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Memory Lane and President Bush's US Tax Suts

Economics / US Economy Dec 31, 2007 - 03:34 AM GMT

By: Gerard_Jackson

Economics As we enter the New Year I thought it appropriate to reflect on President Bush's tax cuts, the ones that the Democrats and their media flunkies screamed would wreck the US economy by generating an unsustainable deficit. It was easy — and still is — to spring to the conclusion that the Democrats' response was driven by opportunism and a deeply ingrained cynicism.

The Democrats also accused the President of playing politics with tax cuts. Of course he did. He would have been stupid not to. In any case, the charge was pretty silly coming from Democrats. What mattered was whether the cuts would work. They did. I also think deeper tax cuts would have worked even better.

What was really troubling were the stories that the President and his economic advisors thought that a huge and immediate cash injection into the economy was unnecessary to bolster consumption because of the extent to which investment fell after the 9/11 atrocity. Then there was the loss 1.2 million jobs because of the Clinton recession*. It's important to reflect on this line of so-called economic thinking regarding consumer spending because it is the reigning orthodoxy — except when a Republican sits in the Oval Office — in academia and the media.

One cannot verify it but it was also rumoured that some White House advisers took a very strong anti-Keynesian line, arguing that the economy's problem was not deficient consumer spending but a lack of investment. They were half right. We now know that consumer spending actually grew during the recession, a fact that the media are not keen on reporting. These advisors would have been right to stress that it is investment that raises real incomes and output and lifts living standards — not consumption.

If the rumours were accurate this would seem to indicate that Bush thought a cash injection could stimulate aggregate demand. But tax cuts not paid for through the printing press only change the composition of demand. And, unlike heavy taxation, they do so in a way that ultimately raises demand through increased investment. What these advisors could not grasp (probably because they had fallen prey to the Clark-Knight fallacy on capital and production) is that capital is a complex heterogeneous structure that can be severely distorted by loose monetary policies.

Given this fact, the cuts to capital gains taxes generated savings that helped accelerate recovery, a recovery that was also fuelled by the Fed's accommodating monetary policy. The natural response of the Democrats and their media footstools was to scream “tax cuts for the rich at the expense of the poor”. That this charge could only hold any water if tax cuts for the so-called rich had been paid for by raising taxes on the poor cut no ice with the likes of Obama, Edwards, Hillary Clinton and Bob Herbert at the New York Slimes .

The cuts encouraged investment and helped raise the demand for labour. Despite the policy's success the Republicans have yet to challenge the Democrats and their media allies to publicly explain why anything that promotes investment hurts the poor. Moreover, Democrats and their media stooges were dumb enough to argue that the cuts would worsen the deficit and raise interest rates which in turn would damage investment. But as we now see, the deficit is heading into the black.

(What the Dems could not see — including the Great Krugman — is that so long as revenues were allowed to grow faster than spending the deficit was bound to shrink).

Few people seemed to cotton on to the fact that the Democrats were really saying that the best way to promote economic growth was to tax savings and investment. Does anyone really believe — including Democrats — that a government can tax an economy into prosperity? Well, it does seem that Democrats think that higher taxation is always the right solution. Their fanatical adherence to this ridiculous line of thought makes one wonder if they think higher taxes will also halt receding hairlines.

Much to the glee of the Dems and their supporters some economists queried the argument that eliminating the tax on dividends would stimulate investment. This was followed by the hoary line that this policy would only benefit the rich. These partisans ignored a couple of vital facts that were later borne out by economic events: Eliminating the tax would make stocks more attractive to savers and thus encourage more investment — it did. Furthermore, it freed up more money for alternative investments by discouraging companies from using retained to earnings for excessive investment in their own concerns — it did.

Another vital fact that was ignored was the existence of about 35 million Americans who earned money from dividends. Ten million of these investors were senior citizens. This fact made the Dems' assertions appear all the more ridiculous. Naturally, the ever-truthful mainstream media neglected to strress these facts. By increasing the net returns on the investments of these people the tax cuts gave them an incentive to save more and to encourage millions more to join their ranks and expand the nation's investment pool. It is through this process of increased investment that the effects of tax cuts impact on employment and living standards.

Democrats treat as an anathema any process that would make the masses financially independent. How else does one explain their determined opposition to significant and permanent tax cuts and their hysterical opposition to personal social security accounts? The cynicism and hypocrisy of their own proposals only reinforces my view that they are entirely indifferent to the welfare of the mass of Americans.

However, what I find particularly disgusting is the sight of smug billionaires like Buffett and Geffen cheering the Dems on in their refusal to support policies that would secure Americans a more prosperous and secure future.

*I refer to the Clinton recession in the sense that it began under his presidency. He was no more responsible for it than was President Bush. Unfortunately Democrats are not given much to fairness these days or even any semblance of honesty.

By Gerard Jackson

Gerard Jackson is Brookes' economics editor.

Gerard Jackson Archive

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