About Me

I am Associate Professor and Chair of the History Department at the University of Massachusetts-Dartmouth. I am also the Academic Director of the Clemente Course in the Humanities, in New Bedford MA. Author of "Social Security and the Middle Class Squeeze" (Praeger, 2005) and the forthcoming "Saul Alinsky the Dilemma of Race in the Post-War City" (University of Chicago Press), my teaching and scholarship focuses on American urban history, social policy, and politics. I am presently writing a book on home ownership in modern America, entitled "Castles Made of Sand? Home Ownership and the American Dream." I live in Providence RI, where I have served on the School Board since March 2015. All opinions posted here are my own.

Friday, October 19, 2012

Rich people to the rescue! Taking apart Romney's tax plan

In the first two presidential debates, Mitt Romney -- without using that horrid word 'stimulus' -- has claimed that his 20% across-the-board cut in marginal tax rates will spark massive job growth AND reduce the deficit.  He has also claimed that the middle class will primarily benefit from these cuts, while the rich will not.

Deficit reduction would presumably occur because he would broaden the tax base by eliminating deductions and subsidies, and because the stimulative impact of the tax cuts would increase investment and demand, and effectively pay for itself through the increased tax revenue that the subsequent growth would provide.

None of these claims are backed up by the evidence.

Economist Laura D'Andrea Tyson gives us a really good breakdown in the NY Times Economix Blog today -- so let's go through it.

Romney proposes the following:
1.  an across-the-board 20% cut in marginal tax rates
2.  repeal of the estate tax (he conveniently didn't mention this in the debates)
3.  repeal of the alternative minimum tax
4.  cut the corporate income tax to 25%
5.  extension of the Bush tax cuts

These cuts would reduce federal tax revenue by an estimated $6 trillion over ten years -- $5 trillion for the first four listed above, $1 trillion for the extension of the Bush cuts.

In other words, his tax cuts would increase the deficit by that amount, all other things being equal.

It should be noted that 4 of the 5 proposals above would be heavily weighted toward tax cuts for the wealthiest Americans -- roughly 2/3rds of the $6 trillion would go to the top 5%, or those taxpayers making $200,000 a year or more.

Even if this $6 trillion could be made up through eliminating loopholes, deductions and subsidies (which it can't), is this really the most effective, efficient and just way to create jobs?

The answer is clearly no. 

More to the point, there is little evidence that cuts of this kind would actually create jobs.

If tax cuts for high-income earners generate substantial real economic activity and job creation, then we should expect to see two things in the data. First, employment growth should be stronger in the years after tax cuts for these earners. Second, parts of the country with a larger share of high-income earners should experience stronger employment growth after national tax cuts for these taxpayers, because the places where they live receive a larger share of the national tax cuts.
What do we actually see after combing through a half-century of economic data? Neither of these predictions is borne out.
Personally, I'm skeptical about relying upon massive tax cuts at all right now, for economic stimulus.  Given how low borrowing costs are at the moment, and given our need for massive infrastructure investments (and money for states and localities), I still strongly prefer to see a job creation program that leans more toward spending than tax cuts.  If we are going to temporarily have the federal government spend more than it takes in, we'll get more bang for our buck with investments.

That said, if the approach of both parties is going to lean heavily toward tax cuts, the evidence is clearly on the side of giving them to the bottom 95% - not the top 5%. 

While Tyson found no link historically between job creation and tax cuts for the wealthy, there is a clear link between job creation and tax cuts for everyone else: 
Almost all of the stimulative effect of income and payroll tax cuts on job creation in the short to medium run result from such cuts for the bottom 95 percent.
A recent report by the Congressional Research Service confirms this.

Remember that consumption -- regular people spending money -- still accounts for 70% of our economy.  Our recovery is slow because of insufficient demand.  It is not possible for the spending of the top 5% to spark sufficient demand to create jobs in large numbers.  Tax cuts for the bottom 95% are much more likely to be quickly spent.  And when they are spent, demand increases...which will lead to more hiring.

In survey after survey, employers have been abundantly clear:  they will hire more people, when demand increases.  Romney seems to think that if he is elected, his overall personal white guy awesomeness will somehow magically cause the confidence of wealthy white employers like himself to soar...inducing them to hire more people.

Does that sound like an economic policy to you?  Romney and his fellow 'job creators' may seek to trickle something down on the rest of us.  But whatever that something is, I'm pretty sure it won't be jobs.  And keep in mind that every tax cut dollar that is distributed in the way that Romney proposes is a dollar that cannot be spent on public investments that will benefit the vast majority of Americans in the coming decades -- public education, public health, infrastructure, etc.

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