Updated date:

Dec 6, 2020

Democrat vs Republican Tax Cuts

Author:

A part-time college economics & finance instructor who began his career in banking, Chuck frequently writes on money & economics online.

Both Parties Have Enacted Tax Cuts in Last Half Century

For more than a quarter century Federal Income Tax cuts have mostly been synonymous with supply side economic theory and Republican Administrations (President Reagan in the 1980s to President Trump in the current century).

Supply side income tax cuts also occurred earlier in the 20th Century during the Republican Administrations of Warren Harding (1921-1923) and Calvin Coolidge (1923-1929).

In between there was the 1964 tax cut that had been championed by President John F. Kennedy and enacted after his assassination by his successor Lyndon Johnson in 1964. While touted as a Keynesian (or demand side) tax cut, the Kennedy-Johnson tax cut was actually a hybrid that contained both supply and demand side cuts.

1960 Kennedy Tax Cuts

The 1960s tax cuts were being pushed by Democrats in the Kennedy-Johnson Administration. Unlike today, where Republicans were urging tax cuts and Democrats opposing them, in those days it was the Democrats pushing the tax cuts and Republicans opposing them.

Was this just partisan politics in which one party proposes the policy and the other one feels obligated to automatically oppose it? The answer is “No” as there are actually two economic theories concerning how and why taxes should be cut.

One theory is aligned with the policy objectives traditionally pursued by Democratic administrations and the other is aligned with policy objectives traditionally pursued by Republican administrations. The theory championed by each party also tended to align with with the views of each party's base. While the makeup of each party's base has been changing in recent years, the Democrat's base was and lower income individuals while the Republican base was middle and upper income individuals.

When finally passed the Kennedy tax cut resulted in both a Keynesian demand side tax cut which reduced rates in the lower brackets as well as a supply side cut in the the top marginal tax rates

Democratic Tax Cuts - Keynesian Theory

The theory favored by the Democrats is the Keynesian theory put forward by the British economist John Maynard Keynes in the 1930s and 1940s.

Keynes' theory sought to manage an economy so as to keep it on an even keel by avoiding fluctuations in the business cycle - both the booms with their rising prices and busts (recessions / depressions) with their unemployment.

Keynesian Tax Cuts

Keynes' prescription for downturns in the economy was to stimulate demand by increasing government spending and/or cutting taxes.

The idea was to get money into the hands of consumers so that they would resume buying, which would cause business inventories to decline and this, in turn, would cause businesses to replenish the inventories by re-hiring laid off workers and putting idle factories and machinery back into production.

As workers were re-hired, they would begin spending their new paychecks which would further stimulate demand until the economy was back to full employment and full production. Of course, at this point, the government would have to pull back by reducing spending and/or increasing taxes, least demand outpace production and lead to serious inflation.

Why Keynesian Theory Opposes Cuts To Upper Income Brackets

Since the objective of Keynesian tax cuts during a recession was to put money into the economy and encourage people to spend money, deficits were encouraged. To provide the stimulation needed to get the economy going, Keynes insisted that the government increase, or at leas maintain, current spending levels.

Offsetting tax cuts with corresponding cuts in government spending, would, again according to John Maynard Keynes' theory, be self defeating in that the object was to encourage spending by consumers. Further, to be effective, Keynesian tax cuts had to be directed toward the lower income brackets since these brackets contained the people with the lower incomes.

The lower a household's income, the more of that income the household has to spend in order to survive. Wealthy people, on the other hand, can afford to save large portions of their income because their incomes are more than enough to meet life's needs.

While saving and investing are necessary to expand the economy by increasing an economy's productive capacity the problem, as Keynesians see it, during a recession is not a lack of new productive capacity, instead the problem is the number factories and other productive resources which are sitting idle due to a lack of demand for goods and services. This lack of demand is due to the fact that a large portion of the population is unemployed and lacks the money to purchase more than that needed to provide basic food, clothing and shelter.

Keynes Favored Tax Cuts And Government Deficits To Fight Economic Downturns

According to Keynes, saving was not desirable because, to be effective, savings have to be invested, but why encourage investment in building more factories and equipment when a large portion of the existing stock was already idle?

During economic downturns (recessions or depressions) the government, according to Keynesian theory, was supposed to run a deficit. However, once the economy pulled out of the downturn, the theory called for the government to cut back on spending and/or raise taxes. This was to pull money out of the economy so as to keep demand from increasing to the point where it exceeded productive capacity and inflation resulted. The government, according to the theory, was now supposed to run a budget surplus.

When President Kennedy called for cutting taxes during the 1960 election it was promoted as a Keynesian style tax cut. The Republicans immediately went into opposition for two reasons. First, the proposal was inflationary (which is exactly what Keynes prescribed for pulling an economy out of a recession) and, second, it would generate a deficit thereby threatening to add to the national debt.

A Note On Progressive Income Taxes

When talking about income tax cuts it is important to understand that most modern income taxes are progressive rather simple flat taxes. With a flat income tax everyone, rich and poor, pay the same percentage rate on their income (while a flat tax rate is the same for all taxpayers, higher income payers pay more since 10% of a million dollars is more than 10% of a thousand dollars).. With a progressive tax system income is divided into brackets with each bracket being taxed at a different rate that rises with each bracket.

In a progressive income tax system there is a bottom bracket with a rate ranging from zero to some relatively low rate. Income in the next and higher subsequent brackets is taxed at increasing rates. Everyone pays the same rate in each bracket however, those with higher incomes end up paying higher rates on each successive bracket.

For example, the first bracket can consist of income from zero to say $5,000 with a rate of 0%. Everyone, from a college student working part-time with a taxable income of $4,500 to a billionaire, pays zero on income in that first bracket. Starting with the next and subsequent brackets everyone pays the same percentage for that tax bracket. While wealthy people pay the same as everyone else in the lower brackets, they get stuck with ever increasing rates on income in brackets above those that are above those into which lower income earners fall. At one time the highest U.S. Federal Income Tax rate was 92% in 1952 and 1953 (source: Historical Highest Marginal Income Tax Rates 1913-2020 data from datapolicycenter.org as of December 2020). According to Wikipedia during World War II the top income tax bracket in Great Britain reached 99.25%.

High Marginal Tax Rates Can Drive People To Reduce Work Hours Or Leave Workforce Entirely

According to Supply Side economic theory the problem with high marginal tax rates is that they provide an incentive for people to stop working and earning money at a point before the tax rate exceeds a certain rate. Thus, if a doctor discovers at the end of June that any additional income earned in the year will be taxed at 92% (i.e., out of each dollar earned the rest of the year 92 cents will go to the government leaving the doctor with the remaining 8 cents to her).

Even in much lower brackets a working class couple with children and one spouse earning considerably more than the other will often find that out of their combined income their taxes plus work related expenses like child care, commuting costs, etc. equal or exceed the income of the lower income spouse. In this case the couple is better off if the lower income spouse leaves the workforce to manage the home and children.

In addition to a number of studies proving this I remember my younger brother and his wife doing this at one point. His wife had a college degree and higher income than him so he quit his job to stay home where he took care of the children and did the cooking and cleaning while working on finishing college in his spare time. In these cases the government lost tax revenue and economy lost the productive labor of the workers who dropped out of the workforce.

Republican Tax Cuts - Supply Side Theory

By the time Ronald Reagan was elected in 1980 the country was suffering from stagflation - a combination of high unemployment and high inflation. Keynesian theory was falling from favor in general and, except for President Nixon's brief flirtation with it, Keynesian theory had never been popular with Republicans. The economic theory that the Reagan Administration looked to was known as Supply Side theory because of it's emphasis on getting an economy moving by focusing on increasing supply rather than demand. This was the opposite of Keynesian theory which concentrated on demand.

Instead of Keynes, the Supply Siders looked to a nineteenth century French economist named Jean-Baptiste Say (1767 - 1832) who is best known for his observation that "supply creates its own demand". In other words, "you make it and they will buy it". Just as John Maynard Keynes was popular with Democrats because he distrusted the free market and saw the government as the manager of the economy, the Conservative Republicans that President Reagan led, looked to Jean-Baptiste Say because his theories supported the idea of leaving the control of the economy in the hands of the market and keeping government intervention to a minimum.

A 14th Century Arab Scholar's Time Tested Solution For Economic Prosparity

Along with Say was another, contemporary, economist, Arthur Laffer of California. Laffer had advanced the theory that, by reducing high marginal tax rates, the government could both stimulate economic growth and increase revenue. He even produced a graph, which came to be known as the Laffer Curve, which showed that, over a certain range, reductions in tax rates would lead to increases in tax revenues.

While Laffer became famous for the Laffer Curve he was not the originator of the theory associated with the Laffer Curve and he willingly acknowledged and credited the 14th century Arab scholar Ibn Khaldun (full name Abdu r-Raḥman bin Muḥammad bin Khaldūn Al-Hadrami) who, as a political advisor to numerous Mediterranean area rulers first recorded his observations on the relationship between the wealth of a kingdom and its tax policy (see my Hub Tax Revenue Theory: From Iban Khaldun to Arthur Laffer)

Bust of 14th Century Arab Scholar Ibn Khaldun
Bust of Ibn Khaldun ommissioned by The Tunisian Community Center and Created by Patrick Morelli of A

Laffer Curve Famously Illustrates Relationship Between Taxes And Economic Stimulus

Laffer's famous curve provides an easy to understand the concept of how increasing marginal tax rates beyond a certain point yield less rather than more tax revenue. The curve clearly shows government revenue increasing as tax bracket rates increase up to a certain point after which revenue falls as further increases in rates result in people cutting back on work hours as well as reducing investment.

