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Bush’s
Policies Don't Promote Growth By John Irons and Lee
Price, at Mother Jones, February 17, 2006 John
Irons is Director of Tax and Budget Policy at the Center for American Progress,
and Lee Price is Research Director at the Economic Policy Institute. The economic evidence
is clear: the president’s tax changes have not worked to improve the health of
the economy. Business investment, employment, and wages have all underperformed
past recoveries. Furthermore, the
choices made in the president’s budget put at risk the future health of the
nation by running massive deficits and by cutting back on important national
investments in education, science, and energy. Tax
Policy Bush’s tax policy has created a
ballooning federal budget deficit that threatens our future prosperity. Between
early 2001 and September 2005, tax changes reduced revenue by $870 billion. The
tax cuts that favor the most prosperous cannot be defended on grounds of
fairness. But the president has tried to justify them as promoting a stronger,
more prosperous economy for everyone. In fact, however, the tax changes since
2001 have failed to spur business investment, jobs, wages, or overall growth. The rhetoric for the
tax cuts was appealing: by taxing income less, businesses would be encouraged
to make new investments and people would work harder, knowing that they would
keep more of what they earn. It has not worked out that way. Business
investment has failed to recover at a normal rate and labor force participation
has fallen. Rather than people coming into the workforce at higher rates, the
opposite has happened. If the workforce had grown with the population since
2001, there would be 3 million more people between the ages of 20 and 65 in the
workforce. Business
Investment According to proponents of the tax cuts,
cutting corporate income taxes and personal income tax rates was supposed to
“improve the investment incentives of America’s businesses.” Small business
owners, especially, were supposed to respond to lower individual tax rates by
investing more and hiring new workers. In addition, more than $200 billion of
cuts were specifically tied to business investment, reducing the cost as a way
to encourage purchases of equipment, software, structures and machinery. The cuts were an utter
failure. Business investment has always recovered after a recession, but this
was the most sluggish recovery in memory. As a result, business investment has
grown 65% more slowly since the peak of the business cycle five years ago than
the average for similar periods after nine cycle peaks in the last 60 years. (A
business cycle includes a recession and the expansion until the next recession.
The peak of a business cycle occurs just before a recession.) In the recession and
recovery of 1990-1994, instead of cutting taxes, Presidents George H.W. Bush
and Bill Clinton signed tax increases into law. Yet businesses’ investment grew
much faster during that recovery than it has during the last four years. The Bush tax cuts have
been a waste precisely because they were targeted at business owners and the
wealthiest Americans, rather than the average consumer whose increased demand
and consumption would have made it sensible for businesses to invest. Employment Business investment didn’t take off, and neither
did job creation. Even
now, after 5 years of huge tax cuts, one million more people are officially
unemployed than when George Bush took office, and millions more have left the
labor force.
President Bush has
noted that 2 million jobs were created over the course of 2005, and that we
have added 4.6 million jobs since the decline in jobs ended in May 2003. This is not evidence that the tax cuts are
working.
When the third round
of tax cuts passed in 2003, one of the Bush administration’s major selling
points was the claim that the economy would create 5.5 million jobs from July
2003 through the end of 2004 – almost one and a half million more jobs than
would be expected in a normal recovery. Instead, only 2.4 million jobs were
created, 1.7 million less than the number we were told to expect with no tax
cut. Job growth remains
abnormally slow. Last year's 2 million new jobs represented a gain of only
1.5%. With normal growth, we would have created 4.6 million jobs last year. Wages
and Income Not surprisingly, since job growth has
been so poor, the tax cuts have also failed to create substantial wage and
salary growth. Most
Americans depend on their wages and salaries for their standard of living. In a
healthy economy, wages and salaries should rise along with rising national
income and productivity. A record long period of job decline followed by
sluggish job growth has created slack in the labor market and pulled down wage
growth below inflation growth in the last two years. Last year, middle income
wages grew less than inflation (2.4% vs. 3.4%), reducing their buying power. The
Overall Economy The tax cuts failed to produce the burst
of economic activity the president promised. Instead of doing better than in
past business cycles, the economy has grown sluggishly, at a rate far slower
than in previous cycles The most common measure of economic activity, the Gross
Domestic Product (GDP), grew only 13.5% since the first round of tax cuts were
passed in early 2001, averaging 2.7% per year. The average for similar periods
in the past was far better – growing 16.3% or 3.2% per year. John
Irons is Director of Tax and Budget Policy at the Center for American Progress,
and Lee Price is Research Director at the Economic Policy Institute. http://www.mojones.com/commentary/columns/2006/03/tax_policy.html |
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