work six more weeks a year.

To keep from falling, the 1999 middle class had to work six more weeks a year for free. Not a few more hours—six more weeks! By the way, maybe it's worth pausing to say this: No wonder our FDP keeps shooting up, if the middle class is being forced to work for free.

But all this unpaid extra labor tends to undermine the Rule of Law.

Why? The economist John Maynard Keynes put it best: "Nothing corrupts society more than to disconnect effort and reward." That's what did in the old Soviet Union: no matter how hard one worked, one could not get ahead of someone who did not work at all. All that is what is happening in the United States, too. Of course, in a certain way our country would seem the very opposite of the Soviet Union. Here, if people don’t' work, they're going to end up homeless. Then again, if they do work, they may end up homeless, too.

That's the point. Like the USSR, we are slowly breaking the connection between effort and reward. And in terms of the Rule of Law, that's a dangerous thing to do. It's dangerous to push the middle class into questioning the fairness of the rules.

The danger is that people in the middle class will begin to see the world as arbitrary and unfair—unpredictable, a matter of luck, a chance of catastrophe around the corner. It does not matter if they work the extra hours. Over 40 percent of American families have less than $5,000 in savings. One bill, a hurricane out of the blue, can blow everything away.

So, quietly and to themselves, people at the median or below have to wonder, as the country becomes fabulously wealthy: Why play by the rules?

I may even understate the case. The disconnect between effort and reward is much greater than it seems. Some families lost income, though they worked harder. But they became wealthier. How? They made money off their homes. But this is not "effort." It's not even savings. It's just something that happened arbitrarily, to me, but not to many others. The moral is: Hard work doesn't pay.

Let's go back to my earlier example. I doubt many people did actually get back to the same 1989 level of income in 1999. Think of pensions. Fewer working people had pensions, though they worked longer. Or they had bigger administrative fees. Think of health insurance. Fewer people had it. Or they had bigger deductibles. They lost out, even with six more weeks of work. Perhaps our moral character can survive one decade of that kind of thing, but it keeps going.

Why is this so dangerous for the Rule of Law? It's simple. If we do not expect the world to be reasonable and fair, then sooner or later we do not demand or expect those qualities from the law, either. We get used to arbitrariness and unfairness. Sometimes we take a certain glee in it—at least when arbitrary things happen to others. Worse, as fewer of us vote, or even watch the news, we experience the legal system not just as arbitrary but as alien. It's something that is imposed on us. We did not consent to it. We didn't vote.

Worse, the more we drop out, the more arbitrary and unpredictable the Rule of Law becomes. The unions, political parties, and other institutions such as the liberal churches helped us shape a certain legal system. When they began to weaken, the law itself begins to change. It became less rational and predictable. It is not just that people now perceive the law as less rational and predictable. It really is.

Maybe the country will survive it. Maybe the less rational and predictable the law becomes, the more people will go along. They will accept it up to a point, as in backward societies, because they will experience the Rule of Law in the same way they experience the world.

America became a wealthy and powerful nation because the availability of free land severed the connection between rewarding land ownership and rewarding hard work. Individuals who wanted to get rewarded for their own work merely had to open new land and put their effort into the enterprise.

When the wealthy landowners tried to get government to tax the new middle class for reasons that did not contribute to their economic success, they used their numbers to change the way government was controlled. The shock expressed by many who had been leaders during the American Revolution when Andrew Jackson took control of the government is clear in history, but the Jacksonian Democrats were people who were used to being rewarded for their effort and weren't going to let a few large landowners (A.K.A. "The Right People") take the rewards away from them.

The fact that the American South with its plantation culture and slavery did not participate in the early stages of the Industrial Revolution (and has yet to get fully with the program) is a clear demonstration of the economic superiority of rewarding the efforts of labor more than land, capital or that strange, mostly ideological economic concept, Entrepreneurship. [Land, Capital and Entrepreneurship are not unimportant economic factors, but the rewards to those who do the final job of creating goods and services are the most powerfully productive rewards in the system. That's what the statement that "a business' most important assets are its workers" really means.]

The reason why laissez faire economics does not work is that it assumes that the social and power structures of society will somehow automatically gravitate to those which produce the best good, services, and social benefits. Unfortunately, there is no automatic pressure or mechanism that makes that true. In fact, in some markets such as a private insurance-dominated national health care system, the assumption that somehow the market will give the best results at the lowest possible cost is clearly false.
America needs to seriously reconsider the reward structure in has in place and that will include, but not be limited to, the tax structure. What social benefit is returned from the super-rich that justifies their failure to pay a greater percentage on their incomes in taxes than those with the least income? The super-rich get proportionately more form society, they should support it proportionately more. Is there any social benefit at all in allowing great wealth to be inflicted on the descendants of wealthy families? Is that not simply an incentive for them to NOT be productive and instead play power politics for the sole purpose of protect their social position?

America has had a three decade experiment with the Reagan Revolution. The Reagan Revolution and the conservative movement that has inflicted in on America has clearly failed our society and our nation. It needs to be rethought and re-worked.

