The Bush-era tax cuts are set to expire at the end of this year. Whoever is elected as President, it’s sure to be a big partisan battle.
So let’s look ahead a bit and try to prepare for the slew of facts and misconceptions that will surely be hurled at us in the coming months. I think, however, it makes sense to first look behind us.
From 1959 to 1973, real Per Capita GDP grew by an average of 2.9% a year, and real wages for workers at every income level grew substantially. But there is another important figure to note from this period: 70%, the lowest point income taxes on the highest income bracket ever reached. In fact, from 1959 to 1963, the United States’ highest earners were taxed at 91%, according to figures from the IRS.
The basic logic behind extending the Bush-era tax cuts for the rich goes something like this: We’re in the middle of a very slow recovery from the 2007 recession. The national unemployment rate is still only just below 8%. America needs jobs, and these jobs can only be created by private companies. Wealthy Americans invest in and own these companies, and in order to create jobs, investors and business owners need more money.
By cutting taxes on wealthy businesses owners and investors, the government is leaving more money in their pockets, which they can then use to create jobs for average Americans. Money “trickles down” from the wealthy to their workers. Republicans assert that raising taxes causes unemployment to rise and growth to be stifled.
Surely high income taxes, low unemployment and a high rate of growth cannot coexist.
Surely they can, and they have. From after WWII up until 1973, the United States experienced a period of rapid economic growth marked by only a few mild recessions. Unemployment was consistently low, yet income taxes paid by the highest earners were extremely high relative to today’s rates. With Bush-era tax cuts in place, the wealthiest Americans pay a mere 35% in income taxes—half of what they paid prior to 1980.
If we focus in on today’s economy, there’s an even more glaring flaw in the narrative conservatives use to justify tax cuts for the rich. Central to the argument for extending cuts is the idea that companies need more cash to create more jobs. If investors and private firms are strapped for cash, lowering income and corporate tax rates might make sense. Lower taxes would free up capital for investors.
In reality, U.S. investors are by no means low on cash. U.S. firms have record piles of cash on hand. American companies are holding more cash in banks — $5 trillion in 2009 according to the IRS — than any other time in American history. This makes one thing clear: our high unemployment is not due to a lack of capital.
Why aren’t companies expanding with all of this capital on hand? Americans simply don’t have money in their pockets to purchase goods and services, transactions that would stimulate the economy and encourage companies to expand. Restaurants don’t hire more servers when they get a tax break. They hire more servers when more people are going out to eat.
According to economist Paul Krugman, extending the Bush-era tax cuts for the rich, while it only amounts to a 4.6% decrease in their taxes, will cause a $4 trillion loss in government revenue over a decade. That’s revenue the government should and could be using for infrastructure spending and tax cuts for middle and working class Americans — the kind of demand side stimulus that actually creates jobs.
So before being overwhelmed by the upcoming debate on extending tax cuts, step back and look at the facts. Then the choice is clear.
By: Mike Guisinger
(Photo courtesy of sxc.hu)