Laffer's graphic illustration of Ibn Khaldun's theory solved two problems for President Reagan and his Young Turk supporters in Congress (notably Jack Kemp and David Stockman) who were looking for ways to reinvigorate the conservative wing of the party. First, it promised a way to get the economy growing and out of the stagflation that was choking it and, second, it was a way to overcome the old line conservative (the Robert Taft wing of the party) insistence on cutting spending first and then cutting taxes. Inflation was this group's fear and they were opposed to any tax cut that threatened to be inflationary.

With the Democrats in control of both houses of Congress, there was no way President Reagan and his team were going to obtain the spending cuts necessary to put through a tax cut. Laffer theory provided a way that would reassure the old time fiscal conservatives, without having to get spending cuts through a Democratic controlled Congress.

Arthur Laffer, father of the Laffer Curve and Influential American Economist receiving Presidential Medal of Freedom from President Donald Trump at White House on June 19, 2019.
Public Domain-Official White House Photo by Joyce N. Boghosian from WikiPedia

What The Future Holds

The idea behind Supply Side tax cuts is that high marginal tax rates discourage both work and investment. As stated in my previous tax cut articles, beyond a certain point, people have earned enough income to satisfy their basic needs for food clothing and shelter and, if most of any additional income earned, from either more work or investment, is taxed away, people have little incentive to continue working or investing.

By lowering marginal tax rates, people have the incentive to earn more by working and investing and, when they do this, the extra income they produce is significantly high so that, even at lower tax rates, the total tax collected is greater than before the tax cut when the rates were higher but, additional government income lower. This is how tax cuts result in greater tax revenue.

Now, it must be understood that true Supply Side tax cuts only work with cuts in higher tax brackets. These would be households with wealthy individuals or upper middle class households where both husband and wife work. Cutting lower brackets to help lower income people, simply reduces the amount of taxes collected. The reason is that people in the lower income brackets have low incomes and are probably working as much as they can to support their families. Obviously the increased take home pay helps them, but, if both husband and wife are already working one or more jobs each, they can't physically work more and, if their total income has not reached the high marginal bracket levels then the cut provides no incentive to try to work more. This is the opposite of the Keynesian tax where we want to put money into the hands of lower income people because we know they will spend it.

Tax Cuts Are A Combination Of Economics And Politics

For analytical purposes, one of the problems with the Kennedy-Johnson, Reagan and Bush tax cuts is that all three contained elements of both Keynesian and Supply Side tax cuts. None of the three were a pure Keynesian or a pure Supply Side tax cut. All three tax cuts had to go through the political process and politics is the art of compromise.

While compromise is needed to get the tax cut legislation passed by Congress, the compromise also means that the results will not be as robust as the theory predicts. This in turn results in the end result of the tax cut being less than promised there by giving critics of the theory ammunition to discredit the theory. There are critics on the left who prefer to regulate people's lives by taxing away a large portion of people's incomes and then using the tax dollars to provide the goods and services those in power believe people should have rather than allowing individuals decide themselves what they want to purchase.

In the case of the Kennedy-Johnson tax cut, Democrats controlled both houses of Congress. However, many of the Democrats were from Southern states at that time were fiscal conservatives and tended to vote with the Republicans on fiscal matters. As a result, the Kennedy-Johnson tax cut was an across the board tax cut that reduced rates in both the upper and lower brackets. The cut in the top bracket was major - the tax rate in the top bracket was cut from 91% to 70%, a 21% reduction. This tax cut did supply both a demand side stimulus that was credited with pulling the economy out of recession as well as a supply side stimulus that resulted in economic growth. Unfortunately, the expected Keynesian deficits ballooned as a result of President Johnson's decision to both expand the war in Vietnam as well as launch his very expensive War on Poverty. The resulting spending binge led to almost two decades of double digit inflation that resulted in rising prices and interest rates (the interest rate on my first home's mortgage was a little over 23% compared to the 4.25% I pay on my current home mortgage).

In the case of Presidents Reagan and Bush, in order to generate the political support they needed from both Congress and the public, they had to make cuts in all brackets. While the thrust was supply side, there were elements of Keynesian demand side cuts in lower brackets as well. In fact, in the case of President Bush's cut, he used Keynesian demand side arguments as well as supply side arguments in his selling of the idea to the American people. Deficits did appear, as anticipated, under the Reagan tax cut as a result of Congress continuing to increase spending despite the initial reduction in tax revenue as there is a lag between the tax cut and the increase in revenues. However, the rising deficits did end up pressuring Congress to reign in some of their spending. Suddenly it was Democrats who were concerned about rising deficits but this could be due to both the public's concern about inflation, having recently experienced double digit inflation in the 1970s as well as frustration over having to cut back on new spending programs due to the inability to raise taxes to pay for them.

As to the future, we can probably expect Republicans to continue to be the party of tax cuts because these are in line with both their political and economic agendas. While Democrats will probably stay away from tax cuts as a policy tool in the near term and rely on increased spending as the tool of choice for combating downturns in the economy.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

Comments

The Republican from USA on July 08, 2012:

Very interesting. I enjoyed reading this. I would be most happy if you read some of my writings.

susan on December 30, 2011:

Flat tax of 10%, then the poor man / woman who makes only $20,000 will only pay $2,000 and the rich man making $2,000,000 will pay 200,000. Wouldn't that make the rich man pay enough? Wouldn't the poor man be glad he didn't have to pay that much? Maybe the rich should pay $200 for a loaf of bread instead of $2 like the rest of us???? Idiots are always wanting someone else to pay their way.

Chuck Nugent (author) from Tucson, Arizona on September 27, 2011:

Mike Duffield - Despite your rant against tax cuts, most of your examples show that tax cuts work. The British reduction in tariffs and the Boston Tea Party example support the idea that reducing high taxes will result in less tax evasion and more revenue for the government.

You are also correct that Arthur Laffer was not the first (and I am certain that neither Laffer nor his supporters ever claimed he was) to show how reducing high marginal tax rates will increase tax revenues.

The policy makers behind the Kennedy tax cut in the 1960s, the Harding-Coolidge tax cut in the 1920s both knew this. The sixteenth century economists at the University of Salamanca in Spain advised rulers to reduce the tax burden on their subjects if they wanted their lands to prosper and increase revenues to the government. There were also earlier Arab scholars who gave the same advice so this is not a new theory.

You are correct in stating that "higher" marginal tax rates are not a disincentive to work. However, the supply side theory states that "HIGH" marginal tax rates are a disincentive, and this is not necessarily the same as a "higher" as a 2% increase on a 10% marginal tax rate results in a "higher" tax rate but a top rate of 10% or 12% is not a discouragingly HIGH tax rate. However, when you are talking about a 90% marginal tax rate which is what was in effect when Congress implemented the tax cut proposed by President Kennedy that 90% rate did both discourage extra work/production and encouraged economically wasteful tax shelters.

Mike Duffield on September 27, 2011:

First, it must be stated that supply-side economics was only floated to make the position of the proponents of starve the beast philosophy palatable to the American people. Starve the beast is a program to reduce the scale and scope of the federal government by reducing revenues via tax cuts, which causes massive deficits. The increasing debt would eventually reach a crisis level forcing a reduction in the size of the federal government. Proponents believe that only a crisis will accomplish their goal of shrinking government. Supply-siders claimed that government revenue would increase do to the tax cuts and would eliminate the deficit. In other words, the supply-siders argued that because the tax cuts would be revenue neutral there is no need to cut spending.

Laffer didn't discover anything new when he developed the Laffer curve. In the 1680s, the English crown cut the rates on tariffs and duties and found that revenues increased. However, there is no evidence that trade increased. The evidence points to less smuggling. So, the tax cuts reduced the incentive to evade the taxes. Another instance of this is the real trigger of the Boston Tea Party. The British had a three cent tax on tea and banned the import of tea from the Dutch colonies. However, Dutch tea could be purchased, smuggled and sold at one cent below the cost of the taxed British tea. The British cut the tax from 3 cents to one cent, which made it cheaper than smuggled Dutch tea. This triggered the dumping of the British tea into Boston Harbor. So, lower tax rates reduce the reward to evade taxation relative to the risk and thus revenue increased.

The idea that people work less if they are paying higher marginal tax rates violates a primary assumption in economics. It is a necessary assumption in economics that more is preferred to less. The argument that I will choose not to make another million because I cannot keep the lions share of it violates this assumption. The only valid reason that I would not work is if my compensation doesn't exceed what I value my leisure time at. In fact lower marginal tax rates are just as likely to reduce effort because the tax is lowered on the high income that I already receive, meaning that I can expend less effort and live just as comfortably. Of course, the reality is that the wealthy expend the same effort and the pocket the increase.

Greg on August 01, 2011:

Keynes "said it" 80 years ago?? Where? I can't find any passage in The General Theory where Keynes said "that tax cuts lead to deficits." Are taxes at 60 year lows? Merely looking at official, posted tax rates is little help, since one must first take into account the bewildering variety of deductions. Are payroll taxes really at any kind of low, 60 year or otherwise?

The overall job rate is determined by many things, including luck. The effect of low tax rates is "at the margin,' as economists use that phrase. Low tax rates operate, as most social forces do, only ceteris paribus. There is no way to say "supply side has failed", never mind "clearly."

Jason on June 08, 2011:

It's quite a shame to see us make the same mistakes year after year. One thing that never changes is that tax cuts lead to deficits. It was true when Keynes said it 80 years ago, but where are the jobs? Taxes are at 60 year lows shouldn't we be swimming in jobs. Clearly supply side has failed. Demand is the king of job creation. How much more historical evidence do we need? Our anemic recovery is caused by lack of demand, until we create more pay checks through government spending (because the rich aren't creating jobs with their extra $) we will continue with a weak recovery.

Roedy Green on November 12, 2010:

President Obama has announced he is caving into the Republicans on the issue of tax cuts for the rich, even though it will increase the deficit by $700 billion every year into the future and speed the day when America goes bankrupt, which some might argue is a Good Thing™.

