Economic Tax Cuts

The first years of tax cuts are consistent with what normally occurs a few years after a recession. Most state tax increases are enacted during fiscal crises, and most such crises are precipitated by periods of high unemployment and declining incomes. Once the recession ends, state fiscal conditions improve, enabling states to reverse some of the tax increases imposed during the fiscal emergency (Sawicky, 1999). Furthermore the tax cuts of the past few years have flowed to high income earners with no clear indication that this has resulted in the kind of spending and investment which create jobs (Berger & Borer, 1997).

Tax cuts do make a difference. The Bush tax cuts were a major factor in softening the recent recession and will be a major stimulus in the future. The US economy got through a stock market bubble and a major drop in capacity utilization and business spending in large part because the consumer had the resources to keep going (Mauldin, 2004). Did the tax cuts positively affect the supply of labor? The answer is yes but the effect was small and much less than postulated by supply-siders.

Studies show that the two main avenues that were supposed to increase employment, the tax cuts and the reduction in or limitations of social programs, had little affect. With labor responses of these magnitudes, it is clear that tax revenues are going to fall; the tax cuts will result in greater revenue losses and will certainly not pay for themselves. The income increase causes taxes to rise and revenues to increase. Thus, there are feedback effects that offset the revenue loss of any tax cut (Campagna, 1994). The fiscal environment will at best be tranquil.

This scenario would unfold if the economy grows steadily close to full employment, federal aid is not reduced and expensive new mandates are not imposed, citizens do not demand significant tax cuts or support stringent new tax limitations, and demographic factors do not result in big increases in service demands. Even in this optimistic scenario, spending will be relatively tight (Gold, 1995).

References:

Berger, M. T. , & Borer, D. A. (1997). The Rise of East Asia: Critical Visions of the Pacific Century. London and New York: Routledge. Campagna, A. S.(1994). The Economy in the Reagan Years: The Economic Consequences of the Reagan Administrations. Westport, Connecticut – London: Praeger/Greenwood. Gold, S. D. (1995). The Fiscal Crisis of the States: Lessons for the Future. Washington, DC: Georgetown University Press. Mauldin, J. F. (2004). Bull's Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market. Hoboken, New Jersey: John Wiley and Sons. Sawicky, M. B. (1999). The End of Welfare? : Consequences of Federal Devolution for the Nation. Armonk, New York; London, England: M. E. Sharpe.