28 September 2012
The Myth of Tax Cuts The biggest event in this year would be the 2012 Presidential Election on November 6. There are two major parties in the United States: Republican and Democratic. Mitt Romney and Paul Ryan are the Republican Presidential and Vice Presidential nominees, respectively. On the Democratic side, incumbent President Barak Obama and Vice President Joe Biden are seeking reelection. Perhaps the biggest issue is the economy. The two candidates have very different plans on how to fix the stagnant economy.
One contentious part of the economic recovery plans is taxes. How can taxes best be used to improve economic conditions? Can they be used at all to fix the economy? Obama favors taxing the rich more and giving tax breaks to the struggling middle class. On the other hand, Romney favors giving tax breaks to the wealthy, specifically corporate investors and executives. The right believes that these people are the “job creators” and that by cutting their taxes, they will be able to create more jobs which will in turn revitalize the economy. I disagree with this notion because statistics show that, historically, tax cuts for the wealthy do not spur economic growth. In fact, they increase economic inequality among the rich and the rest of society. As the old saying goes, “The rich get richer and the poor get poorer.” Moreover, tax cuts, in and of themselves, do not have a significant impact on the economy at all. My thesis is that tax cuts as a way to fix the economy is a public misconception, largely a myth.
In his campaign, Mitt Romney says that he would cut taxes like income taxes and marginal taxes. In general, most people like tax cuts because they think it is a way they can save money. Some people think that these tax cuts will free up citizens’ disposable income and then encourage citizens to spend this money on goods and services. The influx of disposable income as a result of tax cuts will improve the health of the economy. But this may be a misconception. There is no statistical evidence to support this claim. According to Henry Blodget, tax cuts do not spur a country’s economic growth. Yet the public and politicians continue to buy into this theory. As Blodget points out, referring to Mitt Romney, “One of our two Presidential candidates is so convinced of the theory that he has built his entire economic plan around it” (Blodget). Blodget goes on to show that from 1945 to the present, the average tax rates have declined for the highest-income taxpayers. The rich people pay fewer taxes and as a result, this creates more income inequality, widening the gap between rich and poor. “One thing tax cuts do unequivocally do – at least tax cuts for the highest earners – is increase economic inequality” (Blodget).
In contrast to Mitt Romney, Barack Obama plans to extend health care services to everyone, regardless of their income level. He also plans to create jobs and invest in construction. One of his campaign’s main objectives it to level the economic playing field. He will do this by giving tax breaks to the middle class. Those hit hardest by the economic recession are the middle class. Therefore, it doesn’t make sense to tax them higher because this will only hurt them further. Why would you tax those hit hardest in order to improve the economy? The middle class makes up the majority of the country, so to give them tax breaks makes more sense because, from a utilitarian perspective, this will benefit the most people, not just the richest. Obama believes that the economy will improve from “the bottom up,” not from the “top to the bottom.” This may be a better approach than Romney’s, but, as we will see, it is not grounded in any kind of evidence.
The graphs below illustrate the misconception that tax cuts lead to economic growth. New theories suggest that tax cuts don’t actually help the economy improve from a recession. If you look at the graph, in 1990, the first President Bush