Tax cuts are like borrowing money to buy a big pie for a picnic. Then you cut it up in varying size pieces and hand them out to the guests. Both Democrats and Republicans agree that the richer/fatter you are, the bigger slice of pie you need/deserve. The difference is the Republicans think the super rich need really really big pieces, where the Democrat think they deserve only really big pieces. It may not be immediately obvious, but this is a wealth transfer scheme from the poor to the rich, supposedly an anathema to Republicans. However, Republicans only oppose government-aided wealth transfer from rich to poor, not the reverse.

See the comparison chart of two plans at http://politicaltruths.info/

BDB on September 28, 2009:

oops. I am saddened when I hear such Darwinian responses to wealth. Its mine, I worked(even though often at the expense of lower workers), I want more...gggrrrr..stay away frm MINE. I understand and can agree with the basic tenets of Capitalism, but every thing can go to far. Power corrupts, absolute power corrupts absolutely....the need for money corrupts, the LUST for money corrupts absolutely! My faith says bare one anothers burden which one blogger said they agree with...the but the implication is "ass long as it do0esnt cause me discomfort! Im all for a socialism in which all were equal and all worked their beswt for the benefit of the community as opposed to ones own sef interst. But alas, as many have shown here..unless "I" can get more for being smarter or stronger then why work for the greater good? Darwinian at its finest (this is also why this is NOT a Christian nation and never will be--read the NT, Acts 4$5--CLEARLY socialist/communist). beyond this hopr for our better natures, one thing "supply-siders" and their like is failing to address is looking LONG TERM(50-300 YEAR). Disparities of not only income, but "assets" is increasing exponentially. Not even the robber barren era compares. What histiry has shown is when the fewer have more and more, they tend to become apathetic to those with less. what happens when we put the idol of capitalism on an unrestrained course(Bill Gates and Warren Buffet GET this and have said so) of greed is good at all costs. I'll answer with a feww examples historically of wealth inequality. venezuala (Chavez elected on prommise the MAJORITY poor will share in the wealth TOO)--Contra-Sandinista conflict of the 80's (oligarch of very few families controling 90% of resources)--Cabans revelution opposed to batistas "upper class"--Bolshevics overturning the apathic and oligarcical Czars(gave us "godless" communism---french revolution (citizens overthrow of the greedy nobels....I could go on quite a ways. 50 years is my guess before we fall apart under unrestrainedand INEQUITABLE capitalism. I could be wrong...but history is a pretty stable indicator. So you guys get what you can and offer your crumbs to the poorest to alieve your ocnscience. If you only believe in this life you are probably right to resort to Darwism...Id hate to hear your defense if there is a creator. Viva la Capitalism...

BDB on September 28, 2009:

I find this quite interesting

Ralph Deeds from Birmingham, Michigan on September 07, 2009:

Here's a link to an article from a "saltwater economist" which should be mandatory reading for "freshwater" economists like Chuck as well as the students in his economics classes and the others in universities across the land, especially University of Chicago!

http://www.nytimes.com/2009/09/06/magazine/06Econo...

Randy on July 06, 2009:

If all the Supply side economics of the bush era was supposed to generate JOBS. Where are they? I worked at a private company for the last 13 years and saw the owners getting all the supply side breaks. And the theory says they will be inspired to spend and invest more right? They did !!! Only problem is they spent more investing and building their business over in India while laying off people like me here in the states! That my friends does not help anyone. The inherent problem with the supply theory is that people are by nature GREEDY. And Greed needs to be controlled by the big R word that all the supply siders hate to hear... REGULATIONS....Btw, I am well educated, motivated to work, BUT NO JOBS !!!

proh on February 25, 2009:

this is a great hub!

but i fear that all this healthy debating is no use...the US is a country that has been evolving into a more socialist society, and i don't think the trend is going to slow down anytime soon. Its hard to find a true republican in washington today. they have compromised themselves because its hard to get their views across in a country that is becoming more liberal.

http://www.washingtonpost.com/wp-dyn/articles/A842...

an article to show you the ratio of conservative professors to liberal professors. many college students are accepting a more liberal state of mind and its not a suprirse. students are taught with a biased point of view by institutions that are supposed to promote diversity (not just race, gender, and religion)

liberals are quick to point out the rise in inequality and rise in poverty, but never discuss what might be the REAL cause.

a free market economy at its purist state is enough to sustain an economy and more. different choices and preferences among people are what cause inequality to burgeon...capitalism is far from blame. the amount of work you do, if you decide to go to college, what major you choose, having unprotected sex leading to teenage mothers, how much to study, and etc. the list goes on. one can't blame the govt. for inequality.

its no secret that higher educated people make more money. that's where inequality saw a sharp increase. technology boom caused a demand for higher skilled/higher educated workers, which in turn drove their wages up. at the same time, these technological advances replaced many jobs that were done manually. not saying that the unskilled workers are doomed forever....they have the opportunity to go to school and "make of oneself what one can". even Obama emphasizes the fact that higher education "is no longer just a pathway to opportunity. its a prerequisite."

Of course one can argue that immigration and global outsourcing has decreased domestic jobs and wages and although true, they are nominal. forever evolving technology that demands high skilled/high educated workers and provide high premiums is the main cause of inequality. its no coincidence that a higher percentage of lower/middle class students are continuing on to college. they understand the market. (personal choices!)

In survey done in 2005, nonworking poor adults were asked the reason they weren't working. only 6.2% said they couldn't find work! again we see here that personal choice is a major factor.

inequality did increase but that doesn't mean the lower quintile suffered. compared to 1970, the lower quintile's average real income (adjusted for inflation) is 11% higher. meaning everyone's standard of living got better. its just that the rich got richer, and the poor got richer but at a slower rate.

so why all this talk about redistributing wealth? to fight poverty?

from 1950 to 1970 poverty rates declined from an estimated 30% to 12.6%. this was solely due to economic growth and not because of welfare. in 1960, both european economies and the US had similar percentages of their GDP devoted to welfare (27%). In 1980, the US increased their welfare program to roughly 31% of their GDP, but European economies doubled their welfare program (i.e. belgium 60.1%, Sweden 57.8% of their respective GDPs).

Yet these countries are still considered wealthy countries, so egalitarians have been pushing for a more socialists govt in the US. Yes these countries are still well off, but when compared to the US, they don't fare too well. In 1980, per capita income in France was 84.9% of that in the US; by 2004 it dropped to 74.3%. Italy went from 78.7% to 69.4%, Germany from 87.9% to 71.9%, and Sweden from 84.5% to 76.4%.

When asked how satisfied they are with their lives, 58% of Americans said they were satisfied. Only 18% of the French, 21% of the Germans and 16% of the Italians said they were satisfied.

Redistributing wealth causes the size of the economic pie to shrink. Even though a country is able to maintain its wealth, everyone suffers. The low income sector of the US is far better off than the low income sector of the european countries. I guess you can say that in the US, the poor do get a smaller piece but from a BIGGER PIE.

I'm not an economists and not overly knowledgeable in the subject, but I know that redistribution of wealth is not healthy for an economy. I got these stats from a book called "Stealing from Each Other" by Edgar K. Browning.

AH on January 25, 2009:

The basic premise of Communism is that all should work to their ability and be paid to their need, contributing their work to the good of the whole. This creates a system of need: everybody needs, but no one wants to work. Why do people work? So they can experience all the joys of success, including buying stuff, traveling, eating delicious food, and sharing the wealth with those less fortunate, if they choose.

If it comes to taking away 90% of my pay after $70,000, why should I work to make any more than $69,999? Why would I want to be promoted? For my own personal gratification? Because I'm generous and care for my fellow man? I could quit, get paid by the government, and do whatever I want: buy stuff, travel, eat delicious food. I just have to convince the government that I need it. Which shouldn't be too hard if I don't have a job.

Without eternally selfless and generous people, the system doesn't work. If you want what your neighbor has, you shouldn't have to just prove that you need it. You should work for it. You shouldn't look at the guy down the street who can afford a BMW instead of a Toyota and seek to limit his ability to drive a nice car, just because you can't. Demonizing the wealthy is ridiculous. They got that way for a reason. Learn from them! Work for them! Preventing them from doing what they do well... no one wins. Taking away their ability to grow capital, intelligently invest their money in new ventures, and grow successful businesses is counterproductive. Giving that money instead to a government that has proved itself inefficient is counterproductive. CREATING MONEY by borrowing from our future selves doesn't solve the problem. It's not even the amount of money. It's what is done with it. Squabbling over percentages and dollars isn't going to make anyone happy. The real issue is what the government does with the money, and why they need more. Warren Buffet knows what he would do with that kind of money. He'd pump it into the most promising businesses, run by the most brilliant businessmen, and make a heck of a return on it, that the government will then tax to finance all the stuff that it does. That's the point of the Supply Side economics. If people are working, producing, and investing successfully, then the tax revenues will grow regardless of the percentages or dollars. The problem is that everyone sees it in relative terms. We have what we have, and any change from that seems so monumental.

Read Altas Shrugged. One day, the rich will stop being so selfless. They'll get tired of being called evil and getting all of their hard-won success denied them and having other people arguing about what to do with their money, as if it belonged to them and they had a right to it. That is what our country was built on. Property rights. If it's mine, it's mine, and no one--not even the government--has the right to take it.

Side Note: I want to be totally and completely clear that I fully support the intent of most government programs. I believe that no one should go without shelter, food, or clothing. I believe that everyone deserves to be cared for medically and in old age. I just disagree that the government has the capacity to do so successfully and in the best way for all. And taking all of my theoretical money that I don't make just makes me resent it--I give both time and money, and I believe everyone should to the best of their ability. Letting the government do it for me just removes me from the situation and absolves me of any responsibility (someone else will take care of it--not my problem).

