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Wednesday, January 02, 2013

Fiscal Cliff Deal Demonstrates the Fantasy of Trickle-Down Economics

Motivational poster of Reagan staff laughing - 'We told them the wealth would trickle down!'
Last night's passage of the fiscal cliff agreement in the House of Representatives highlights a few important points: that Washington is broken, that a leaderless House GOP is in chaos, that Eric Cantor and John Boehner are working against each other and at cross-purposes, etc. You're going to hear a lot about that in the coming days, so I'm not going to waste your time writing a post you'll be able to read pretty much anywhere else.

Instead, I'm going to use the fiscal cliff deal to demonstrate how Republican explanations of economics are complete BS. As part of the deal (or, more accurately, because the deal completely ignores it), the payroll tax cut holiday will expire, hitting middle- and lower-income workers the hardest. Meanwhile, households over $450,000 and individuals making $400,000 or more will also see their taxes go up. Here's a fun game: guess whose tax hike will slow the economy more, the wealthy's or the rest of us?

Associated Press:

The higher taxes on the wealthy will probably slow the economy a little bit. But a bigger drag would come from a tax increase Democrats and Republicans aren’t even bothering to fight over: the end of a two-year Social Security tax cut. The so-called payroll tax is scheduled to bounce back up to 6.2 percent this year from 4.2 percent in 2011 and 2012, amounting to a $1,000 tax increase for someone earning $50,000 a year.

“It’s a huge hit,” says Joel Naroff, president of Naroff Economic Advisors. “It hits people whether they’re making $10,000 or they’re making $2 million. It doesn’t matter who you are... The lower your income, the more of your income you’re (spending). So if your taxes go up, it’s going to come out of your spending.” And that is bad news for an economy that is 70 percent consumer spending.

Mark Zandi, chief economist at Moody’s Analytics, calculates that the higher payroll tax will reduce economic growth by 0.6 percentage points in 2013. The other possible tax increases — including higher taxes on household incomes above $450,000 a year — will slice just 0.15 percentage points off annual growth, Zandi said.


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Math time: ending the Bush tax cuts for the wealthy will bring in $600 billion over ten years or $60 billion a year. The payroll tax cut would've cost almost twice that -- about $112 billion a year. But here's the thing. If we look at the effects of each cut on the economy, as Zandi reported above, we see that the payroll tax holiday is four times as effective in promoting economic growth as the tax cut on the wealthy. If the two were balanced out to reflect the same amount of lost federal revenue, we'd see that the payroll tax cut would still be roughly twice as effective at creating economic growth as the tax cut for the rich.

Granted, the payroll tax holiday had to end sometime, but now is not a good time. "The economy doesn’t have much growth to give," AP reports. "Mark Vitner, senior economist at Wells Fargo, predicts it will expand just 1.5 percent in 2013, down from a lackluster 2.2 percent in 2012. Unemployment stands at 7.7 percent." We should've gone with Obama's original number and ended the tax cuts for those making $250,000 or more, while extending the payroll holiday for another year, at least -- or shift the tax cut from payroll to a tax credit for middle- and lower-income earners, to take the burden off the Social Security trust fund. But, as I said, Washington is broken because of the GOP's own brokenness and getting it to churn out something half-assed, rather than completely worthless, is probably a monumental achievement on its own.

But again, this all points to the fact -- as reality does over and over and over -- that trickle-down economics is a bunch of horse crap. The "job creators," as Republicans refer to the rich, don't drive the economy, consumers do. And it's consumers who create the jobs, by creating demand for goods and services. The Republican argument that employers "grow" and hire when they can afford to is ridiculous if you think about it for just a second -- would you hire a plumber whenever you could afford to or only you needed to?

Other employers are the same way. If they need more widgets made, they'll hire more widgetmakers. And they won't need more widgets made unless you, the consumer, want to buy some. Keynesian demand-side economics is real, Reaganaut supply-side is fantasy. If that weren't true, the differences in the economic impact of the two tax cuts would be reversed. Demand side tax cuts are far more effective than supply side tax cuts -- mostly because supply-siders have this whole "lob creation" thing balled up and backwards and wrong. Period.

And consider, Republicans' stated goal is deficit reduction. Fine. The most painless way to reduce the deficit is -- hands down -- to grow the economy and increase employment. More people working means more taxpayers with growing incomes. Let me ask you, did Clinton's balanced budget come during a downturn or during a period of unprecedented economic prosperity?

It's time for everyone to stop pretending that Republicans merely have a differing opinion on the economy and deficits. What they have is a collection of fairy tales. The media needs -- absolutely needs -- to stop pretending that conservatives are repeating anything other than laughable BS when they start spouting this trickle-down nonsense.

Our nation's health requires it.

-Wisco

[image source]


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