Why Double-Down on Trickle-Down?

           The Figure 1 graph, courtesy of the Center on Budget and Policy Priorities, illustrates what the Congressional Budget Office says will be our budget deficit over the next 10 years. Notice that dark orange section in the middle? That’s the Bush Tax Cuts of 2001-2003. If extended in their entirety, as some conservative politicians are calling for, they will account for a whopping percentage of the budget deficit by 2019.

            First, this chart should finally dispel the myth that tax cuts actually increase government revenue. It simply isn’t true. Increasing revenue by cutting taxes is absurd, unless somehow the tax cuts spur a massive jump in the economy, which didn’t happen in this case. That fact is perhaps the most damning evidence against extending these massive tax cuts.

            Notice the dark blue section at the bottom of the graph? That’s the lost government revenue due to the economic downturn. An economic downturn that we were all told would be prevented by the Bush Tax Cuts. The Bush Tax Cuts were supposed to really stimulate the economy and produce broad economic benefits. Well, there were economic benefits, just not for everyone. You see, these tax cuts were designed by the Trickle-Down folks on the right side of the political spectrum. Most of their tax cuts went to the very highest income levels. If extended in their entirety, the biggest tax cuts go to the top 0.1% of the people, those making an average of 7 million dollars a year or more. According to New York Times columnist Paul Krugman and the non-partisan Tax Policy Center, these folks would receive an average tax cut of 3 million dollars over the next 10 years. These folks, in part due to these Trickle-Down tax cuts, now bring in almost 25% of the yearly national income. They control 40% or more of the nation’s total wealth. They own a whopping 80-90% of the stock market, depending on who you ask. What does giving these folks a tax break accomplish? Well, as you can see from the chart and the numbers above, not much.

            Trickle-Down tax cuts work when the upper income levels, the people who own the large businesses, lack capital to invest and expand. As we can see, they definitely don’t lack much of anything at this point. The top 1% of income earners now control as much of the yearly national income as they did just prior to the 1929 stock market crash. They already have money to invest, they just aren’t doing it, or at least, they aren’t investing in ways that cause broad-based economic gains.

            The case can be made that the smaller portion of the Bush Tax Cuts that went to small businesses the middle class should be extended because those folks actually spend the extra money they take in.  This is what the Obama Administration is now pitching to Congress. However, the chances of the minority party in the Senate and a few right-leaning Democrats allowing the middle-class and small businesses tax breaks to pass by themselves are slim. They’re clinging to those top end cuts. Congressional Republicans are even pitching a doubling of the top end cuts and a host of other changes to Social Security and Medicare (We’ll talk about this in an upcoming blog), which amounts to about $7 trillion in extra debt over 10 years. Really serious about that budget deficit, aren’t they?

            The Democrats can take at least a portion of the blame here. They get sucked into the neo-conservative “tax breaks are always good policy” and “budget deficits are more important than jobs, but less important than wars” trap all too easily. In 2009, Democrats sabotaged their own stimulus package by first making it too small by at least 50%, then making a full 1/3 of the remaining package tax cuts. Fact is, tax cuts are poor economic stimulators. The Bush Tax Cuts produced just 28 cents worth of economic growth for every dollar we invested, and that includes the slightly more effective tax cuts to the middle-class and small business. The top end tax cuts by themselves produce less than 20 cents per dollar. The Center on Budget and Policy Priorities and the Congressional Budget Office estimate that the 40 billion in tax cuts due to the top 1% next year will produce less than 10 billion dollars in economic growth. However, if that money were shifted, through various government programs, to those who are currently out of work and struggling, the 40 billion dollars would produce 58 billion dollars in growth, a 48 billion dollar gain compared to the tax cut.

            We’ve tried Trickle-Down economics. It hasn’t worked out all that well for us. It's a risky bet that never seems to pay-off. So tell me, why should we Double-Down on Trickle-Down’s failures?

Sources for this column are The Congressional Budget Office, The Center on Budget and Policy Priorities, The Tax Policy Center of the Urban and the Brookings Institutes, and The Centers for American Progress.