Paul on January 14, 2009:

problem is that once government gets a tax in place they will rarely undo or reduce unless its gop in control.

Democrats since the 60's have always been for tax increases or unrestrained spending (up till bush's time).

reason on October 10, 2008:

CTC, that whole rant you just said made absolutely zero sense. You talk about not refuting other peoples arguments, but you fail to address any of the crucial arguments that were just made. Fortunatly, it looks like America wont have to endure any more of the same policies that Bush, Mccain, and obviously you endorse. Please in the future just keep your comments to yourself.

CTC on October 08, 2008:

Mr. Deeds:

I loved your response regarding kameron's brilliant example of liberal economics, which you so lovingly espouse. You could not logically refute this "Vivid example of truth and certitude" about the system you embrace, so you attacked the source and gave absolutely "0" reasonable response. Your response is the classical liberal response, when they are confronted with truth and that is "Denial". Sadly, the same kind of denial has infected our political system and is currently and continuously deny facts and destort history, they ultimately contribute to the ongoing demise of a society, who has given them the liberty to dissagree. When people fail to take responsibility for their behaviour, actions and unsubstantiated theories of life, they have and will always consider the truth as a threat to their existence and will result to every form of denial, accusation and refutation of facts. After all, it's allot harder on the ego to acknowledge truth and change than to accept falsehood and live in denial. CTC

CTC on October 08, 2008:

Sorry...Forgot to do a spell check (Should be serving at the end)

CTC on October 08, 2008:

Mr Deeds:

Your inundation of of subjective or carefully chosen data affirms Chuck's Keynesian economic theory, The irony is that this theory is primarily embraced by liberal government representatives, welfare recipients, undocumented illegal aliens, union workers, media and very much supported by educators (Professors, teachers and others paid on the basis of tenure rather than a system to evaluate the quality of their teaching). Redistribution of wealth, a concept that you and Mr. Biden may call charity and humanitarian virtue, destroys the very incentive that makes America different than any country on earth. The views espoused by you and our liberal representatives is the very reason why small business owners (The backbone of America) have been going out of business and will do so at an accelerated rate now and in the ongoing future. It is the reason why brilliant doctors, scientists, inventors and entreprenauers have immigrated to this country with the enthusiasm, understanding and vision that they will no longer receive the same salaries as those who have been less motivated to fill the cup of opportunity that God has generously bestowed upon them. If you claim that you will tax only those, who make 250k or more per year, you are guilty through either omission or ignorance on the inevitable outcome of this proposition. A proposition which will inevitably lead to employee lay offs and terminations, reduction of wages, removal of the very premise of free market "Supply and demand", because business will not be able to supply and the majority of citizens will have to dramatically change what they consider demand, even to the point of providing an basic living for their family. It's tragic that people who work in institutions most their lives often fail to understand the reality of the kind of liberty that are ancestors fought for in this country. I call it intellectual apathy....Mr Deeds I would suggest you read some of the literature from Alexander Soltynetsin (Nobel prize winner) or other brillian individuals who escaped communist societies. When you conviently destroy the incentive for the creativity and hard work through wealth distribution, you foster the continuing evolution towards socialism and even communism? Right wing extremist?? Don't ask me ..Just talk to any LEGAL IMMIGRANT, who has escaped the opression of communist dictatorship and why they are echoing the words of a great president of the past.."There you (Us Government) go again! When we fail to understand the words of George Santana: "Those who fail to remember the past are condemned to relive it" , we inevitably and naively move in the direction of the oppressive Governments of past countries. Countries, whose citizens have desperately fled to the USA to make phenomenal contributions as unique and celebrated Americans.....Yes, real successful americans, who understand suffering and can appreciate liberty and and beauty of the Economic theory of Jean Baptiste; an economic theory commensurate with the vision of the great men who wrote the constitution and the declaration of independance, which have established the criteria for freedom and growth in this country. Who am I to state these views? Upper middle class, rich, Republican, libertarian, democrat??

No, I am a simply an unemployed college graduate, who has spent several years severing his country through the military and living in a post communist country for 7 years...CTC

Ralph Deeds from Birmingham, Michigan on August 13, 2008:

Republican tax cuts--Most U.S. Corporations pay no federal income taxes:

http://dealbook.blogs.nytimes.com/2008/08/13/study...

Ralph Deeds from Birmingham, Michigan on August 10, 2008:

Some words of wisdom on taxes from Republican economist/entertainer Ben Stein:

A Familiar Tax Tune But its Not Mine

A few days ago I saw Senator John McCain on television saying something I had heard a few times before. Basically, he said that if you want to have your taxes raised, don't vote for him.

Let me start by saying that I am a huge fan of Senator McCain...and I do not want my taxes raised...I would like to pay no tax at all...

But the unhappy fact is that it's necessary to raise my taxes and the taxes of all upper-income Americans...

The sad truth of the last two two-term Republican presidents is that their economic premise, the key part of their economic game plan, simply has not done what it's supposed to do.

That is, cutting taxes, especially on upper-income Americans, does not generate so much economic activity that it replaces all the lost I.. S. take and then some. At least those have been the results so far. When Reagan lowered taxes, personal income tax

revenue stagnated from 1982 to 1984. Now, you may say that revenue rose sharply after than. So maybe that was a mixed result.

But when President Bush drastically cut taxes after he was first elected, the IRS take from individual income taxes fell and did not recover its 2001 level until 2006. A conservative purist might rejoin here that it would be fine if income tax receipts fell, because we would then have a smaller government and a freer society.

That would be nice, but far from true Instead, government just keeps growing. Government spending grew dramatically under President Reagan, very nearly doubling, and leaving us with a federal deficit vastly bigger than the one he inherited. I know that a large chunk of that increase was to rebuild the military. I heartily approved of it.

But if you want to have a military buildup--and we need one now, desperately--that's usually a reason to raise taxes, not cut them.

Under the current president, we have had the same story. As income tax receipts fell, military and other spending rose rapidly. Again, this spending was justified as far as I'm concerned. But we have been left with immense deficits and a doubled national debt as President Bush enters his final months in office.

Mr. McCain wants to extend many of President Bush's income tax cuts and to reduce taxes on corporations. But the facts of life are that we have a large budget deficit, even though some other nations have even larger deficits as percentages of gross domestic product. We have to pay interest on it. As a people and as a nation, we owe this money in large part to foreigners...The facts of life are that federal spending is almost all untouchable: the military, Social Security, Medicare,interest on the debt, pensions. The discretionary part is tiny.

Every category of federal spending is likely to grow. This means that if we don't raise taxes, if we keep doing what we're doing, the immense deficits and debt will not go away--and will probably grow.

The question is simply this: do we want to step up to the plate like responsible people--I hate to say this, but the last responsible people who actually did this were named Bill and Bob (Clinton and Rubin)--and shoulder our responsibilities? Or do we just kick the can down the road and leave the mess for our children and their children...Do we pay it or make our children pay it? Dwight Eisenhower--and Bill Clinton--knew the answer: You behave responsibly and balance the budget except in rare circumstances.

Somehow, Republicans (and I am a Republican) have forgotten this basic lesson of adulthood. Maybe Senator McCain is grown up enough to remind us of the real urgency of personal and national responsibility. Or maybe not. ????

The New York Times 8-10-08

Free Car Quotes on July 19, 2008:

Great Hub you have here :) please read my new hub about getting free online car quotes...

Chuck Nugent (author) from Tucson, Arizona on June 24, 2008:

Ralph, I realize that there was nothing in the article that stated or implied that this was illegal. However, the entire tone of the article was negative in the sense that it implied that these companies were getting away with not paying their fair share of taxes even though this money had been earned abroad and taxed by the governments in the host countries.

However, having just located a January 29, 2008 New York Times article (http://www.nytimes.com/2008/01/29/washington/29ear... on wasteful Congressional earmarks, I must admit that the $18,000,000,000 (eighteen BILLION dollars) raised by the government as a result of this one time tax break is a paltry sum given that, according to the New Youk Times, "... earmarks, which now total more than 10,000 items and nearly $20 billion annually" are $2,000,000,000 more than the taxes brought in by this one time tax cut. According to the Times this $20 billion in wasteful earmarks represents 1% of the Federal Budget.

Given that one could probably paper over a good portion of the lower 48 states with 18 billion one dollar bills, plus the fact that even the far left leaning New York Times considers this portion of government spending to be wasted money, it is time for the political debate to shift from tax cuts to major cuts in spending.

Four simple reforms could propel us in that direction:

1 Make it illegal for Congress to attach riders having no relavence to bill being debated and require that each spending bill be for one line item in the budget only. No more hiding spending bills inside other legislation or consolidating thousands of spending projects into a single ten thousand plus page omnibus bill that even members of Congress don't know what they are voting on until they read about it in the Washington Post or Wall Street Journal a few weeks after passage.

2. Require that any bill that involves government spending be voted upon, both in committee and on the final floor vote, with a roll call vote with each member of Congress announcing their vote front of a TV camera. This will make our Senators and Representatives more accountable to the voters.

3 Abolish tax withholding and instead require that each taxpayer pay their full taxes due with cash, check or credit card on April 15th. This way people will physically part with their money in one lump sum and realize just what it costs to elect big spending politicians.

4 Move election day from the first Tuesday in November to April 15th. This should bring out the voters in droves and force politicians to be as careful with the people's money as with their own funds. We can further simplify paying taxes and encouraging voter turnout by having a drop box for cash and check tax payments and point of sale credit card machines for paying by credit card.

Our forefathers went to war when King George III levied a three cent per pound on tea. Now, a little over two centuries later, our elected representatives consider it their right to simply waste $20 BILLION per year.

