A Financial Times Analysis (9/15, p. 24) of the effects of extending the Bush tax cuts shows that it would be an even bigger calamity than the GAO has projected (nearly $3.7 trillion in additional deficits piled up over the next ten years).
The tax cuts, passed in 2001 and 2003 with the latter reducing taxes on capital gains from investments to 15% (thereby delivering an unequal status to rentiers over workers) have been almost totally responsible for the deficit mess we’re in especially since 70% of the hit transpired after 2006.
The Financial Times analysis by Richard Bernstein notes (ibid.)
“Our own examination of U.S. non-residential investment indicate the reduction in capital gains tax rates failed to spur U.S. business investment and failed to improve U.S. economic competitiveness”
In other words, the FT’s findings were exactly opposite to what had been touted by the 2003 cuts’ cheerleaders (many of the same people who claim that extending the Bush cuts to the wealthiest now is critical for job formation).
The FT’s analysis continues:
“The 2000s- that is the period immediately following the Bush tax cuts – were the weakest decade in U.S. postwar history for real, non-residential capital investment. Not only were the 2000s by far the weakest period but the tax cuts did not even curtail the secular slowdown in the growth of business structures. Rather the slowdown accelerated to a full decline”
Contrast this with the hike in taxes immediately after Bill Clinton took office, leading to the accumulation of more than $600 billion in surpluses by the time he left office (pissed away by Bush with his stupid 2001 tax cuts) and the creation of 20 million jobs- unmatched since.
Meanwhile, the FT analysis observes that “during each decade from the 1950s to the 1990s, growth in real gross non-residential investment averaged between 3.5 percent and 7.4 percent a decade. During the 2000s it averaged a mere 1%”
For reference, the top marginal tax rate during the Bush years (for income tax) was reduced to 36% from the 39.5% during the 1990s Clinton Years. Over the 1950s and into the 1960s (until about 1964) the top marginal rate was at 91%, going down to 65% by the mid -60s. The low level of 39.5% wasn’t reached until Reagan arrived in 1980, and passed his tax cuts. (And we note here that the debt as a percentage of GDP rose to nearly 30% during the Reagan years, caused by his tax cuts in conjunction with mind boggling military spending that amounted to nearly $2.2 trillion over his tenure- rendering the U.S. a net debtor nation.)
Another telling statistic from the FT study is the growth rate for investment in equipment and software for business. They note that this ranged from 5.7% a year to 9.9% in earlier decades but was reduced to 1.9% during the 2000s.
Meanwhile, “average growth in non-residential structures ranged from 1.3% to 5.7% from the 1950s through the 1990s but declined 0.8% during the 2000s.”
The conclusion of the analysis is stark and absolutely uncompromising (ibid.):
“The stated goal of cutting taxes to spur U.S. capital investment was not achieved.”
This led Bernstein to ask ‘Where did the benefits of the tax cuts go?’
Obviously, if they didn’t redound to the U.S. benefit they had to go somewhere, right?
The FT found: “an increasing proportion of the benefits of U.S. monetary and fiscal policy are leaking outside the U.S.”
The FT and Bernstein goes on to note that the tacit assumption of U.S. policy makers and taxpayers is that the U.S. is a “closed economic system” but in fact, it isn’t. Whatever consequences accrue can often be exploited in ways unseen. Indeed, the FT notes that the Bush tax cuts actually encouraged “capital flight from the U.S.”
Part of this, of course, had to do with the weak dollar policy the Bush administration also resorted to at the time. For those unaware, the Bushies dealt with the exploding trade deficits by allowing the dollar’s value to sink (it was debased more than 35% during the eight Bush years). Because the lower dollar value made U.S. goods-exports cheaper it enhanced U.S. trade activity and narrowed the import deficits. The problem is that it was done at great cost, spurring an investor run to stronger currencies (like the euro).
But make no mistake the inability of the Bush tax cuts to propel business (non-residential) investment in the ways noted earlier meant falling stock prices that also drove investors to emerging market funds.
The FT conclusion is blunt:
“Business investment data demonstrate the Bush tax cuts failed to achieve their goal of spurring productive U.S. investment and that failure has contributed to the poor performance of U.S. stocks”
In this sense, and looking at the GAO’s deficit projections if these tax cuts are allowed to go forward, we can see that even more dreadful economic results may well be forthcoming: not only much higher deficits by the end of the decade ($3 trillion higher if only the middle class cuts are allowed) plus a lack of job creation since business investment will be as reduced (from the FT analysis-evidence) as it was in the 2000s.
The conclusion is clear and obvious: we can’t afford ANY of the Bush tax cuts. Let them all expire. Better that than deficit hawks going after Social Security and Medicare when millions more will need it by the end of the decade.
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