Still waiting for the tax-cut boost

The US economy has nearly stalled four years after several major tax breaks took effect.

from the June 25, 2007 edition

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He notes that the ratio of business investment to household-related investment (one statistical test of tax cuts' effectiveness), shows a mediocre performance in the current expansion. But when President Kennedy implemented a tax credit for business capital equipment during the economic expansion starting in 1961, business investment did boom.

Jared Bernstein, an economist with the liberal Economic Policy Institute in Washington, says that job growth, wages and income, and the labor supply (the proportion of the population that's working or seeking work) have done poorly in this recovery compared with other post-World War II recoveries from recession.

"The evidence is quite clear – the tax cuts didn't work," he says.

As for the theory that supply-side tax cuts boost private savings, Kasriel comments, "Sadly, this appears to be another case of ugly facts discrediting a beautiful theory." The saving rate has plummeted since 1984 after the supply-side tax cuts of President Reagan.

Another supply-side theory, now less popular, was voiced by Bush in February 2006: "You cut taxes, and the tax revenues increase."

The theory is that with lower marginal tax rates, people work harder and longer, thereby raising their income – and paying more taxes on it.

But even top Bush economic advisers now reject that thesis.

"I certainly would not claim that tax cuts pay for themselves," Edward Lazear, the current chair of the Council of Economic Advisers, has stated.

Economics, though, is not an exact science. There is room for debate. J.D. Foster, an economist at the conservative Heritage Foundation, notes that because the recession at the start of the decade was shallow, the recovery would also be modest. And, he notes, the most important supply-side tax cuts on capital gains and dividends didn't go into effect until 2003. These take time to work.

Chris Edwards, an economist at the libertarian Cato Institute, figures the tax cuts on dividends and capital gains have encouraged investors to create a bull stock market – a big rise in stock prices.

Yes, comments Mr. Bernstein, these tax cuts did redistribute income to the "investor class – those at the top of the income scale."

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