Ralph Deeds from Birmingham, Michigan on June 24, 2008:

Nobody said the profits or their repatriation were illegal. The issue is whether the tax break was in the public interest at a time of huge Bush deficits.

Chuck Nugent (author) from Tucson, Arizona on June 24, 2008:

Ralph, Thanks for the comment and article.

However, by not offering the tax break the amount of this money collected by the IRS would have been zero (which proves the point that tax cuts generate tax revenues). Further, a chunk of the money was invested in business expansion which created new jobs by these companies directly.

The portion of this money that went to legal fees, advertising and marketing was either for these services which would have been purchased anyway but by using this money from abroad the company was able to use the funds it would have paid for these services for other things (like new investment). To the extent that the legal, advertising and marketing services were only purchased because of the availability of this money from abroad, this was in effect new demand for these services which led to the creation of jobs (from janitors to executives) in these industries.

The same is true of the portion of the funds which were used to buy back stock or increase dividends to share holders. Both of these meant more money in the hands of the individual stockholders which they could spend (thereby driving up demand for consumer goods & services and creating jobs which is the standard Keynesian prescription for stimulating the economy and increasing jobs - except that the funds used are from the private sector rather than the government) or used to invest in new businesses which are currently the greatest creators of new jobs in the econmy today.

The problem with this type of liberal thinking is that the preference seems to be for others to be brought down economically rather than everyone moving up, alibet not equally. A perfect example of this occurred in pre Thatcher England when, according to one of my economic professors at the time, a poll showed that a majority of people in Britain preferred no increase in their real income rather than an increase that was less than that of their neighbor (i.e., they would rather both their neighbor and themselves each have no car, or each starve, than for them to get one car, or three square meals a day, while their neighbor got two cars, or three gourmet meals per day). My professor also pointed out that the big debate going on in economic circles at the same time was whether or not it was possible for a nation to move backwards from being an industrialized first world nation to a pre-industrial third world nation. Britain was close to third world living standards at that time. Fortunately, Margaret Thatcher won the next election and restored prosparity to the nation. As I mentioned in my Hub entitled "Anarchy Reconsidered" https://hubpages.com/politics/Anarchy_Reconsidered , Hong Kong under the governorship of Sir John Cowperthwaite in the 1950s and 1960s, when it was still a British colony, was more prosperous and had a larger GDP (Gross Domestic Product) than that of the mother country, Great Britain, which was suffering under the socialist thinking described above.

Finally, it should be noted that there was nothing illegal or unethical about the profits discussed in your article. They were earned as a result of legal operations abroad and legally (under both U.S. and the local foreign laws) retained abroad. It was the high taxes in the U.S. which had kept the funds from being brought back to the U.S. The real culpert here is not the tax break but liberals and their class warfare mentality that prefers to punish success rather than see the nation as a whole prosper.

Ralph Deeds from Birmingham, Michigan on June 24, 2008:

Here's a typical GOP tax cut:

A One-Time Tax Break Saved 843 U.S. Corporations $265 Billion .nytimes.com/2008/06/24/business/24tax.html By LYNNLEY BROWNING Published: June 24, 2008 More than 840 of the largest American corporations reaped a $265 billion windfall thanks to a one-time tax break aimed at bringing home profits stashed overseas, according to recent government data.

The windfall resulted from a temporary tax deduction for big corporations, which were keeping billions of dollars in profits in overseas subsidiaries and out of the hands of the Internal Revenue Service.

The total amount brought back to the United States was far above some estimates, according to the data, which provides new details on the tax break.

American companies can typically defer paying taxes on foreign profits as long as they keep that money outside the United States. When companies bring the money back, they usually pay the top corporate tax rate of 35 percent.

In recent years, the biggest and wealthiest companies in the United States have increasingly set up foreign subsidiaries and used them either as foreign operations or offshore repositories.

The subsidiaries, many in offshore tax havens like the Netherlands, Ireland and the Cayman Islands, collectively held about $804 billion in foreign profits on which their American corporate parents had yet to pay any United States taxes, according to the I.R.S.

A one-time tax holiday enacted by Congress in 2004 offered companies the chance to bring that money back at a reduced tax rate of 5.25 percent.

Some of the biggest names in corporate America decided to take advantage, in particular those in the pharmaceutical and technology industries. Pfizer brought back $37 billion, while Hewlett-Packard repatriated $14.5 billion.

In all, 843 corporations took advantage of the offer, according to recent I.R.S. statistics of income data, bringing back $362 billion in foreign profits, paid to the parent corporations as dividends. Of that amount, $312 billion qualified for the tax break, giving those companies total tax deductions of $265 billion claimed from 2004 through 2006.

Put another way, the tax break gave each company claiming it an average $370 million in tax deductions.

Supporters of the tax break say it was a success because it brought about $18 billion into Treasury coffers that otherwise would have stayed overseas. The nonpartisan Joint Committee on Taxation, a Congressional agency, had estimated that the tax break would bring in only $2.8 billion, a sixth the actual amount.

“The provision was generally successful in prompting the repatriation of vast sums of foreign profits,” wrote Joseph Calianno, a tax partner at Grant Thornton, in a recent analysis of the data.

But the tax break would not produce income for the I.R.S. in later years in part because of associated foreign tax credit provisions set to kick in later, and in part because of the need to replenish capital in foreign subsidiaries.

Edward D. Kleinbard, chief of staff of the committee and a tax authority, said that the government had privately estimated that companies would bring back only $200 billion, or a third less than the $312 billion that qualified.

Private-sector estimates from Wall Street investment banks, including Bank of America and JPMorgan Chase, were closer to the mark.

The tax break was included in a larger piece of legislation called the American Jobs Creation Act of 2004, with the intention that the repatriated money would prompt investment in the United States economy and spur job growth. Companies had to promise to use the money to invest in their domestic operations. They could not use it to pay dividends, or compensate executives.

But the provision had wide definitions of the term investment and allowed corporations to use repatriated profits to shore up their domestic finances, pay legal bills and even bankroll advertising.

Critics of the legislation say there is little convincing evidence that companies put the money into creating jobs or investing in United States operations and deride the tax break as corporate welfare.

“It basically worked out to be one big giveaway,” said Robert Willens, a tax and accounting authority in New York. “The law never took into account the fact that money is fungible.”

Mr. Willens said while companies did make investments in their domestic operations, the repatriated money also freed up a corresponding amount of cash to pay out to shareholders or buy back stock — moves that do not generate job growth or investments. “We know that a lot of stock was retired during this time,” he said.

A 2007 academic study by Roy Clemons, then a graduate student at Texas A&M University, that was based on earlier data, found that the tax break did not stimulate investment in the United States economy and that repatriated money was often used for disallowed purposes, like stock repurchases.

According to I.R.S. data and Grant Thornton, pharmaceutical manufacturers alone accounted for more than 30 percent of the repatriated total, with 29 corporations each claiming an average tax deduction of almost $3 billion on foreign profits brought home.

Some 9,700 United States corporations had foreign subsidiaries in 2004, the latest year for which data is available. While only 843 corporations took advantage of the tax break, those companies are the biggest and wealthiest in America, Mr. Willens said.

Martin A. Sullivan, an economist and former member of the Joint Committee on Taxation, said, “just use common sense.”

“If I’m going to give you $100 to buy lunch,” he said “but you spend $500 a year anyway on lunch, you then bring receipts showing you bought $100 in lunch — it’s a ridiculous fig leaf.”

More Articles in Opinion »

VanBergen on June 02, 2008:

Great discussion. It is hard to look a gift horse in the mouth as they say, but long term it can create more problems. You just hope that it does more good today than harm tomorrow.

6 pack abs on May 26, 2008:

Interesting subject. Great hub.

Mike Geary on May 24, 2008:

Very interesting information. Great hub!

Brian Common Sense Iowa on May 13, 2008:

Let's look at this very simply. We as the people have to make hard decisions regarding our budget. When our family demands more goods than we have income to provide, we must cut back or make more money. When the government wants more money to provide more "goods" it taxes those whom they decide will pay for it. This is the simple difference. Wake Up, this is not a complicated concept. Our politicians don't have the guts to make tough decisions about cutting expenses that they require us to make. Very simple!

Ralph Deeds from Birmingham, Michigan on April 27, 2008:

Yes, there is a big difference between Republican and Democrat tax cuts AND economics!

INEQUALITIES by Larry Bartels, NYTimes Magazine4-27-08

E-MailPrint Save Share DiggFacebookMixxYahoo! BuzzPermalinkBy LARRY M. BARTELSPublished: April 27, 2008

The past three decades have seen a momentous shift: The rich became vastly richer while working-class wages stagnated. Economists say 80 percent of net income gains since 1980 went to people in the top 1 percent of the income distribution, boosting their share of total income to levels unseen since before the Great Depression.

Skip to next paragraph Enlarge This Image Photograph by Erick Hartman/www.magnumphotos.com

Despite the historic magnitude of this shift, inequality has thus far had little traction as a political issue. Many Americans seem to accept the conservative view that escalating inequality reflects “free market” forces immune to amelioration through public policy. As Treasury Secretary Henry Paulson put it, perhaps a bit defensively, the growing income gap “is simply an economic reality, and it is neither fair nor useful to blame any political party.” Paulson’s assertion, however, is strongly contradicted by the historical record. While technology, demographic trends and globalization are clearly important, purely economic accounts ignore what may be the most important influence on changing U.S. income distribution — the contrasting policy choices of Republican and Democratic presidents.

The Census Bureau has tracked the economic fortunes of affluent, middle-class and poor American families for six decades. According to my analysis, these tabulations reveal a wide partisan disparity in income growth. The real incomes of middle-class families grew more than twice as fast under Democratic presidents as they did under Republican presidents. Even more remarkable, the real incomes of working-poor families (at the 20th percentile of the income distribution) grew six times as fast when Democrats held the White House. Only the incomes of affluent families were relatively impervious to partisan politics, growing robustly under Democrats and Republicans alike.

