Tax Cuts and the American Economy
No one enjoys paying taxes, but nearly everyone agrees that taxes are necessary. Without tax revenue, the government would not be able to fund the basic public goods that all Americans rely on in their daily lives. Yet disagreement is widespread about how high taxes should be, how they should be distributed across individuals and corporations, and what types of taxes government should impose. President George W. Bush’s major tax reductions of 2001 and 2003 reignited fundamental debates about the purposes and consequences of federal tax policy.
Supporters defended Bush’s tax-reduction policy on two grounds. First, they argued that taxes should be as low as possible because the individual taxpayer, not the government, is the best judge of how his or her money should be spent. Second, they claimed that taxes should be especially low on investments and on corporations because a vibrant economy depends on the investment decisions of wealthy individuals and corporations. This supply-side rationale for tax policy maintains that lower taxes encourage investment and stimulate growth, which benefits all Americans.
Reduced government revenues are not a problem, according to tax-cut supporters. Lower tax revenues will impose fiscal discipline on Congress, forcing it to become much more careful in spending the public’s money. Tax-cut supporters argue that tax cuts cannot cause budget deficits; excessive spending is the true cause of deficits. In any case, over the long term, tax cuts will stimulate new growth that will replenish the federal coffers. Proponents of the tax cut dismiss charges that the cuts are tilted toward the rich, calling this claim a strategy of “class warfare” used by politically desperate Democrats. They point out that all Americans benefit from having their taxes reduced and that wealthy Americans continue to pay the largest share of taxes.
Opponents of the Bush tax reductions made three arguments. First, they noted that the cuts made the federal tax system much more regressive. Thus, the cuts created a permanent bias in favor of business and the very wealthy. Tax cuts for the very rich cost more than support for K–12 education, veterans’ medical care, and the National Institutes of Health in 2006.a We should be spending our money on these important public purposes, not on tax cuts for those who don’t need the money, according to this perspective. Second, critics point to the large deficits that have occurred as a result of the tax cuts. These deficits will ultimately harm the economy by driving up interest rates. Moreover, the deficits will saddle future generations with the consequences of Bush’s policy. Thirdly, critics charge that the administration’s tax cuts were little more than a political ploy to reward President Bush’s wealthy supporters and corporate allies, not a policy designed to achieve broad economic goals.
Taxes became a major issue in the closing weeks of the presidential race in 2008. John McCain, the Republican candidate, pledged not to raise taxes, and he labeled Barack Obama a “redistributionist.” Using the example of “Joe the Plumber,” an Ohio man concerned that Obama would raise his taxes, McCain made the taxes his central issue in the waning days of the campaign. Obama, for his part, defended his plan to roll back the Bush cuts and stuck with his pledge to raise taxes on the 3 percent of households who make more than $250,000 a year. He pointed out that Joe the Plumber, who made far less than $250,000 a year, would in fact benefit more from his plan than McCain’s. The debate recapped a classic partisan division, with Republicans arguing that any tax increase harms the economy and Democrats contending that taxes are needed to support public programs and that it is only fair for high earners to pay a larger share of taxes than those with lower incomes. As the Bush tax cuts neared expiration in late 2010 and the Republicans looked to regain seats in Congress, the debate intensified once again, with Republicans campaigning to make the tax cuts permanent and President Obama pledging to veto any tax cuts for those making above $250,000 a year.
The tax cuts were renewed for all income levels through the end of 2012. When the tax cuts came up for renewal again in 2012, Speaker John Boehner (R-Ohio) argued that if they were not renewed again, “750,000 jobs are going to be destroyed at a time when the American people are asking where are the jobs.… It’s time to put rhetoric aside. It’s time to put politics aside—I know we’re in an election year, but my goodness. Raising taxes at this point in the economy is a very big mistake.”b Democrats disputed the number of jobs cited by Boehner, arguing that it came from a biased report that left out vital information, such as alternative tax breaks that President Obama sought for businesses. Democrats also pointed out that the supply-side argument that tax breaks create jobs and stimulate the economy doesn’t seem to be true in this case, as unemployment and job losses have been up since the tax breaks were put in place in 2001 and 2003.
a. Aviva Aron-Dine, “Have the 2001 and 2003 Tax Cuts Made the Tax Code More Progressive?” Center on Budget and Policy Priorities, March 19, 2007, www.cbpp.org/3-19-07tax.htm (accessed 3/20/08).
b. Michael McAuliff, “Obama Tax Cuts Rejected in House,” Huffington Post, August 1, 2012, http://www.huffingtonpost.com/2012/08/01/obama-tax-cuts-house_n_1730734.html (accessed 8/6/2012).