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Do tax cuts actually grow jobs? 

Is there any evidence to support the mantra that cutting taxes stimulates job growth? I'm old enough to remember the Reagan years, and it seems most of those tax cuts went into the pockets of the wealthy, and what trickled down was pink slips as jobs went offshore. - Keynes Friedman Locke., Greenspan, Minnesota

The truth is, what arguably began as a noble effort - making U.S. income taxation fairer and more rational - has degenerated into one of the great con games of our time.

First the big picture. While cutting taxes to boost the economy is associated with Ronald Reagan and supply-side economics, the underlying "trickle-down" idea is an old one: if you let people on top keep more of their money, they'll invest it in business, creating jobs and making those below better off.

John Kenneth Galbraith cynically referred to this as the "horse and sparrow" theory: "If you feed the horse enough oats, some will pass through to the road for the sparrows." But income taxes when Reagan took office were confiscatory - the top-bracket rate was 70 percent. Few actually paid it, of course, due to a seamy mess of loopholes.

Reagan changed that. The top rate was cut sharply - today it's 35 percent - and many tax shelters were eliminated. But Reagan didn't change the other side of the big-government equation.

In his influential 1981 book Wealth and Poverty, George Gilder argued that tax cuts should be balanced with public spending cuts. Reagan skipped that part. He cut back on social programs but cranked the defense budget.

The excuse was the infamous Laffer Curve, the brainchild of economist Arthur Laffer, who reputedly sketched it on a napkin during a 1974 lunch. The curve plotted tax revenue against tax rates, showing lower rates would spur the economy and produce a net increase in revenue.

Magic? No, the start of the con. Reagan's first budget director, David Stockman, later admitted to journalist William Greider that he pushed through the 1981 tax cuts knowing full well they would lead to massive federal budget deficits. He hoped this would keep Congress from spending on domestic programs.

How did this bastardized version of trickle-down work out for those on the bottom rung? Reagan took office with 7.5 percent unemployment. By Sept. 1982 it climbed to more than 10 percent and didn't drop below 7 percent till halfway through his second term.

In 1979-2004 the real after-tax income of the poorest fifth of the country rose by a paltry 9 percent, while that of the richest fifth rose by 69 percent.

That's not the con, though. The real cause of growing U.S. income disparity isn't tax policy but globalization. What with competition from China and other low-wage countries, U.S. workers are in no position to demand better pay.

It's the crowd whose skills can't be easily outsourced - the creative class if you're part of it or the 1 percent if you're not - that's made off with most of the increase in wealth of the past 30 years.

Which brings us to the con. A string of millionaire candidates for public office has duped a good chunk of the electorate into thinking the way to create jobs and otherwise solve the problems of the middle class is to cut the taxes of the wealthy.

That's absurd. If the massive tax cuts of the Reagan era didn't do the average worker much good, trimming another percent or two now sure won't.

Why does this argument fly? Because too many Americans don't get where they stand. The U.S. has one of the most unequal distributions of income in the developed world-we're closer to Latin America in that respect than to Europe-and low economic mobility.

But much of the country's workforce believes it's either already in the overtaxed bourgeoisie or on its way there. The top 10 percent of filers shoulder most of the income tax burden (about 70 percent in 2009). For a typical U.S. wage-earner to worry about sharing in this plight is borderline delusional.

Don't misunderstand. Keeping taxes at a moderate level is good. Laffer makes the legitimate point that in 1925, 1965, and 1985, cutting taxes from very high levels to more reasonable ones caused the economy to boom.

But know this. While cutting taxes may help the country as a whole, if you're like most people, it probably won't help you.

 

 

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Cecil Adams

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