The cumulative effect of these partisan differences is enormous. If the pattern of income growth under postwar Republican presidents had matched the pattern under Democrats, incomes would be more equal now than they were in 1950 — a far cry from the contemporary reality of what some observers are calling a New Gilded Age.

It might be tempting to suppose that these partisan differences in income growth are a coincidence of timing, merely reflecting the fact that Republicans held the White House through most of the past three decades of slow, unequal growth. The partisan pattern, however, is remarkably consistent throughout the postwar period. Every Republican president since Dwight Eisenhower presided over increasing economic inequality, while only one Democrat — Jimmy Carter — did so. (I allow one year for each president’s economic policies to take effect, so the recession of 2001 is counted against Clinton, not Bush.)

If middle-class and poor people do so much better under Democratic presidents than under Republican presidents, why do so many of them vote for Republicans? One popular answer, advanced by Thomas Frank and others, is that they are alienated by Democratic liberalism on cultural issues like abortion, gay marriage and gender roles. This does not appear to be the case. In recent presidential elections, affluent voters, who tend to be liberal on cultural matters, are about twice as likely as middle-class and poor voters to make their decisions on the basis of their cultural concerns.

A better explanation for Republican electoral successes may be that while most voters, rich and poor alike, do vote with their economic interests in mind, they construe those interests in a curiously myopic way. Their choices at the polls are strongly influenced by election-year income growth but only weakly related to economic performance earlier in the president’s term. And while Republicans have presided over dismal income growth for middle-class and poor families in most years, they have, remarkably enough, produced robust growth in election years.

Why have Republican administrations typically presided over strong election-year growth? The pattern probably reflects the fact that presidents have more clout early in their terms than at election time. Republicans have often used that clout to rein in inflation and social spending, producing or prolonging economic contractions that then wear off by the time of the next election. New or newly re-elected Democrats, for their part, have frequently stimulated the economy and expanded employment, producing economic booms that raise all boats in their second and third years but trail off as the next election approaches. As a result, even working-poor families have experienced stronger income growth under Republicans (1.8 percent) than under Democrats (1 percent) in election years.

This year looks unusual in this respect, with slow growth likely despite the infusion of substantial tax rebates from an election-year stimulus plan. If that slow growth produces a Republican defeat in November, it will be a rare instance of economic accountability for a party with a long history of delivering meager income gains for most American families.

Larry M. Bartels, a professor of politics at Princeton, is the author of “Unequal Democracy: The Political Economy of the New Gilded Age.”

Next Article in Magazine (10 of 16) »

Chuck Nugent (author) from Tucson, Arizona on April 21, 2008:

Good comment, Ralph. I actually agree with you on part of it. The Fed's continnual expansion of the money supply has kept the economy flush with money and interest rates low but we are starting to feel the pain of the inflation that accompanies such a policy. I don't see anything wrong with collateralized debt obligations in general but, from what I have been reading, the mixing of loans of varying quality from good to very bad was not good, and this is the source of much of the current debt crisis as banks don't know what many of these debt obligations they are currently hold actually contain in terms of the quality of the loans in the package. Much of the current writing down of portfolio assets is the result of banks taking a conservative approach and assuming that large numbers of loans in these packages are poor quality and then recalculating the value of these packages based upon what they would be worth on the market if offered for sale today and did indeed contain mostly bad loans. Many of these obligations are probably in fact good and the holders of them will not sustain real losses (as opposed the the paper losses they are now recording on their books). The real problem here, in addition to the stupid practice of mixing loans of varying qualities, is the fact, as the Wall Street Journal has frequently pointed out over the past few years, is that Fannie Mae and Freddie Mac, both former government entities that have since been fully privitized but still retain strong links to the U.S. government, have allowed, possibly even encouraged, investors to believe that they had a line to the U.S. Treasury and would back these obligations and not allow the purchasers of them to lose money. Apparently believing that guarantee to be real, many institutions appear to have purchased them without doing any due dilligance since they were supposedly "guaranteed" not to fall in value. Without this belief, institutions would have checked the packages in advance and refused to purchase those loaded with junk loans which would have quickly put an end to that practice.

As to oil, it is true that as the rest of the world develops, including large nations like China and India, the demand for oil will increase. However, as history has demonstrated time and again, as prices for a scarce commody rise, people have an incentive to seek out alternatives (real alternatives, not political boondagles like ethanol as I described in my hub https://hubpages.com/hub/The-Politics-of-Ethanol). Just as the world did not come to an end or civilization collapse during the great whale oil "crisis" of the 19th century so, too, will we survive the current so called "energy crisis". Further, while investors are seeking new technologies, the high oil prices are also seeking new sources of oil which, while not of the same quality or have the same ease of pumping out of the ground they are locating in abundance. In addition to the Alaskan reserves (off limits due to government decree), offshore on the 3 coasts of America's lower 48 states (again mostly off limits due to government regulations), there are the Albertan tar sands in Canada the known reserves of which, while expensive to extract, are equal to the known reserves in the Middle East, ditto for the Colorado shale deposits which also contain reserves equal to or greater than the Middle East. There is also the possibility of vast deposits under the melting Arctic ice cap which I referred to in my Hub entitled "A Very Civil War in the Arctic ( https://hubpages.com/politics/A_Very_civil_War_in_... ). Like other current problems the real problem here is government regulations designed to garner votes by appeasing special interests rather than the welfare of the nation.

Thanks again for the comment.

Chuck Nugent (author) from Tucson, Arizona on April 21, 2008:

Good comment, Ralph. I actually agree with you on part of it. The Fed's continual expansion of the money supply has kept the economy flush with money and interest rates low but we are starting to feel the pain of the inflation that accompanies such a policy. I don't see anything wrong with collateralized debt obligations in general but, from what I have been reading, the mixing of loans of varying quality from good to very bad was not good, and this is the source of much of the current debt crisis as banks don't know what many of these debt obligations they are currently hold actually contain in terms of the quality of the loans in the package. Much of the current writing down of portfolio assets is the result of banks taking a conservative approach and assuming that large numbers of loans in these packages are poor quality and then recalculating the value of these packages based upon what they would be worth on the market if offered for sale today and did indeed contain mostly bad loans. Many of these obligations are probably in fact good and the holders of them will not sustain real losses (as opposed the the paper losses they are now recording on their books). The real problem here, in addition to the stupid practice of mixing loans of varying qualities, is the fact, as the Wall Street Journal has frequently pointed out over the past few years, that Fannie Mae and Freddie Mac, both former government entities that have since been fully privitized but still retain strong links to the U.S. government, have allowed, possibly even encouraged, investors to believe that they had a line to the U.S. Treasury and would back these obligations and not allow the purchasers of them to lose money. Apparently believing that guarantee to be real, many institutions appear to have purchased them without doing any due diligence since they were supposedly "guaranteed" not to fall in value. Without this belief, institutions would have checked the mortgage backed security insturments in advance and refused to purchase those loaded with junk loans and this would have quickly put an end to that practice.

As to oil, it is true that as the rest of the world develops, including large nations like China and India, the demand for oil will increase. However, as history has demonstrated time and again, as prices for a scarce commodity rise, people have an incentive to seek out alternatives (real alternatives, not political boondogles like ethanol as I described in my hub https://hubpages.com/hub/The-Politics-of-Ethanol). Just as the world did not come to an end or civilization collapse during the great whale oil "crisis" of the 19th century so, too, will we survive the current so called "energy crisis". Further, while investors are seeking new technologies, the high oil prices are also encouraging the seeking of new sources of oil which, while not of the same quality or have the same ease of extraction as Middle Eastern oil, they are locating in abundance. In addition to the Alaskan reserves (off limits due to government decree), we have reserves on the offshore Continental shelf along the 3 coasts of America's lower 48 states (again mostly off limits due to government regulations), the are the Albertan tar sands in Canada the known reserves of which, while expensive to extract, are equal to the known reserves in the Middle East, ditto for the Colorado shale deposits in the U.S. which also contain reserves equal to or greater than the Middle East. There is also the possibility of vast deposits under the melting Arctic ice cap which I referred to in my Hub entitled "A Very Civil War in the Arctic ( https://hubpages.com/politics/A_Very_civil_War_in_... ). Like other current problems the real problem here is government regulations designed to garner votes by appeasing special interests rather than the welfare of the nation.

Thanks again for the comment.

Ralph Deeds from Birmingham, Michigan on April 21, 2008:

A Republican's view of the state of our economy and the nation: In his recently published book, "Bad Money" Kevin Phillips diagnoses our ailing economy as follows:

1. The Current Debt Debacle--"The 1980s were the start of three profligate decades when the expansion of mortgage credit and the invention of financial instruments like collateralized debt obligaions led to an orgy of leveraging and speculation. The Federal Reserve kept the bubble afloat with easy money, while regulators and rating agencies looked the other way.

"By 2007 total indebtedness was three times the size of the GDP, a ratio that surpassed the record set in the Great Depression. From 2001 to 2007 alone, domestic financial debt grew to $14.5 trillion from $8.5 trillion and home mortgage debt ballooned to almost $10 trillion from $4.9 trillion, an increase of `102 percent.

2. Oil industry Upheaval--The second componenet of the perfect storm is the upheaval in the oil industry. Domestic production peaked in 1971, and there are signs that production worldwide is also peaking. And with the emergence of new economic powers like China and India, demand has risen dramatically.

3. America's "calcified" Political System--We may need new regulations to deal with the debt mess, along with an energy policy to address the changing world of oil, but Washington, Phillips says, has become dedicated to the "politics of evasion."....Instead of a "vital center" in Washington, we now have a "venal center."

