Obama's economic plan addresses a number of fundamental problems with our economy. A key feature is his tax plan which features major increases in taxes on the rich.
Republicans claim that Democrats believe you can "tax your way to prosperity", while they favor tax cuts which will stimulate economic and employment growth. And many intelligent people appear to accept the idea that tax cuts will (usually) give stronger growth. But it's simply not empirically true.
The Republican argument is that low taxes encourage investment and investment leads to jobs and economic growth. The argument makes sense, but if it were true then why was the period of fastest growth in the US economy also the same time when taxes were highest? I decided I would look into the idea of tax cuts promoting growth to see if I could reconcile the logic of their argument with the historical fact of simultaneous high taxes and rapid growth. My detailed analysis appears here: http://www.safehaven.com/...
The idea that lower taxes enhance investment in general is fairly well supported by data. For example, the growth of interest-producing assets (debt) varies as expected: the rate of debt growth rises in the 1980's when taxes came down, fell in the 1990's with higher taxes, and rose again in the 2000's with lower taxes. The same is shown with dividends: the rate of dividend increase made a step increase after the 2003 dividend tax cut. The development of a stock market bubble shortly after the 1997 capital gains tax cut and a real-estate bubble after the 2003 capital gains cuts supports a stimulative effect of tax cuts on asset price rises (that produce capital gains).
However, none of these kinds of investment creates jobs. In fact, asset bubbles or increased debt growth are usually considered to be bad things for the economy. The kind of investment related to job creation would be private non-residential investment. This category of investment shows the opposite relation to taxation. It fell in the 1980's, rose strongly in the 1990's and then has fallen in the 2000's.
Tax cuts do stimulate investment, just not the kind that creates jobs
Tax cuts don't stimulate job-creating investment because they are inflationary. To keep inflation at bay it is required that job growth be slow. Thus, if the economy happens to be strong, the Fed will slow it by hiking interest rates.
Tax cuts are inflationary in two ways. First they lead to deficits, which are directly inflationary. Second they result in accumulation of wealth by the investing class relative to workers (i.e. economic inequality). More investor money means more investor demand which leads to more assets and rising price of existing assets. More assets are seen in increased debt and new kinds mortgage securities. That unprecedented rises in asset prices have occurred is shown by the succession of bubbles (stocks, real estate, commodities) in just the last decade. Both of these have led to increases in effective money supply and velocity which are inflationary.
Inflationary forces generated by tax cuts must be countered by weak job and income growth. When the economy is reasonably strong (e.g. the 1980's), this is done with high interest rates. During the 2000's job and income growth has been particularly weak, and so serious inflation has yet to break out despite low interest rates, a deficit and two asset bubbles.
Jobs are sacrificed to prevent inflation generated by tax cuts
The actual record of job creation and income growth supports the observations about job-creating investment. Employment and income growth was stronger in the high tax 1950's and 1960's than any other postwar decade. The next strongest decade after them was the 1990's (Clinton's tax increases) then the 1980's, 1970's and at the very bottom the 2000's (which featured the lowest tax rates). Growth in GDP/worker was 1.5% in the period between the Civil War and New Deal and 1.5% in the period 1981 to the present. These periods were when low-tax policy was pursued by conservative policymakers. Growth was 2.3% (50% faster) between the New Deal and 1981 (when high-tax policy was pursued by liberal policymakers).
The best economic performance ever achieved in America occurred when taxes were highest
See http://www.safehaven.com/... for details.