The biggest tax fraud of all time has just been perpetrated on U.S. taxpayers. This fraud was not perpetrated by any individual or corporation but by our own U.S. President and our own U.S. Congress. Like the tax fraud perpetrated by Reagan in 1980, this tax fraud claims that it will be a boon to the U.S. economy and will benefit everyone at every level. Furthermore, it will even pay for itself over time as the boost to the economy will increase tax revenues even more than the tax cuts. Now if you believe this, I would like to sell you some ocean front property in Idaho.
So why do so many people believe this? Is there a theory that explains the benefits of tax cuts? Is there any historical evidence that tax cuts benefit everyone? Let’s look at the theory (as explained by the tax cut proponents). Cutting taxes on corporations induces corporations to invest more which translates to a boost in the economy which benefits everyone. So what’s wrong with that? First, it ignores the fact that corporations have multiple options on what to do with the tax cut windfall. They can invest it to increase production – but then they must have customers to purchase what is produced. No customers, no incentive to produce. Second, they can distribute the money to shareholders – but then shareholders are generally in the top 1% of income earners, so the average person doesn’t benefit. Third, they can invest in acquisitions (mergers, buyouts and buyback of outstanding stock). Fourth, they can sit on the cash and wait for golden opportunities to present themselves. (In 2015 non-financial corporations in the U.S. were sitting on $1.7 trillion in cash or cash equivalents, and since 2007 those cash holdings have more than doubled.) Finally, the windfall can be used to raise executive salaries (without bargaining power there’s not much incentive to raise worker’s wages.) Since there has been no significant rise in personal incomes of the vast majority of Americans, it is highly unlikely that the tax windfall will be applied to increased production (meaning no increases in employment or wages), so corporations will choose one of the other options which don’t benefit the 99%. So much for the theory.
So what’s the history? If we look at the benefits of the Reagan and Bush tax cuts, we see that the bottom 20% hasn’t gained at all, the middle 20% gained a tiny bit, the upper 20% gained fairly well and the top 5% made out like bandits. (See chart below.)
So much for the trickle down theory. What about the theory that the tax cuts pay for themselves? Looking at the government budget history (chart below), we see no significant reduction in borrowing over the nearly 40 years since they started cutting the taxes, and the government debt continues to grow unabated. So the tax cuts haven’t paid for themselves yet. (How long do we have to wait until the tax cut fairy pays off the debt?)
The bottom line is that tax cuts don’t benefit anyone except corporations and the rich and they don’t pay for themselves. In fact they force the government to continue borrowing money to cover them forever. Surprised? One would think that’s a blinding flash of the obvious.
So the big question is why do so many people believe the tax cut sales pitch and vote for politicians that sell this snake oil? And why is it that so many of these people are those at the bottom of the income scale? It would appear that voters who buy this snake oil don’t bother to question the sales pitch and simply put their faith in their favorite political party to do what’s right. (Brings to mind the subject of faith based politics.)