Friday, January 09, 2009

Why Bush's Consumer Driven Tax Cuts Didn't Work

For decades Republicans wisely discredited Democrat attempts to provide small and modest tax cuts for the middle and lower class at the expense of those with higher incomes, simply because such polices are ineffectual. In 2008, as Republicans were fighting for their political lives, President Bush passed just such a package. Most Americans received checks that were designed to make them go out and buy a new TV, maybe take a vacation, or even use it towards the down payment on a car. I predicted on my radio show that it wouldn't work and have defined effective tax policy often in this blog. I hate to say I told you so, but they didn't work. Instead, people used them towards their mortgage so they can stay in their home one more month, others paid on a credit card, and others still put it away for a rainy day. Very few used it to jump start the economy.

This "demand side" tax cut (meant to increase consumption) has the potential of giving all tax cuts a bad name. Supply side tax cuts have a much different effect. These cuts are usually long term (multi year in scope) and proportional (giving as big of a percentage to the affluent as those in lower income brackets). The amount of savings for the affluent -- who pay the vast majority of all the revenues the government acquires annually -- are typically significant enough to lead to the creation of new jobs, the expansion of businesses, and to stimulate the economy. History has proven this to be true.

Calvin Coolidge passed a massive tax cut that led to one of the greatest expansions of the economy in US history during the 1920s. In the 1960s, Presidential candidate John F. Kennedy eloquently stated that it was imperative to "get the economy going again" and believed that tax cuts would lead to a "rising tide that will lift all boats" (rich as well as those not so rich). Those tax cuts, which were predicted to lead to a depletion in revenue, let to one of the last balanced budgets the US enjoyed for decades and economic expansion. In 1980 Ronald Reagan inherited one of the worst economies since the Great Depression and he attacked taxes with a plan that was largely modeled after the Kennedy tax cuts. That tax bill was called a "jobs creation act," which is exactly what supply side tax cuts achieve, and it lead to one of the strongest periods of economic growth in US History. Finally, following the technology bubble burst at the end of the Clinton Administration and the tragedy of September 11th, President George W. Bush used supply-side tax cuts to create an economy that sustained the lowest unemployment for the longest period of time since the early part of the 20th century (years of full employment). He followed that up with the ridiculous consumer tax cut of 2008 that did nothing to move things in the right direction and has left many scratching their heads. Not all tax cuts are alike.

The dramatic decline in the economy is actually linked to the end of the Bush supply-side tax cuts, that had to be approved each year by the Congress in order to stay in effect. In 2006, pro supply-side Republicans were beat by Democrats who opposed those policies. The businesses that largely drive the economy knew their days were numbered. The results were almost instant. After less than two years unemployment went from 4.5 percent to 6 (and is now pushing 7), consumer confidence reached an all time low, and the Dow Jones went below ten thousand for the first time in four years (is is now typically between 8 to 10 thousand). 2008 should have been a Referendum on the Democrats. Instead, Americans decided to consume more of the poison that is destroying the economy.

Americans need to know the difference between consumption and supply-side tax policies, and remind their representatives of those differences before the next election cycle.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

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