The Most Recent Tax-Cutting Scheme

I just contacted my senator (Ron Johnson) and told him to vote no on this reckless tax cut. There is no evidence supporting the claim that lower top income tax rates grow the economy. There is no evidence supporting the claim that higher top income tax rates stifle economic growth. Indeed, high top marginal income tax rates—rates exceeding 90 percent—are historically associated with sustained economic growth and shallower business contractions. In contrast, lower top marginal income tax rates—rates set at levels we are moving to with the present tax bill—have historically been associated with erratic economic behavior and deeper business contractions with anemic periods of expansion. Lower tax rates are moreover associated with larger budget deficits, which are then used to justify cuts in public and social investments, investments (education, infrastructure, etc) that are associated with sustained economic development and more widely shared prosperity, as well as providing social support for the needy among us—the elderly, children, and the disabled.

The theory that tax cuts produce growth misunderstands the role effective demand plays in economic development. When there is effective demand the rich invest to meet demand, and they do this with other people’s money, not with tax savings. Cutting top income rates only make rich people richer. And while they may consume more, they are a small portion of the population consumption and cannot represent sufficient demand to drive investment. Effective demand is a mass phenomenon and is had when the masses are consuming at a level sufficient to trigger investment in production.

With growing redundancy in an increasingly mechanized and automated and globalized society, effective demand is hamstrung even with investment in production and, therefore, public spending is needed more than ever to make up effective demand—to plug the hole in the circuit of production.

What the tax cut will achieve in the current context of late capitalism is a shrinking economy which will be used to further reduce government activity in the very sectors that are actually associated with growth and shared prosperity. It will spur calls to further privatize public services. It will feed the downward spiral into third world conditions in the first world.

I am being charitable in my analysis, assuming that those who support this policy don’t understand the mistake they’re making. That is certainly true for many of them. I have friends who run small businesses who are hoodwinked by this talk of lower taxes, which, if this bill is passed into law, will actually squeeze them and pull their wealth upward—while leaving them behind.

However, the people pushing this policy understand the consequences of the bill. At least in terms of the immediate future. This is yet another phase in the class war to curtail democracy and personal liberty by destroying those pieces of the republican machinery and social democratic legacy won by previous generations that empower working people, i.e., the great majority of Americans, those who get up everyday and either go to work or look for work, fight the wars, and buy the goods and services, mostly by going into debt, that feed the bankers and business peoplers who are the only ones who will gain anything if this bill becomes law.

But the gains are in the end unsustainable. The fact that the rich will benefit in the present and near future will not stop the inevitable collapse of the capitalist system if these policies continue. However smart they are, in the end, the tax cutters only think they are clever. Just as they have been with our environment, their recklessness here represents a boomerang. Unfortunately, we are all in the boomerang’s path.

Published by

Andrew Austin

Andrew Austin is on the faculty of Democracy and Justice Studies and Sociology at the University of Wisconsin—Green Bay. He has published numerous articles, essays, and reviews in books, encyclopedia, journals, and newspapers.

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