Thursday, September 28, 2017

Why Tax Cuts Don't Typically Produce Growth

Bruce Bartlett was on the Ronald Reagan team that developed his economic plan.  It was a classic Keynesian plan that Republican's fight against when Democrats are in office.  That is, taxes were cut and government spending increased. That producing budget deficits.  The economy grew according to plan.  Unfortunately,  Republicans have created a myth about the positive effects of tax cuts that is with us today.  Bartlett explains why the Reagan plan was well suited for that period and he reminds us that Reagan raised taxes towards the end of his presidency in order to reduce the rising federal budget deficit.  Bartlett provides us with some important data that may be useful in countering the tax cut myth:

*  Growth in real GDP during the high tax period preceding Reagan was 37.2% versus 35.9% following the Reagan tax cuts in the 1980's

* The Fed set interest rates very high in the 1980's to deal with extremely high inflation rate.  The Fed cut interest rates by half after reversing the inflation rate.  Lower interest rates played a big role in producing GDP growth.

* Wage growth slowed down in the Reagan era.  The distribution of income shifted more than the growth in the economy following the Reagan tax cuts.

* One of the implications of the tax cuts myth is that increasing taxes would slow down GDP growth.  Clinton increased the top tax rate and real GDP growth under Clinton was 37.3% versus 35.9% in the 1980's

* Following Clinton, George W. Bush made deep cuts in the top tax rates.  Real GDP growth under Bush was only 19.5%

* Obama increased the top tax rate and the stock market expanded by 10,000 during his administration.

Bartlett concluded that tax cuts can be useful under certain economic conditions.  However, they should be done following the typical process that is time consuming but productive.  Forcing a cut in taxes by the current process that failed to produce a good healthcare bill is the wrong way to go,

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