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View Diary: The False Promise of Tax Cuts to the Wealthy (30 comments)

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  •  Well, here's a chart Paul Krugman put together... (1+ / 0-)
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    jeopardydd

    The impact of tax cuts/hikes on the economyThe chart shows that tax cuts for the wealthy were immediately followed by increasing unemployment as a percentage of all workers.  When tax cuts were increased on the wealthy under Clinton, employment increased immediately.

    Here is a link to an article that explains why the above results are what logic tells us we should expect:

    Tax cuts are contractionary because governments cannot spend money that they do not have. If taxes are cut and nothing else is done to sustain government spending, then government spending is going to drop by the amount of the drop in tax revenue.

    Because not all of the tax ‘refund’ will be spent (some of the money will be removed from the economy by savers), the increase in consumption C generated by the tax cut is going to be less than the drop in government spending G that will also be caused by the tax cut.

    That, my friends, is what we call a contractionary effect, a caused drop in GDP that is initiated solely by a reduction in taxes collected.

    Raising taxes, on the other hand, is expansionary if at least some of the tax revenues collected by the government would have been saved. The increase in G is greater than the drop in C.

    Money that would otherwise have been removed from the economy by savers is spent, instead, by the government. The result is a net increase in aggregate demand, in GDP, and that is the very definition of the term ‘fiscal stimulus.’

    It is true that if the government cuts taxes while maintaining its spending levels with borrowed funds, a net stimulus to the economy is generated, but none of the increase in GDP effected by this fiscal policy ‘combo initiative’ can be rationally attributed to the tax cut.

    All of the stimulus effect we would observe would be derived from the spending of borrowed money, money that had been removed from the economy by savers.

    Tax cuts BY THEMSELVES are always contractionary (or at least, never expansionary). But when the government borrows money to finance a tax cut, the stimulative effect of spending borrowed money is usually enough to overcome the contractionary effect of the tax cut (sometimes only barely: see The Bush Years).

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