On Tax Cuts for the Middle Class and the Wealthy

August 20, 2011
Ziad K. Abdelnour

Exploring Financial Strategies and Economic Insights

The blog analyzes the impacts of tax cuts on different socioeconomic groups, with a particular focus on the middle class and the wealthy. It argues that while tax reductions can stimulate economic activity, they often disproportionately benefit higher income brackets, potentially widening income inequality. The author calls for a balanced approach in tax policy to ensure fair and equitable economic growth, emphasizing the need for targeted tax relief that genuinely benefits the middle class without overly favoring the affluent.

It is a known fact today that extreme conservatives push for tax cuts (but just for the wealthy) and extreme liberals are against all tax cuts, believing that we need higher taxes to pay for government programs … and that taxes somehow won’t create any drag on the economy.

I believe both extremes are wrong.

In the real world, tax cuts for the middle class and poor stimulate the economy, but tax cuts for the wealthy hurt the economy.

Look at the facts: Taxes were cut in 2001, 2002, 2003, 2004 and 2006.

It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. Real G.D.P. growth peaked at just 3.6 percent in 2004 before fading rapidly. Even before the crisis hit, real G.D.P. was growing less than 2 percent a year…

According to a recent C.B.O report, they reduced revenue by at least $2.9 trillion below what it otherwise would have been between 2001 and 2011. Slower-than-expected growth reduced revenue by another $3.5 trillion….and spending was $5.6 trillion higher than the C.B.O. anticipated for a total fiscal turnaround of $12 trillion. That is how a $6 trillion projected surplus turned into a cumulative deficit of $6 trillion.

If you recall, it was George W. Bush’s father, GWH Bush, who, when campaigning against Reagan, called supply side economics’ claims that tax cuts pay for themselves Voodoo Economics. And Bush was proved right when deficits spiraled out of control and both Reagan and Bush were forced to raise taxes. In fact, the Bush tax cuts accrued disproportionately to the wealthy. The Tax Policy Center shows that 65 percent of the dollar value of the Bush tax cuts accrued to the top quintile, while 20 percent went to the top 0.1 percent of income earners.

If you want to talk about redistribution, there it is.

Bottom Line?

First, the rich spend a smaller proportion of their wealth than the less-affluent, and so when more and more wealth becomes concentrated in the hands of the wealth, there is less overall spending and less overall manufacturing to meet consumer needs.

Second, in both the Roaring 20s and 2000-2007 period, the middle class incurred a lot of debt to pay for the things they wanted, as their real wages were stagnating and they were getting a smaller and smaller piece of the pie. In other words, they had less and less wealth, and so they borrowed more and more to make up the difference. Between 1913 and 1928, the ratio of private credit to the total national economy nearly doubled. Total mortgage debt was almost three times higher in 1929 than in 1920. Eventually, in 1929, as in 2008, there were “no more poker chips to be loaned on credit,” in [former Fed chairman Mariner] Eccles’ words. And “when their credit ran out, the game stopped.”

And third, since the wealthy accumulated more, they wanted to invest more, so a lot of money poured into speculative investments, leading to huge bubbles, which eventually burst. Reich points out:

In the 1920s, richer Americans created stock and real estate bubbles that foreshadowed those of the late 1990s and 2000s. The Dow Jones Stock Index ballooned from 63.9 in mid-1921 to a peak of 381.2 eight years later, before it plunged. There was also frantic speculation in land. The Florida real estate boom lured thousands of investors into the Everglades, from where many never returned, at least financially. Tax cuts for the little guy gives them more “poker chips” to play with, boosting consumer spending and stimulating the economy.

Besides, small businesses are responsible for almost all job growth in a typical recovery. So if small businesses are hurting, we’re not going to see much job growth any time soon. On the other hand (despite oft-repeated mythology), tax cuts for the wealthiest tend to help the big businesses … which don’t create many jobs.

In fact, economics professor Steve Keen ran an economic computer model in 2009, and the model demonstrated that giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch [than giving money to the big banks and other creditors]. And as discussed above, Reich notes that tax cuts for the wealthy just lead to speculative bubbles … which hurt, rather than help the economy.

Indeed, Keen has demonstrated that “a sustainable level of bank profits appears to be about 1% of GDP” … higher bank profits lead to a Ponzi economy and a depression. And too much concentration of wealth increases financial speculation, and therefore makes the financial sector (and the big banks) grow too big and too profitable.

Government policy has accelerated the growing inequality. It has encouraged American companies to move their facilities, resources and paychecks abroad. And some of the biggest companies in America have a negative tax rate … that is, not only do they pay no taxes, but they actually get tax refunds. Indeed, instead of making Wall Street pay its fair share, Congress covered up illegal tax breaks for the big banks.

For those who still claim that tax cuts for the rich help the economy, the proof is in the pudding. The rich have gotten richer than ever before, and yet we have Depression-level housing declines, unemployment and other economic problems.

No wonder Ronald Reagan’s budget director David Stockman called the Bush tax cuts the “worst financial mistake in history”, and said that extending them will not boost the economy.

What do you say?

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

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