Tuesday, October 23, 2012

Bruce Bartlett's The New American Economy 5: Did the Bush Tax Cuts Work?

For my write-up today on Bruce Bartlett's The New American Economy: The Failure of Reaganomics and a New Way Forward, I'll use as my starting-point Bartlett's assessment of the Bush tax cuts on page 140:

"To be sure, some of Bush's tax cuts, such as the cut in the capital gains tax, did have supply-side effects and undoubtedly recouped much of the static revenue loss.  But the vast bulk of Bush's tax cuts in dollar terms involved rebates and tax credits that had no supply-side effects whatsoever.  Therefore, to claim, as Bush often did, that his tax policies as a whole had such strong supply-side effects that they paid for themselves is the grossest of exaggerations.  The truth is that they increased growth a little, but at a very large cost in terms of federal revenue, and far less than would have been the case had the supply-side elements of Bush's tax cuts been made permanent and not phased in."

Earlier in the book, Bartlett says that the rebates were not strengthening the economy because many of the people getting them were not spending them, but rather were saving them, since the rebates primarily went to people "with relatively high incomes" (page 138).

I appreciate Bartlett's argument that some tax cuts stimulate economic growth and bring in revenue more than other tax cuts.  Although I have moved somewhat to the Left over the past couple of years, I myself prefer a degree of flexibility when it comes to tax cuts.  If the capital gains tax cut stimulates economic growth and recoups a lot of lost revenue----and maybe even increases revenue (see here)----then why not have it?  At the same time, I do think that it's problematic to give tax cuts to people who make so much that they probably won't spend it, for that doesn't stimulate the economy.  I tend to gravitate towards Bill Clinton's approach, as I understand it: cut the tax on capital gains, yet also increase income tax rates on people making over a certain amount.

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