Cross posted from Real Economics. According to an analysis by Pulitzer-Prize winning reporter David Cay Johnston, the Bush tax cuts, rather than resulting in great general prosperity – as argued by Bush and the Republican Party – cost working Americans a total of 6.6 trillion dollars in lost income over 12 years. For each American taxpayer that is $48,000 in pre-tax personal income. Johnston is author of the 2008 book Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill), and was formerly a correspondent for the New York Times. He has been a pioneer in tracking down, calculating, and revealing to the public the trillions of dollars the very rich and various corporations have hidden in hot money centers around the world to avoid and evade taxes. In January 2009, he presented in Mother Jones magazine a point-by-point plan for dramatically shifting government policies away from favoring the rich and corporations, to working for the general welfare of all Americans. Among his points was a ruthless crackdown on tax havens such as Bermuda and the Cayman Islands, including the use of military force if that was required to overcome the refusal of the authorities of those locales to cooperate. The discussion on Daily Kos of Johnston’s determination that the Bush tax cuts had essentially robbed each working American of $48,000 in pre-tax personal income reflected the confusion and ignorance that still characterizes thinking about political economy among Democrats and the left generally. A number of tenets and assumptions fostered by movement conservatism were much in evidence. For example, one commenter wrote: But how do you make that the fault of the Bush tax cuts? For at least the first few years doesnt it make more sense to blame 9/11? In actual fact, I think a big part of the issue is globalization and the knowledge economy…. Globally, incomes are converging…. Secondly, the Internet and the knowledge economy are transforming us into a winner takes all economy. Leaving aside the glaring contradiction of how incomes could possibly be converging in a “winner takes all economy,” the commenter is asking an important question> What is the causal mechanism by which Bush’s $1.6 trillion in tax cuts resulted in a drop in personal income of $6.6 trillion? This is slightly different than asking why Republican / conservative tax cuts don’t actually pay for themselves, but is closely related. In December 2010, when President Obama was pushing through an extension of the Bush tax cuts, I wrote The Obama tax deal with Republicans is insane, in which I noted, “there have been three grand multi-year national experiments with Republican / Conservative tax cutting over the past century.” These were: the Harding / Coolidge tax cuts of 1921 through 1926; the Reagan tax cuts of 1981; and the Bush tax cuts of 2002. The results of each one of these tax cuts was exactly the same: “all three experiments resulted in the average American becoming poorer, the real (industrial) economy in tatters, and spectacular financial crashes.” Which should lead to the obvious question: Why do tax cuts lead, counter-intuitively, to industrial decline, stagnant wages, and finally financial collapse? Continued below the fluer de Kos.... And I explained: If you look under the hood of the industrial economy, you easily see why there is this counter-intuitive relationship between tax rates and economic growth . With high taxes, the only way to retain the bulk of the wealth created by a business is by reinvesting it in the business -- in plants, equipment, staff, research and development, new products and all the rest. But if tax rates are low, then there is more incentive to pull the wealth out, by declaring it as profits that are taxed at what turns out to be too low a rate. In other words, low taxes create an incentive for profit taking. This in turn creates an incentive for short-term horizons in business planning. If you’re going to be taking all the profits out of a company, and take home a few million a year, why bother to reinvest anything in the business? You’re going to be rich, and never have to work again, even if the business goes bust. Or gets packed on a boat and shipped to China. Or goes virtual and lets all the hard work, like, you know, actually making something, be done by the lowest bidder. Employees? Don’t need them. But employees are also customers. If enough businesses take profits, after some length of time, the former employees also become former customers. Meaning, they stop buying. The economys aggregate demand generation is crippled. From the three Republican tax cut experiments this past century, it appears the length of time for this to happen is five to seven years. If tax rates are high enough to discourage profit taking - forcing wealth created by a business to be recycled back into the business – then businesses are pushed toward longer-term planning, as they invest in new plant and equipment that will be used for many years. And you do not get the absurd situation you have now, where companies are posting record breaking profits, but are not buying new equipment, nor hiring new employees. Low tax rates encourage taking wealth out of industrial companies; the wealth taken out must then be put to work. That means more money chasing investment opportunities, leading to price increases in financial capital or real estate or some other asset. In other words, an asset bubble. The rise in prices of an asset bubble has nothing to do with the creation of real wealth. It all looks like prosperity – until the asset bubble bursts. That’s where we are now.
Posted on: Tue, 15 Jul 2014 00:42:01 +0000
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