A major element of that rethinking is how work is rewarded. Today it is more likely for most people to become wealthy by hitting the lottery than by the results of their hard work. That is simply wrong, and destructive on any society that is supposedly built on the rule of law and also wants to be an economically productive nation that can compete in the world economy.

Conservative thought is based on the assumption that the nation exists to support business and reward the rich and powerful. Somewhere in the Reagan Revolution the idea that the heart of our nation is its families, and that business and the economy exist to improve life for the workers and their families, not for the CEOs, the investors and the politicians who enable them. Conservative thought and actions have failed America.

It's time for American to return to its roots as a middle class nation not dominated by an aristocracy. Instead, work needs to be properly rewarded and families supported by the economy.

You went 20 mph over the limit - Ticket? $1050

Welcome to Virginia. Can't raise taxes to repair roads? Simple solution - increase traffic fines. Big Time. The New York Times reports in today's "Week in Review."

under a new set of rules there are now a whole host of violations considered “reckless driving” that subject errant Virginia drivers to fines of $1,050 to $3,000 — plus court costs, if you fight and lose. The money will be spent on maintaining roads and bridges, safety improvements and closing a $500 million gap that emerged in last year’s transportation budget.

Welcome to Republican heaven. Or as intelligent people call it "Incompetent Government."

Halliburton moving HQ to Dubai - Rats? Sinking Ships?

I find the timing of this interesting.

From MANAMA/HOUSTON (Reuters) - U.S. oil services firm Halliburton Co. is moving its headquarters and chief executive to Dubai to better position itself to gain contracts in the oil-rich Middle East.

Texas-based Halliburton, which was led by Vice President Dick Cheney from 1995-2000, did not specify what, if any, tax implications the move might entail. It plans to list on a Middle East bourse once it moves to Dubai -- a booming commercial center in the Gulf.

"My office will be in Dubai, and I will run our entire worldwide operations from that office," said Chief Executive David Lesar at an energy conference in Bahrain on Sunday. "Dubai is a great business center."

Halliburton has drawn scrutiny from auditors, congressional Democrats and the Justice Department for the quality and pricing of its KBR Inc. unit's work for the U.S. army in Iraq. [Snip]

Halliburton said it would maintain its legal registration in the United States and was not leaving Houston, where it was currently based.

But Lesar told reporters: "At this point in time we clearly see there are greater opportunities in the eastern hemisphere than the western hemisphere."

KBR, the engineering and military-services contractor unit that Halliburton is in the process of splitting off, is the Pentagon's largest contractor in Iraq.

This should put their records of what they did in Iraq outside the U.S. where subpoenas can't get at them and where the shredders can operate at a much more liesurely pace. Not only will this make it easier to escape U.S. Justice, they plan to list on the Dubai Bourse, which removes them from the control of the SEC and from any U.S. Stock Exchange regulations.

Think this might have anything to do with the Democrats taking over the Congress and the slow-motion implosion of the Republican Party?

An agenda for recovery from Bush.

Talkleft extracted the elements from the NY Times article entitled "The Must-Do List." Here is the list of things that have to be done to recover from the Bush/Cheney/NeoCon administration.

• Restore Habeas Corpus
• Stop Illegal Spying
• Ban Torture, Really
• Close secret prisons,
  
• Account for the ghost prisoners,
  
• Ban extraordinary rendition,
  
• Tighten the definition of enemy combatant,
  
• Fairly screen prisoners,
  
• Ban secret and tainted evidence,
  
• Better define "classified evidence" and
  
• Respect the right to counsel.

Those are mostly all recovery efforts to problems caused by the Bush administration adn the conservatives. I'd also add:

• Get us out of Iraq and quit wasting American lives there.
• Get serious about the world-wide Counter-Terrorism effort ASAP.
  
• Start cleaning the NeoCon moles out of the Federal Government.
• Reinstate the "Fairness Doctrine" for all broadcast media.
  
• Get serious about taking care of the disabled military veterans, physically, mentally, and financially. Their families also.
  
• Audit and investigate the contractors who have had contracts with the military or the Intelligence Agencies active since 1994.
• Ensure that the systems of taking voting results and tabulating them are as close to tamper-proof as possible.
  
• Provide more serious support for training in college and work training for life.
  
• Implement a health-system that includes government guaranteed 100% coverage. Base this on community pricing instead of exclusions for prior health conditions so that along with 100% coverage, everyone pays the same premiums.
  
• Standardize the systems for applying for health care services so that clerks have to learn only one system to get reimbursement.
• Develop a general nationwide system that provides medical information on everyone similar to the one used by the VA system.
  
• Reestablish corporate income taxes, progressive individual taxes for the high income and the estate tax to pay for these programs.
  
• Follow the above up with getting control of spending and approach balancing the budget. [Note - the above healthcare reforms are expected to throw off extra funds that can be used to pay for them after the initial costs.]

This is only a start. A lot more needs to be done.