Vail Daily letter: GOP’s views are rich
July 26, 2010
You’ve probably noticed that the federal legislators are primarily lawyers who suddenly become economists upon entering office. True economists don’t run for public office. They correctly perceive that providing statistics and economic projections that people don’t want to hear will not get them elected.
The lawyers turned economists who are Republican legislators (and those hoping to achieve that status in November) are zeroing in on a platform for the midterm elections, now just over three months away. The major strategies are to cut federal income taxes, permanently eliminate federal inheritance tax and to severely cut government spending. The Republicans have not lost sight of the old slogan “it’s the economy, stupid” that is going to be front and center in the minds of voters come November.
To meet the “jobs challenge,” the GOP is reinventing voodoo economics from the past.
The argument goes something like this: Cutting individual income taxes and corporate taxes stimulate the economy so that the lost tax revenue from the tax reductions, are more than offset by the new tax revenue that accrues from the additional jobs (think income) created by the extra consumption of goods and services bought by the populace who has been taxed at a lower rate. Still with me?
There is some logic in support of this theory, but it has never worked in practice because of savings rates. For those who are at the lower income level who pay taxes, this is not as issue — they spend every cent of disposable income. It’s not much of an issue either for the middle class which has a savings rate of maybe 3 percent to 5 percent.
The problem is with the wealthy, who save a significant portion of their tax savings. Money saved is money not spent on goods and services and therefore do not stimulate employment.
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Savings are not unimportant. Savings are the fuel for capital formation, but we usually attribute corporate savings from retained earnings as the savings vehicle that meets capital formation needs.
The introduction of these voodoo economics occurred during the Reagan administration and was championed by his director of budget, David Stockman. The result was failure. The Reagan administration was not a vibrant job creator and the deficit tripled during Reagan’s eight years.
The next example was the administration of George W. Bush, who pushed the national deficit into the stratosphere and had a dismal job creation record in spite of funding two wars off budget.
The last flaw in this “cut taxes to stimulate the economy” theory is the impact upon businesses. Cutting taxes to businesses do not automatically lead to job creation. It may improve profits, but it takes an increase in the demand for goods and services that spurs job creation.
As for reducing federal spending, there are lots of inefficiencies to attack. Our goal should be to identify programs that have outlived their purposes and those that are outsized for their roles. Eliminate those programs we can and downsize those whose roles have shrunk over time.
Existing GOP legislators and Tea Party favorites such as Rand Paul of Kentucky and Sharron Angle of Nevada have promoted ideas that are so radical as to defy imagination. In aggregate they have advocated eliminating the U.S. Department of Education, the Federal Reserve System, the Americans with Disabilities Act, the Environmental Protection Agency, the Department of Veterans Affairs, and eliminating or privatizing Social Security and Medicare.
Many of us think of reducing the size of government by using a scalpel, not a chain saw. Paul’s and Angle’s argument is that the necessary functions within these eliminated departments and agencies should be the responsibility of state governments. Are these the same state governments that are broke? I didn’t hear Paul or Angle recommending raising taxes at the state level to pay for adding these responsibilities.
In their wildest dreams, Republicans believe they can permanently eliminate the federal inheritance tax, which in the absence of congressional action, will revert back to the rates in place prior to George W. Bush’s tax cuts (taxes begin with inheritance to an individual that exceeds $1 million). Just a note here, many state inheritance tax laws are tied directly to the federal inheritance tax laws, so changes in federal law will have a spillover impact upon the states.
The Obama administration is purportedly in favor of establishing tax-free inheritances of between $5 million to $10 million. This magnitude or somewhat greater seems reasonable for families to pass along residences, small businesses and investment portfolios to their offspring. But what is the objective of allowing billions to be passed along tax free as was documented by the recent death of a Texas billionaire (why does it always have to be a Texan?).
These are the same Republicans who are campaigning on deficit reduction and happily willing to forego billions in inheritance tax revenue! These are the same Republicans that argue that a few hundred dollars a week in unemployment benefits will reduce the incentive for the unemployed to seek work. And we are to believe that inheriting hundreds of millions or billions of dollars won’t incentivize the happy inheritance recipients to do anything but party, party and party?
What would you do if you just inherited $500 million tax free with the knowledge that you could pass along whatever amount of money to your offspring tax free? You would get busy inventing the next gee whiz invention, wouldn’t you? Five percent of a half-billion is $25 million per year. I could have a lot of fun every year with that. Why work at anything? And will my children be inspired to do anything other than party?
The operative words here are plutocracy and aristocracy. If you are relatively older and wealthy, this Republican moment is definitely for you. If you are something else, you better vote for something else.