David Leonhart, in today's New York Times, spells it out.
Do Tax Cuts Lead to Economic Growth?
By DAVID LEONHARDT
Published: September 15, 2012
Washington
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FOR one of my occasional conversations with Representative Paul D. Ryan
over the last few years, I brought a chart. The chart showed economic
growth in the United States in the last several decades, and I handed
Mr. Ryan a copy as we sat down in his Capitol Hill office. A
self-professed economics wonk, he immediately laughed, in what seemed an
appropriate mix of appreciation and teasing.
One of the first things you notice in the chart is that the American
economy was not especially healthy even before the financial crisis
began in late 2007. By 2007, remarkably, the economy was already on pace
for its slowest decade of growth since World War II. The mediocre
economic growth, in turn, brought mediocre job and income growth — and
the crisis more than erased those gains.
The defining economic policy of the last decade, of course, was the Bush
tax cuts. President George W. Bush and Congress, including Mr. Ryan,
passed a large tax cut in 2001, sped up its implementation in 2003 and
predicted that prosperity would follow.
The economic growth that actually followed — indeed, the whole history
of the last 20 years — offers one of the most serious challenges to
modern conservatism. Bill Clinton and the elder George Bush both raised
taxes in the early 1990s, and conservatives predicted disaster. Instead,
the economy boomed, and incomes grew at their fastest pace since the
1960s. Then came the younger Mr. Bush, the tax cuts, the disappointing
expansion and the worst downturn since the Depression.
Today, Mitt Romney and Mr. Ryan are promising another cut in tax rates
and again predicting that good times will follow. But it’s not the
easiest case to make. Much as President Obama should be asked to grapple
with the economy’s disappointing recent performance (a subject for a
planned column), Mr. Romney and Mr. Ryan would do voters a service by
explaining why a cut in tax rates would work better this time than last
time.
That was precisely the question I was asking Mr. Ryan when I brought him
the chart last year. He wasn’t the vice presidential nominee then, but
his budget plan has a lot in common with Mr. Romney’s.
“I wouldn’t say that correlation is causation,” Mr. Ryan replied. “I
would say Clinton had the tech-productivity boom, which was enormous.
Trade barriers were going down in the Clinton years. He had the peace
dividend he was enjoying.”
The economy in the Bush years, by contrast, had to cope with the popping
of the technology bubble, 9/11, a couple of wars and the financial
meltdown, Mr. Ryan continued. “Some of this is just the timing, not the
person,” he said.
He then made an analogy. “Just as the Keynesians say the economy would have been worse
without the stimulus” that Mr. Obama signed, Mr. Ryan said, “the flip
side is true from our perspective.” Without the Bush tax cuts, that is,
the worst economic decade since World War II would have been even worse.
Since that conversation, I have asked the same question of conservative
economists and received similar answers. “To me, the Bush tax cuts get
too much attention,” said R. Glenn Hubbard,
who helped design them as the chairman of Mr. Bush’s Council of
Economic Advisers and is now a Romney adviser. “The pro-growth elements
of the tax cuts were fairly modest in size,” he added, because they also
included politically minded cuts like the child tax credit. Phillip L. Swagel,
another former Bush aide, said that even a tax cut as large as Mr.
Bush’s “doesn’t translate quickly into higher growth.”
Why not? The main economic argument for tax cuts is simple enough. In
the short term, they put money in people’s pockets. Longer term, people
will presumably work harder if they keep more of the next dollar they
earn. They will work more hours or expand their small business. This
argument dominates the political debate.
But tax cuts have other effects that receive less attention — and that
can slow economic growth. Somebody who cares about hitting a specific
income target, like $1 million, might work less hard after receiving a
tax cut. And all else equal, tax cuts increase the deficit, as Mr. Bush’s did, which creates other economic problems.
When the top marginal rate
was 70 percent or higher, as it was from 1940 to 1980, tax cuts really
could make a big difference, notes Donald Marron, director of the highly
regarded Tax Policy Center and another former Bush administration
official. When the top rate is 35 percent, as it is today, a tax cut
packs much less economic punch.
“At the level of taxes we’ve been at the last couple decades and the
magnitude of the changes we’ve had, it’s hard to make the argument that
tax rates have a big effect on economic growth,” Mr. Marron said.
Similarly, a new report
from the nonpartisan Congressional Research Service found that, over
the past 65 years, changes in the top tax rate “do not appear correlated
with economic growth.”
Mr. Romney and Mr. Ryan, to be sure, are not calling for a simple repeat
of the Bush tax cuts. They say they favor a complete overhaul of the
tax code, reducing tax rates by one-fifth (taking the top rate down to
28 percent) and shrinking various tax breaks. Many economists think such
an overhaul could do more good than the Bush tax cuts, by simplifying
the tax code.
The problem for anyone trying to evaluate the Romney plan, however, is that there isn’t a full plan yet. He will not say which tax breaks he would reduce, and the large ones, like the mortgage-interest deduction, are all popular. In a painstaking analysis,
the Tax Policy Center showed that achieving all of Mr. Romney’s
top-line goals — a revenue-neutral overhaul that does not increase the
tax burden of the middle class — is not arithmetically possible. History
is littered with vague calls for tax reform that went nowhere.
Beyond taxes, Mr. Romney has declined to detail what spending cuts he
would make, although he has promised to make big ones. And some of the
programs that would be at risk — medical research, education,
technology, roads, mass transportation — probably have a better historical claim on lifting economic growth than tax cuts do.
The policies that new presidents pass tend to be ones on which they laid out specifics, be they the Bush and Reagan tax cuts
or the Obama health overhaul. Based on the specifics, Mr. Romney puts a
higher priority on tax cuts than anything else. Yet the reality of the
last two decades has caused conservative economists, and Mr. Ryan
himself, to acknowledge the limits of tax cuts.
In one of our conversations, Mr. Ryan told me that the single most
important objective of any economic plan had to be raising growth. “We
have to figure out how best to grow the pie so it helps everyone,” he
said.
It is certainly true that strong economic growth helps solve almost
every challenge the country faces: the deficit, unemployment, the income
slump, even the rise of China. It is also true that some liberals put
too much emphasis on the distribution of the pie and not enough on the
size.
But when you dig into Mr. Romney’s and Mr. Ryan’s proposals and you
consider recent history, the fairest thing to say is that, so far at
least, they have laid out a plan to cut taxes. They have not yet
explained why and how it is also an economic-growth plan.
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