"Tax Cuts Are Not The Answer"

In his latest missive on the No Nonsense Economics pseudo-blog, economist Chris Thornberg provides a very detailed analysis on why tax cuts in the U.S. are not the panacea that some politicians would have you believe.

From his post:

First I need to make one thing perfectly clear: I am not a fan of paying taxes. I recognize that government involvement in the economy is necessary for the promotion of the public welfare. But the waste in terms of efficiency not to mention the funding of pork barrel projects for privileged special interests is at best frustrating and at worst criminal.

I mention this because I realize I will hear a howl of protest from the right when I point out something quite obvious—that cuts in public spending and tax cuts for individuals at any level of income are not going to cure what currently ails the U.S. economy. Such a statement is close to blasphemy in some circles, but unfortunately neither the data nor the logic support the point of view...

In particular the Bush tax cuts, which lowered overall tax rates substantially, did not lead to a new acceleration in job growth. Instead jobs stayed on their same slow downward trend. Looking back farther, a sharp increase in taxes at the end of the 1960s did not substantially lower job growth either. And most damning of all is that taxes, for the past 2 years, have been pegged to their lowest level for well over 50 years—and it hasn’t helped pull the U.S. out of its current slump...

On tax cuts, both parties are wrong. All the tax cuts put into place by both Bush and Obama are doing as much to stimulate the Chinese economy (if not more) as our own by simply keeping the trade gap unsustainably high. And it surely hasn’t helped those ‘job creators’ create more positions given that job growth over the last decade has been tepid at best. Ultimately the cuts are only enabling Americans to continue to overspend—a bad habit that started during the housing boom that dominated the economy over the past decade.

Its time to recognize the failure of these policies as a cure for the U.S. economic doldrums. Instead they are simply building up a painful amount of Federal debt that will eventually need to be reckoned with. As for spending, this money would have been much better used as direct funding for infrastructure projects, and perhaps tax credits for small business investments and hiring. This would be spending that directly affects U.S. production...

Click here to read the post in its entirety.