Tax Cuts For the Wealthy

That seems to be the refrain of conservatives, Republicans and Tea Party activists: they advocate making the Bush tax cuts permanent. Yet, at the same time, they rail about the admittedly huge government debt. Making the tax cuts permanent, would, it's estimated, increase government debt in the next ten years by well over $2 trillion. And Boehner, the House Republican leader, actually said the tax cuts don't have to be paid for!

Republicans are attempting to gain political traction with the "all debt is bad" crowd, while also currying favor with wealthy fundraisers, and indulging in the you-can-get-it-for-nothing thinking that created the disastrous 2007-8 collapse.

Cutting taxes has stimulated the economy, and increased revenue in some limited situations. It worked with JFK's tax-cuts, because tax rates were very high then (they are very low now), and their reduction made money available for consumption and therefore created incentives for investment (from the added spending boosting demand). They didn't work so well from Reagan through Bush II, because wages did not keep pace, increased consumption was based on adding to private debt; foregone taxes benefited the wealthy, who saw "investment" opportunities in financial speculation, or foreign production. So, the famous Bush tax cuts doubled the US debt, and led to speculative excess that caused the collapse.

Obama's stimulus spending has almost doubled the debt again, but without the stimulus we'd be calling this a Great Depression, not a Great Recession. Maintaining tax-cuts for the wealthy would create greater deficits, but would not stimulate the economy. Why? Banks and individuals are sitting on hoards of cash already, rather than investing, because there is little demand for new production: investment in the face of low or shrinking demand is usually considered foolhardy.

Conservatives have an ideological rationale for high-end tax-cuts: encouraging investment and cutting down the size of government. The former works in limited instances, but won't work now. As for the latter, when in power conservatives have increased government size, while still cutting taxes--hence creating structural deficits, i.e. deficits in good times.

A deficit in bad times is a natural outgrowth of need--people need support and can't pay taxes when unemployed--and partially counters the decline in demand: it is an investment for better times. A deficit during a boom is like living high on your credit card.

Tax cuts to the wealthy, now, would inflate speculation, but would not increase consumption enough to stimulate growth. They would balloon the deficit even further. They might also, finally, drive the world away from the dollar as world reserve currency: Americans would have demonstrated their financial recklessness once again. (The US caused the global downturn by encouraging out of control speculation).

Flight from the Dollar could end the American Empire as we know it.