Wintery Knight

…integrating Christian faith and knowledge in the public square

Did George W. Bush’s tax cuts help or hurt the economy?

From Investor’s Business Daily.

Excerpt:

Data from the end of 2001 to the latest recession bear this out. The economy started expanding again in the fourth quarter of 2001 and grew for 25 consecutive quarters. After enactment of the 2003 tax cut, which lowered the marginal effective tax rate on new investment, gross domestic product surged 7.5% in the third quarter, the fastest pace since 1984. And for 26 straight months unemployment stayed below 5%.

The Bush tax cuts also led to increases in tax revenues, and after 2004 the revenues grew faster than the economy. The ratio of tax receipts to GDP rose to 18.8% in 2007, above the 40-year average, and the deficit was just 1.2% of GDP.

From 2004 to 2008, capital gains realizations grew by 60%; from 2004 to 2007, corporate tax receipts nearly doubled, adding a full point to the revenues-to-GDP ratio.

The Heritage Foundation reported on research by two Harvard economists who published a research paper on this very topic.

Excerpt:

…government spending cannot create economic growth. More government spending, whether financed by taxes or borrowing, only takes money from one sector of the economy and transfers it to another. The government creates no new spending power when it redistributes money so it creates no new economic growth.

As the Heritage Foundation has pointed out, a stimulus package that lowered marginal tax rates instead of spending massive amounts of future generation’s wealth would actually create jobs and help pull the economy out of the Great Recession. That is because lower marginal tax rates would increase the incentives of people and businesses to work, save and invest – the very ingredients needed to create economic activity.

These findings are backed up by a new study, “Large Changes in Fiscal Policy Taxes Versus Spending,” authored by Alberto F. Alesina and Silvia Ardagna – both Harvard economists. Alesina and Ardagna find that:

…tax cuts are more expansionary than spending increases in the cases of fiscal stimulus. Based on these correlations…the current stimulus package in the US is too much tilted in the direction of spending rather than tax cuts.

In addition to their findings that tax cuts are better at promoting economic growth, Alesina and Ardagna found that spending-based stimuli are actually associated with lower economic growth rates.

The problem is that Democrats like Obama don’t know anything about economics, and they don’t care. They know less about economics than my keyboard. In fact that is exactly what being a Democrat means. It means that you know nothing about economics, but prefer to create policy based on feelings, rather than facts. Economics is irrelevant – they just want to be loved. It’s narcissism.

Economics in One Lesson

Perhaps it is time to review Henry Hazlitt’s Economics in One Lesson, chapter 4, entitled “Public Works Mean Taxes”.

Excerpt:

Therefore, for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers.

And consider Chapter 5 as well, entitled “Taxes Discourage Production”.

In our modern world there is never the same percentage of income tax levied on everybody. The great burden of income taxes is imposed on a minor percentage of the nation’s income; and these income taxes have to be supplemented by taxes of other kinds. These taxes inevitably affect the actions and incentives of those from whom they are taken. When a corporation loses a hundred cents of every dollar it loses, and is permitted to keep only fifty-two cents of every dollar it gains, and when it cannot adequately offset its years of losses against its years of gains, its policies are affected. It does not expand its operations, or it expands only those attended with a minimum of risk. People who recognize this situation are deterred from starting new enterprises. Thus old employers do not give more employment, or not as much more as they might have; and others decide not to become employers at all. Improved machinery and better-equipped factories come into existence much more slowly than they otherwise would. The result in the long run is that consumers are prevented from getting better and cheaper products to the extent that they otherwise would, and that real wages are held down, compared with what they might have been.

There is a similar effect when personal incomes are taxed 50, 60 or 70 percent. People begin to ask themselves why they should work six, eight or nine months of the entire year for the government, and only six, four or three months for themselves and their families. If they lose the whole dollar when they lose, but can keep only a fraction of it when they win, they decide that it is foolish to take risks with their capital. In addition, the capital available for risk-taking itself shrinks enormously. It is being taxed away before it can be accumulated. In brief, capital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises. The government spenders create the very problem of unemployment that they profess to solve.

George W. Bush cut taxes in his first term and created 1 million NEW JOBS. Government spending is a job killer. And no amount of charm and teleprompter reading is going to change the laws of economics.

In fact, you can even see it failing today in Japan: Did massive government spending succeed or fail in Japan?

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