Crazy Talk: If You Want to Slow the Economy, Cut Taxes

Last Updated Apr 25, 2011 1:58 PM EDT

Lowering taxes always sparks economic growth, Rep. Paul Ryan, R-Wis., (and his ancestral line of supply-siders) would have us believe. George W. Bush's tax cuts prove otherwise, notes Jeff Madrick:
Since the bottom of the 2001 recession to the top of the expansion in 2007 -- before the credit crisis and Great Recession! -- GDP discounted for inflation grew more slowly than during any expansion in post-World War II history.
Even excluding the disastrous last several years, in other words, slashing taxes when the economy is recovering from a recession can actually stifle growth -- the exact opposite of what Ryan claims in his budget plan. During the first six years of Bush's administration, when taxes fell to historically low levels, U.S. GDP (adjusted for inflation) grew only 2.7 percent per year.

That pales in comparison to previous growth spurts, says Madrick, a senior fellow in economics at The New School in New York, citing data from the nonpartisan Economic Cycle Research Institute. Job growth between 2001-07 was even more anemic (click on the table below to expand). Notably, capital investment also slowed during this period. If Ryan is to be believed, the Bush tax cuts should've boosted investment as entrepreneurs put these savings to work. It didn't happen.

Bush's tenure also saw a plunge in federal tax receipts. From 1980-88, an era when Ronald Reagan followed big tax cuts with big (and generally regressive) tax hikes, per capita government revenue increased 19 percent. From 1992-2000, after both George H.W. Bush and Bill Clinton raised taxes, revenues soared 41 percent.

Ryan's dream: Starve the beast
Chopping taxes amid a fragile economy does more than sap growth. Unless the revenue loss is matched by offsetting reductions in spending, it can also raise government debt by triggering higher interest rates on those obligations. The Bush cuts wiped out a U.S. budget surplus, while costing the economy the equivalent of roughly 2 percent of GDP for each year they were in effect. If that's a bad idea even when times are good, it's a positively terrible one when times are bad.

Ryan is presumably well aware of the adverse impact of big tax cuts on a fragile economy. That explains why he wants to hack federal spending on everything from Medicare and Medicaid to education and infrastructure. After all, with the economy likely to slow as his proposed tax cuts take effect, there will be no choice but to "starve the beast."

The result, Madrick concludes:
[P]overty will rise and public investment in the economy's foundation will founder, while people with an annual income of more than $1 million a year will get a tax cut of $125,000 a year. Does any rational person think this is a sound approach to our future?
Nope.

Image from Flickr user wwhyte1968
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    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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