Weird Tax Myths #2 - Recessions, Depressions and Tax Policy

[LongTomH]

Good article by Larry Beinhart at Huffpost: Weird Tax Myths #2 - Recessions, Depressions and Tax Policy. Beinhart destroys the conventional wisdom that "Tax cuts stimulate the economy."

Our prevailing mythology is that tax cuts help the economy.

They stimulate it. They promote growth. They create jobs.

The truth is that tax cuts cause crashes.

Tax hikes end depressions and recessions.

Beinhart supports his thesis with historical examples:

But now that we've had four of them (including the crash of 2001), we can see a pattern.

The sequences of boom, bubble, and crash have, in each and every case, been preceded by a significant tax cut.

Coming out of World War One we had a top marginal tax rate over 70%.

From 1921-25 it was cut, in steps, down to 25%.

There was a boom, particularly in the fiscal sector.

The crash came in 1929.

When Ronald Reagan came into office in 1981, the top marginal rate was, once again, 70%.

Reagan started cutting in 1982, down to 50%, then to 38.5% in 1987, and 28% in 1988. There was a boom in the fiscal sector. In the mid-eighties the collapse began, and over 1,600 banks failed. There was a huge bailout.

It was followed by the recession of 1990.

There are more examples of tax increases and cuts and the resulting boom or bust:

The 2,000 recession was followed by tax cuts. Not tax hikes.

A very strange think followed. There was great growth at the top. Corporate profits rose, there was a boom in real estate and in the fiscal sector generally.
But for normal people the recession never ended. There were no new private sector jobs. Median income went down. Manufacturing continued to decline.

The historical record suggests that this recession won't end until there is a tax increase.

<snip>

If the Bush tax cuts are allowed to expire they will, hopefully, work as tax hikes. That will mark the beginning of a real recovery.

If they don't, and there are no other tax increases, expect lingering unemployment, lower wages, increased corporate profits, especially in the fiscal sector -- which we're already seeing -- a short term boom in the stock market, and another crash.

Sorry about busting the 4 paragraph rule - but the paragraphs in this article were very short.

Edited to add: Here are links to Larry Beinhart's previous tax myth articles at Huffington Post:
Weird Tax Myths #1 - Tax Cuts Create Jobs and
Tax Cuts Vs. Unemployment

Edited again to add: The last article on "Tax Cuts Vs. Unemployment" gives tracking figures for tax cuts or increases since 1962 and how employment was affected.

[valerief]

1. But the privileged got rich-rich-richer and that's all that matters.

They don't crash. We bugs do.

[Sherman A1]

2. Thanks for Posting

Good information

[Demeter]

3. A properly designed tax will shrink the hoards of the wealthy

which, piled up like manure, stinks and draws flies.

Money, like manure, is only productive when it is spread evenly and not too thickly around.

[Kablooie]

4. Exactly! Obama is *preventing* the recovery with this agreement!

I don't care what all his smiling economists say.
They've been running things for the last 10 years and have nearly destroyed the country.
The current crop of economists are totally screwed up.

Use common sense and history as a guide, not new age economics!

[cate94]

5. Absolute truth.