The Problem with Tax Cuts to Utopia

It is all so simple! The Tax Cut Mantra says this - just cut taxes, grow the economy, use the new tax revenue to balance the budget, watch as the new economic growth dribbles down to the masses, and then live in Utopia!

We have been hearing this mantra for about 40 years now - at least since Ronald Reagan. How has this worked out?

Tax Cuts and Balanced Budgets: 

When Reagan came to office, the US Government debt was $988 Billion - 32% of GDP, and the deficit was $79 Billion. When he left office, the debt was $2,875 Trillion - 50% of GDP, and the deficit was $153 Billion.

Reagan famously cut taxes. Amongst proponents of the Tax Cut Mantra, what is almost never mentioned is that he almost tripled the National Debt, and he doubled the yearly budget deficit.

Bush Jr. also favoured massive tax cuts. When he came to office the US Government debt was $5.807 Trillion - 55% of GDP, and the deficit was actually a surplus of $128 Billion, courtesy of Clinton's tax increases. When Bush Jr. left office, the US Government Debt was $1.910 Trillion - 83% of GDP, and the deficit was $1.413 Trillion.

Like Reagan, Bush Jr. oversaw massive tax cuts. Amongst proponents of the Tax Cut Mantra, what is almost never mentioned is that he almost quadruped the National Debt in just eight years, and left the country with its largest budget deficit in its history. His presidency was a financial catastrophe.

Household Income:  

Welcome to the trickle down!  These tax cuts were supposed to benefit EVERYONE!  Look at this closely...

The income of the bottom 80% of income earners in the USA has been virtually stagnant for decades.

The income of the wealthy really started to take off in the early 1980s - with Reagan's tax cuts. The reason of this is simple - the majority of the tax cuts were to the income for the wealthy, therefor they are the ones who benefited from those same cuts.

What Happened?

In theory, tax cuts should benefit everyone and should work to grow the economy thereby having a positive effect on government finances. This obviously did not happen. Two things happened to frustrate this mantra.

First of all, which politicians cut taxes on cue, they did not retrain spending. Like politicians everywhere, the conservative politicians who cut taxes also never saw a new dollar in revenue that they did not want to spend. 

For example, Bush Jr.'s tax cuts were in the manner of $350 Billion a year, but he oversaw spending increases of about $900 Billion a year by the end of his time in office.  The problem here wasn't the necessarily the mantra - it was the people who were tasked with implementing it.

The other problem is the simple fact that the tax cuts were targeted at the wrong people - the rich, rather than everyone else. 

What we have learned from 40 years of tax cuts is that the rich do not work hard to build and economy for everyone - they work hard to build an economy for themselves. To benefit everyone, tax cuts have to be targeted at everyone. This should not have been difficult to figure out, and it really speaks more to how much influence the rich actually have on American politics.

Beware when politicians come calling promising tax cuts to Utopia!  The theory may be sound....but the politicians themselves most certainly are not.




BTW - this site is brilliant...

https://www.advisorperspectives.com