There Are Other Strategies

Continuing RealClearPolitics’s series debating the issues in the present election, William G. Gale of Brookings’s strongest argument is when he’s sticking with the evidence. The Reagan tax cuts on personal income tax promoted a little economic growth and the Bush tax cuts promoted almost none at all:

But the record is clear that deficit-financed tax cuts on high-income households and businesses have failed to boost growth at the federal or state level in the U.S. (or in other countries). For example, when growth is (appropriately) measured from peak to peak of the business cycle, the vaunted Reagan tax cuts produced a period of only average growth. Indeed, research by Martin Feldstein, President Reagan’s former chief economist, and Douglas Elmendorf, the former Democrat-appointed Congressional Budget Office Director, concluded that the 1981 tax cuts had virtually no net impact on growth. Instead, the post-recession recovery of the early 1980s benefitted primarily from the Fed’s decision to reduce interest rates.

The 2001 and 2003 Bush tax cuts do not appear to have stimulated much growth, if any, despite cuts in tax rates on ordinary income, capital gains, dividends, and estates. Moreover, even that lackluster growth is generally attributed to the Fed’s expansionary monetary policy (and to a housing boom that unfortunately went bust and triggered the Great Recession of 2008–2009).

Unfortunately, the policies that he proposes for the next administration are largely faith-based. In summary he wants to

• Increase spending on higher education
• Increase spending on healthcare

Although he casts those as being on behalf of the poor, the reality is that those two measures will result in

• Paying college administrators more
• Paying more to healthcare providers

neither of which is likely to foster much growth. Total real spending on college faculties has been flat for decades even as spending on administrators has skyrocketed. And we’ve been paying healthcare providers ever more for most of the last half century with only very modest improvements in health. In healthcare, too, much of the additional spending goes to pay administrators rather than paying for care.

There are strategies other than cutting the personal income tax rates, the proceeds of which go overwhelmingly to the highest income earners, and the demand side trickle-down approach of spending on education and healthcare. For example, you could give money directly to the poor. Or you could cut the taxes paid disproportionately by the poor, e.g. payroll taxes.