The above comment was taken from a review of Kevin Phillips book by Barry Gewen in the NYTimes 4-21-07.

http://www.nytimes.com/2008/04/21/books/21gewen.ht...

Doug on April 17, 2008:

There is sooo much reference to the wonderful Bill Clinton economy and the perceived surplus accumulated as the house of cards continued to build. Little discussion, if any, includes the enormous amount of venture capital in the markets during Clinton's presidency, most of which supported .com growth. All things considered it looked like a time of prosperity and market growth. However, as one would expect, when the cork was put back on the genie bottle the markets retraced to predictable levels blame was placed on everyone but Clinton. In reality, Bill Clinton and his staff should have been warning consumers about inflated markets, the pitfalls of leveraged investing, and the risk of following venture capital into the market. Clinton stayed remarkably silent and watched as many people lost their personal fortune. I am not faulting all his policies but c'mon the 90's were a time of artificial prosperity.

Medical Alert Calling Systems on April 15, 2008:

Nowadays everyone is more worried discussing the gender and race of presidential candidates, the sexual scandals of governors and delegates... This is a great hub! People should be engage in dscussion this issues.

Ralph Deeds from Birmingham, Michigan on April 13, 2008:

http://www.salon.com/tech/htww/2008/03/28/supply_s... A conundrum for Chuck: If tax cuts increase government revenues and tax incerases reduce government revenues, in order to "starve the beast" why not raise taxes and thus reduce government revenues, thus "starving the beast?"

caseysellers02 on April 07, 2008:

This is another great work of yours! I have seen your hub on how to become a commercial pilot and I have noticed you have a very long list of commetns from the readers. That means you are doing a great job! Congratulations! I want to share another lens to you that may help you too http://www.privatejetscenter.com/BusinessJetCharte... with so much informations on business jet charters from its cost to its features. I find it as great as yours. You can check it out!

Ralph Deeds from Birmingham, Michigan on April 07, 2008:

Continued:

current worldwide system is often derided as making American firms uncompetitive relative to their foreign competition. So, there are easy ways to take political potshots at the current system from both sides.

Q: Do any of these taxes really influence how corporations work?

A: It's now quite clear that these rules significantly influence how investors diversify their portfolios; the organizational and ownership decisions firms make; firm investment[PDF] decisions; and myriad financing decisions, including capital structure and repatriation. Perhaps, the biggest single sign of how these rules matter is the little experiment that the United States ran in 2004. As part of the American Jobs Creation Act, firms were allowed a "one-time" reduced tax on any profits repatriated back to the United States. Predictions varied at the time, but I don't think anyone expected the approximately $350 billion that was repatriated to the United States to take advantage of that incentive. This really woke people up about the importance of these rules.

Q: So, what is the right way to tax global corporations on their overseas profits?

A: Fortunately, economic theory can help us think through what the right way to do this is.

Historically, the idea was that multinational firms were looking at after-tax rates of return around the world and choosing to invest their capital eitherat home or abroad up to the point that those returns were equalized. If you believe that, economic theory tells you that a tax system should effectively neutralize tax differences around the world so that firms would make the decisions based on pretax rates of return. More specifically, the United States should, under this view, operate a worldwide system without deferral and with unlimited foreign tax credits so that, effectively, Cummins would pay the U.S. statutory rate no matter where it invested and would make the decision on purely pretax rates of return. The goal of that regime is to leave the distribution of capital undistorted. Indeed, this path of thinking has been highly influential in shaping how U.S. taxation has evolved.

Recently, the underpinnings of this historic view have been questioned. In particular, the historic view assumes that what multinational firms do is choose between investing at home and abroad and effectively arbitrage any differences in returns in the process. Scholars of multinational firms, however, don't really think about these firms in that way; that characterization would seem more apt for a hedge fund than Cummins. In reality, increased foreign activity by Cummins need not be associated with reduced domestic activity; and much of what these firms do is not to ship capital around the world but to take ownership of assets and run them more productively. If productivity differences are central to what these firms do and outbound investment does not reduce firms' domestic investment, then a completely different prescription emerges. In this case, it makes sense for countries to exempt foreign income from taxation.

The intuition for this is that tax rules should leave "who owns what" undistorted. If countries impose worldwide taxation, then the highest-productivity buyers may be handicapped by their tax systems, and the gains from having the right owner of those assets are lost. Concretely, imagine that Cummins is bidding on that operation in Germany and so is Mitsubishi. If Cummins is the higher productivity owner, it should win that auction in order to maximize social welfare. But tax systems can distort that, so Cummins might not win that auction.

In order to make sure that the highest-productivity owner wins, countries should typically adopt exemption of foreign income so that overall productivity is as high as it could be. Said another way, it may well be more important to leave who owns what undistorted rather than leaving the capital flows undistorted.

So, we're in the middle of a changing understanding of what these firms do and how they should be taxed. As I mentioned, most of the world has moved to exemption systems, which is consistent with this emphasis on ownership as being central to multinational firm activity.We've also come to understand that the current system is highly distortionary and, yet, raises very little revenue. As such, the rationale for the current rules is increasingly outdated, and the current rules don't appear to function very well.

Q: You mentioned that one critical assumption underlying the historic rationale for taxing corporations on foreign profits was that firms choose to invest either at home or abroad. Do we know if the activities abroad of U.S. firms really reduce their activities at home in the way that many people have suggested?

A: This intuition that firms substitute between domestic and foreign activity is the basis of much of tax policy and also of the rising concern over the global activities of American multinational firms. While a popular belief, it doesn't seem to hold up to closer scrutiny. Indeed, if anything, the opposite appears to be the case. Recent research indicates that firms that grow abroad are also more likely to grow domestically; this relationship is robust to a variety of alternative explanations. As such, the rationale for current tax policy might have the relationship between foreign and domestic activity exactly wrong.

Q: Will there be a significant change in these rules in the coming years? And if there is a change, what direction will it take?

A: I think there will be a change soon, but it's unclear which direction we will go in.

One possibility is that we move toward a greater tax burden on foreign operations. This could take the form of a repeal of deferral or the selective repeal of deferral with respect to a "blacklist" of countries that are deemed to be tax havens. Or we could try to define what a "patriotic" firm is and base the tax system on that. Some have even called for a system similar to what U.S. states do, which is a "formulary apportionment" system whereby profits would be allocated around the world on the basis of a formula. Any of these possibilities would likely result in a greater tax burden on foreign income.

Alternatively, we could move to where much of the rest of world is, which is effectively exempting foreign income from U.S. taxation. This could be accompanied by some bells and whistles to ensure that American firms didn't react to exemption by trying to shift profits offshore more so than they do now. Depending on these bells and whistles, this could result in an increase or decrease in the tax burden on foreign profits.

It's also possible that the entire corporate tax system should be rethought, given a variety of very serious problems associated with it—including the gap between profits reported to capital markets and tax authorities and the treatment of corporate capital gains.

Change is afoot, but the direction in which we move will be a function of the election and the prevailing sense of Americans toward globalization and the foreign activities of their firms. It should be interesting.

Q: What do you think should happen?

A: I think we should consider a broader restructuring of the corporate tax, and with respect to foreign income, we should consider exemption with some safeguards against an overly aggressive use of tax havens. I fear that alternative paths will lead to much more harm than good and won't raise much revenue, either. I'm in the middle of detailing some of these ideas for a proposal and will share them as soon as I have it fully cooked!

About the author

Sean Silverthorne is the editor of HBS Working Knowledge.

For more of Mihir Desai's research on this topic, visit his Web page: www.people.hbs.edu/mdesai. For a variety of research on these topics, he also recommends the International Tax Policy Forum

Ralph Deeds from Birmingham, Michigan on April 07, 2008:

Research & Ideas

The Debate over Taxing Foreign Profits Q&A with:Mihir A. DesaiPublished:April 7, 2008Author:Sean Silverthorne Executive Summary:

Corporate tax policy has suddenly become a hot topic in the U.S. presidential debate, including the issue of whether tax laws encourage American firms to outsource jobs to other countries. Harvard Business School professor Mihir Desai makes a case for exempting foreign profit from taxes if proper safeguards are put in place. Key concepts include:

The United States is increasingly an outlier in its taxation of corporate income earned on foreign soil.Critics argue the ability to defer U.S. taxation until profits are repatriated provides an incentive to ship jobs overseas. On the other hand, the current worldwide system is often derided as making American firms uncompetitive relative to their foreign competition.An alternative may be to exempt foreign income from taxes paired with safeguards against an overly aggressive use of tax havens. <p>Corporate tax policy has suddenly become a hot topic in the U.S. presidential debate, including the issue of whether tax laws encourage American firms to outsource jobs to other countries. Harvard Business School professor <b>Mihir Desai</b> makes a case for exempting foreign profit from taxes if proper safeguards are put in place.</p> About Faculty in this Article:

Mihir A. Desai is a Professor of Business Administration at Harvard Business School.

More Working Knowledge from Mihir A. DesaiMihir A. Desai - Faculty Research Page E-mail Mihir A. Desai: mdesai@hbs.edu

Congress and the next president of the United States will be under pressure to make major changes to U.S. corporate tax policy, the consequences of which could have significant impact on profit and competitiveness of American companies on the global stage.

One heated issue is the charge that the U.S. tax code provides incentives for companies to ship jobs overseas. It's nothing new. In the 2004 presidential race, then-candidate John Kerry blasted "Benedict Arnold CEOs" for using tax advantages to do exactly that.

We asked Harvard Business School professor Mihir Desai, an expert on international and corporate finance, to guide us through the complicated U.S. tax law on foreign profits, and to explain why this system is so different from those found in other countries.

Sean Silverthorne: Why has this issue on taxing foreign profit become so central?

