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Wednesday, November 29, 2006

Bush Tax Policy is Hurting Families

If you ever want a little break from reality, you have a few choices. You can drink or use drugs, you can somehow put yourself into a coma, or you can head over the the White House website.

The difference between the spin at the WH site and drugs and alcohol though, is that the stuff put out by Tony Snow's press office is confusingly close to reality -- that's what spin is. Consider:

The President's Tax Cuts Have Helped Our Economy Grow Faster Than Any Other Major Developed Nation.

See, that's because the unbelievably wealthy are doing very well. The economy sucks for everyone else.

And there's this:

Recent Paycheck Growth Increases Have Been Larger Than Those In The 1990s Economic Expansion, Compared Either Over The Past Year Or For The Entire Business Cycle.

The blurb goes on to explain that "Real hourly wages for production and non-supervisory workers have increased 2.4 percent in the past 12 months..." But with the current average rate of inflation for the year being over 3%, people are actually losing ground. At the very best, they're only breaking even.

All of which is what a new report by the Center on Budget and Policy Priorities basically confirms. Among the key findings:

-- Consumer Expenditures Lag for Low- and Middle-Income Families

-- Most Americans Treading Water or Falling Further Behind, Consumption Data Show: Only High Earners Spending More Than Before Recession

Bush made a lot of the fact that his tax cuts would be 'across the board', which was supposed to be fair. But since the cuts were in percentages, not dollars, there was no way they could possibly be fair. According to the report:

While tax cuts can enable households to increase their consumption even if their pre-tax incomes did not increase, the tax cuts enacted since 2001 have given the largest benefits to high-income families. The top fifth of families received an average tax cut of $4,845 in 2005, according to the Urban Institute-Brookings Institution Tax Policy Center, enough to help them improve their standard of living despite the lack of improvement in their average pre-tax income. The bottom fifth of households, in contrast, received an average tax cut of just $18 in 2005, not enough to have a meaningful effect on their consumption.

So the people with the most money got an average of almost five grand, while the poorest get eighteen bucks. That's fair? And these inequities are only in the base tax rate, the wealthy also enjoy other advantages that tip the scales further.

In writing about a conversation with billionaire investor Warren Buffett, Ben Stein wrote in the New York Times:

It turned out that Mr. Buffett, with immense income from dividends and capital gains, paid far, far less as a fraction of his income than the secretaries or the clerks or anyone else in his office. Further, in conversation it came up that Mr. Buffett doesn’t use any tax planning at all. He just pays as the Internal Revenue Code requires. “How can this be fair?” he asked of how little he pays relative to his employees. “How can this be right?”

Even though I agreed with him, I warned that whenever someone tried to raise the issue, he or she was accused of fomenting class warfare.

“There’s class warfare, all right,” Mr. Buffett said, “but it’s my class, the rich class, that’s making war, and we’re winning.”

So the guy flipping burgers some place is actually taxed at a higher rate than Warren Freakin' Buffett. Here's the thing, our tax system is totally bass-ackward because our economic policy is totally bass-ackward. Economic policy is based on Reagan's 'trickle down theory,' where money is piped to the top and is supposed to make it down the economic ladder.

But the problem with this idea, also known as 'supply side,' is that it makes a lot of faulty assumptions. The first is that employers get into business to make their workers rich and create jobs. They don't; they get into business to make money. The idea that I'll pay my workers more or hire more workers simply because I can afford to is ridiculous.

To go back to the guy flipping burgers, let's say he works for me. If I suddenly have more money, I could pay him more or I could hire more people, but why? I'm already making money, so what would be the return on my investment? I'm buying a new grill -- if I have to pay anything extra at all -- because that'll pay back.

The problem is that money moves up the economic ladder much easier than it moves down. When someone needs something, they buy it. And that spending generally goes up the ladder, not down.

The truth is that if you really want people to spend money, which is what a healthy economy is, you get money to people who need money. Give a fiver to someone who's hungry and they'll buy a sandwich. Need spurs spending more than anything else. I like to say that Bill Gates never looked at his tax return and said, "Hey honey, now we can finally get that new washing machine!"

Supply-siders like to refer back to tax cuts by Kennedy to make their case. Unfortunately, they're flinging BS. It's true that Kennedy's cuts increased federal revenues, but it's not true that these were the same thing as supply side tax cuts.

David Greenberg, Slate [emphasis mine]:

So, was Kennedy really a forerunner to Reagan and Bush? Or are supply-siders just cynically appropriating his aura? The Republicans are right, up to a point. Kennedy did push tax cuts, and his plan, which passed in February 1964, three months after his death, did help spur economic growth. But they're wrong to see the tax reduction as a supply-side cut, like Reagan's and Bush's; it was a demand-side cut. "The Revenue Act of 1964 was aimed at the demand, rather than the supply, side of the economy," said Arthur Okun, one of Kennedy's economic advisers.

This distinction, taught in Economics 101, seldom makes it into the Washington sound-bite wars. A demand-side cut rests on the Keynesian theory that public consumption spurs economic activity. Government puts money in people's hands, as a temporary measure, so that they'll spend it. A supply-side cut sees business investment as the key to growth. Government gives money to businesses and wealthy individuals to invest, ultimately benefiting all Americans. Back in the early 1960s, tax cutting was as contentious as it is today, but it was liberal demand-siders who were calling for the cuts and generating the controversy.

What's the real difference between a supply side and a demand side cut? Demand side works, supply side does not. Comparing Kennedy's cuts to Reagan's is ridiculous. Reagan cut taxes, sure, but in order to increase revenues, he had to increase taxes again -- although he didn't actually call them tax increases, they were "revenue enhancers."

The fact is that supply side economics have never actually worked. But the unbelievably wealthy pay for the campaigns of tax cut friendly politicians. And tax cut friendly politicians tend to be Republican. So who cares if it works or is even responsible? It works for them and that's all that really matters.

How do you think they got rich in the first place?


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