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Business and Politics: Do tax cuts spur economic growth?

The Top Story by Chris Graham

(Second in a series.)

“There’s no surer way to kill economic growth and kill jobs than raising taxes in tough economic times.” Former Virginia attorney general and ’05 gubernatorial silver medalist Jerry Kilgore is echoing there what has become the Republican Party mantra dating back to Ronald Reagan. Cutting taxes on the wealthy and on big business pushes economic growth and brings in more government revenues to balance the federal budget.

The massive deficits and modest economic growth of the tax-slashing Reagan ’80s that preceded the Clinton tax increase of 1993 that came at the beginning of a long period of economic expansion and fiscal restraint in Washington that was followed by the deep tax cuts of the Bush ’00s that have in turn seen deficits and economic slowdown would seem to raise into serious question the wisdom of that foundational stance of the GOP.

“One really serious problem with Republicans is that they have really bought into the claim, completely false, that tax cuts increase revenues and tax cuts spur lots of growth. The right kind of tax cuts at the right time may spur some growth. But they have wildly oversold this,” James Madison University economics professor Barkley Rosser said.

“The real simple thing to do is look back at the Clinton years,” Rosser said. “He raised taxes, and when he did so, not one single Republican in the House or Senate voted for that, not one. And all of their spokesmen were very loudly proclaiming that we were going to have a recession, that this was going to lead to a terrible economic outcome, and in fact we had a huge boom. I’m not saying the huge boom was due to the tax increases, but the fact of the matter is that they were just wrong. You won’t find any of them admitting that they were wrong, of course,” Rosser said.

A recent report from Michael Ettlinger of the Center for American Progress and John Irons of the Economic Policy Institute gives us something concrete to use as a jumping-off point to further examine this line of thought with regard to the interrelation of tax and fiscal policies and the economy. According to Ettlinger and Irons, economic growth as measured by GDP was stronger following the 1993 tax increase (3.9 percent per year for the following seven years) compared to the years after the 1981 Reagan tax cuts (3.5 percent per year growth for the following seven years) and the 2001 Bush tax cuts (2.5 percent growth per year for the following seven years). Other measures also bear this out – real investment growth was higher after the tax increases of 1993 than after the tax cuts of Reagan in 1981 and Bush in 2001, wage levels were better post-1993 compared to the post-1981 and post-2001 eras, as was employment growth.

As to why this might be, we turn to Missouri Democratic Sen. Claire McCaskill. “You cannot continue to run an economic policy that’s all about the very, very wealthy and trickle down when it’s obvious it’s not trickling anywhere,” McCaskill said of the theory behind reducing taxes on the wealthy and big business, which is often referred to as “trickle-down economics” from the explanation from the Reagan era that tax policies that benefit the wealthy and big business will trickle down to benefit the middle and working class eventually. “It’s causing a deep problem in this country not just in the underpinnings of our economy, but also the long-term security of our nation because of the deficit spending,” McCaskill said, noting the classic criticism from fiscally-conservative critics of trickle-down economics who point out that the tax cuts that are advocated by the Reagan-Bush tax-cut boosters need to be balanced with deep spending cuts that have not been in the offing under either of the administrations that pushed these policies through.


Note to Readers
– Click here to read our Sept. 12 story on how the Barack Obama and John McCain tax plans will impact your bottom line.
– Check back tomorrow as we examine the fiscal approaches of Barack Obama and John McCain in more detail.

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