Mihir Desai: I think there are several reasons for these developments. First, the integrated, global nature of firm operations has increased to such a degree that it's hard to think about taxing corporations without figuring out what to do with their foreign profits. As one example, more than half of GE's assets are not in the United States now, and close to half of GE's profits are abroad as well. Foreign operations are growing very quickly and can be more profitable than domestic operations. There's also a growing awareness that not all countries tax their corporations in the same way, and that American firms have to compete with firms that face very different tax regimes, many of which also feature a much lower tax rate.

Second, Americans are coming to question whether globalization broadly and the foreign activities of American firms specifically are really fostering their welfare. As such, we've seen a dramatic increase in the importance of foreign activities, and this has given rise to increased scrutiny of how we should tax these operations.

Finally, there is a growing sense that firms are increasingly savvy with respect to tax planning and that profits are easily reallocated through the movement of intangible property or otherwise. As a result, the fairness of the overall system has come into question. When a number of firms tried to "expatriate" from the United States and reincorporate in tax havens in the Caribbean several years ago to avoid the U.S. tax system, their chief executives were labeled "Benedict Arnold CEOs." As such, this topic has evolved into quite a heated area.

Q: Rhetoric aside, how do the U.S. tax rules for corporations work? And how do U.S. rules compare to how other countries tax their corporations on foreign profits?

A: While the overall picture is somewhat complex, there are several underlying principles that help explain it.

First, every country must decide whether it wants to tax its citizens, including its corporations, on their domestic or worldwide income. The United States taxes its citizens and corporations on worldwide income. As a result, when engine maker Cummins, for example, makes profits in Germany, its subsidiary pays German taxes, and the U.S. government retains the right to tax those profits as well.

Second, when the United States imposes its taxes on Cummins's German activity, the government provides some relief for the foreign taxes paid by Cummins to avoid double taxation of overseas profits. In particular, Cummins would receive credits for foreign income taxes paid, up to the U.S. statutory rate. In effect, this means that Cummins will ultimately pay a total of the U.S. statutory rate on its overseas activities in lower tax countries and pay the local rate in higher tax countries. One way to understand this is to say that the United States tries to top up the tax bill on lower tax country profits to the U.S. statutory rate and doesn't do this for profits earned in higher tax countries. This system is known as the foreign tax credit system.

Third, the United States only imposes this additional tax on foreign profits when those profits are returned to the United States, not when those profits are earned. This resembles the treatment of capital gains for individuals where capital gains taxes are only due when gains are realized rather than when they're accrued. As with individual capital gains, there is value in this ability to defer taxes, and this effectively reduces the tax burden on foreign profits. But, to receive the benefits of deferral, Cummins must reinvest the profits in active businesses as opposed to passive portfolio assets.

Finally, a number of significant corporate expenses that Cummins undertakes in the United States and that might otherwise offset its U.S. tax liability—such as interest expenses and some HQ expense—are allocated abroad so that they cannot be used to lower the firm's U.S. taxes. Because foreign governments, unsurprisingly, don't recognize these expenses, these deductions are effectively lost to Cummins. One way to analogize this is to imagine if a fraction of your mortgage interest deduction was disallowed, and that fraction reflected the number of days you spent abroad. Such a disallowance would increase your taxes and effectively puts a tax on you going abroad.

So, in effect, the United States operates a mishmash of a system that taxes worldwide income, provides partial relief for foreign taxes paid, imposes those taxes only upon repatriation, and forces firms to allocate expenses on a worldwide basis.

The major other alternative out there is to simply exempt foreign income from taxation or, said another way, simply tax corporations on their domestic income. Interestingly, the United States is increasingly an outlier in the way it tries to tax overseas income of corporations. The United Kingdom was the only really other significant country that tried so hard to impose taxes on foreign income; it is undertaking a serious reexamination of that now.

In terms of the political debate, the ability to defer U.S. taxation until profits are repatriated is often framed as providing an incentive to ship jobs overseas. On the other hand, the curren

Wbisbill from Tennessee USA on April 04, 2008:

My problem with the present tax system is:

!. All taxes are too high!2. Too many people don't pay taxes;causing too much burden on too few; this stiifles jobs, growth and incentive.3. It leads to politicians buying votes through IRS manipulation; causing social engineering and political demagoguery.4. If they raise taxes a dollar, both parties want to spend a buck fifty!5. It gives rise to multiple streams of government tax stream along with multiple layers, compound and hidden fees driving costs.6. It leads to deficit manipulation and burdens passed to future generations.7. It leads to massive invasion of privacy and civil liberties.

We need something like a "fair tax" which wouldn't solve all our problems but would make a step in a better way.

Just my thoughts

Chuck Nugent (author) from Tucson, Arizona on March 12, 2008:

Ralph - I too, found this letter from Ben Stein hard to believe and even went to the March 9, 2008 NY Times on line Opinion Page to check it myself. Ben Stein, in addition to his Hollywood and financial advising work, is also a conservative economist like his father, Benjamin Stein Sr. who was the Chairman of President Nixon's Council of Economic Advisers. Of course, Benjamin Stein Sr. was more middle of the road (especially in terms of today's economic policy positions) and tended toward Keynesianism and was probably behind President Nixon's famous "I am a now a Keynesian" statement) and certainly accepted the big government philosophy of that era.

I have two problems with Ben Stein’s position in this letter. First, he seems to have fallen into the trap of simply accepting government spending at both the current level of spending and current level of annual increases as a given. Using that assumption his analysis is partially correct in that current tax revenue is not sufficient to cover current spending. As I see it, what is needed to reign in the Federal Government's addiction to spending are two things - Accountability for Congress and the Federal Government and more direct input from the citizens who have to pay for all of this spending. Here are three simple reforms that could go a long way toward again making our government, in the words of Abraham Lincoln, a "government OF the PEOPLE, BY the PEOPLE and FOR the PEOPLE".

1 Require that all spending bills be submitted and voted on by Congress as single items and not lumped together in thousand page omnibus spending packages rushed through Congress in the wee hours of the morning orburied in totally unrelated pieces of legislation. A new Amtrak station for West Virginia, a bridge to nowhere in Alaska, etc. would have to be voted on and enacted as separate pieces of legislation and not quietly inserted into the middle of some other totally unrelated piece of legislation at the last minute (as Senator Harry Byrd of West Virginia did when he deceitfully attached the funding authorization for his pork barrel Amtrak Station into the Patriot Act). This way, the American people could see exactly what is being spending is being proposed and be able to inform their Congressmen and Senators as to their wishes on whether or not the proposed spending should be approved or not.

2 Require roll call votes for all legislation regarding the spending of the taxpayer's money. In this way the voters will know exactly how their representatives voted on every specific piece of spending legislation.

3 Abolish payroll withholding of income taxes and require that people pay their taxes in full each year with a check or credit card. Having to actually PAY taxes rather than having the funds siphoned off of workers paychecks by the government before the pay is even received and then receiving a refund for the deliberate overage that the Feds have helped themselves to and used interest free for up to a year is not the same as handing over cash that has already been in one's hands.

My second problem with his op ed piece is his call for a tax on the rich which is not really a workable solution as I have pointed out in my recent Hub on problems with taxing the rich which you can see by clicking here: https://hubpages.com/politics/Problems-with-Taxing...

Chuck

Ralph Deeds from Birmingham, Michigan on March 09, 2008:

Here's some advice on tax cuts from Ben Stein, an honest and informed Republican:

Everybody’s Business

What McCain Could Do About Taxes

By BEN STEINPublished: March 9, 2008DEAR John McCain:

Skip to next paragraph Philip AndersonCongratulations. The nomination of the Grand Old Party is yours. Now comes the hard part, winning, and the almost impossible part, governing sensibly. Since you were, in your usual modest way, genial enough to acknowledge recently that you know little about economics, may I offer you some thoughts on a big part of economics, namely tax policy, bearing in mind that no one knows much about it?

Let’s start with the obvious. Almost everyone dislikes taxes. No sane person enjoys writing out a big check to Uncle Sam when he could spend that money or bank it for retirement. By the same token, almost everyone likes the phrase “tax cuts” for the same reason.

The problem, and it’s a killer, is that over the years we have obligated ourselves as a nation to spend truly staggering sums. These sums are growing rapidly. They consist mostly of entitlements, like Social Security and Medicare; fixed obligations like interest on the national debt, pensions for federal and military employees and various subsidies that have already been enacted; and morally mandatory expenses like those for national security.

All politicians campaign on the promise to cut federal spending by identifying hitherto unfound waste, fraud and corruption. None of them ever do so in a meaningful way. Total federal spending has not once fallen noticeably since 1954, no matter the party or the promises of the incoming chief executive.

That is the first thing you need to know. The next thing is that the Republican Party (my party and yours) has for the last 30 years or so been operating under a demonstrably false and misleading premise: that tax cuts pay for themselves by generating so much economic growth that they replace the sums lost by tax cutting.

This would be a lovely thing if true, and the best of all ideas, the “something for nothing” idea. In fact, tax cuts lower federal revenue and generate federal deficits. It is also true that they do stimulate the economy and after a long period of years, federal tax receipts go back to where they were before the tax cuts.

For example, when President Bush enacted his tax cuts in the early 2000s, income tax receipts fell dramatically. It took almost six years for them to reach the level they had been in the last year of the Clinton administration, while G.D.P. in that period rose by roughly 30 percent. In the eight years Ronald Reagan was president (and I love and worship him), tax receipts did not fall anywhere near as much, but they rose more slowly, on a percentage basis, than they did in any other comparable eight-year period after World War II.

In other words, tax cuts do not pay for themselves, at least not on any basis I can see. Certainly, they are not worthless. They make taxpayers feel good and they generate growth. But basically, they shift the tax burden from us to our progeny and add immense amounts of interest expense to the federal budget. At this point, taxpayers shell out about $1 billion a day just for that item.

Moreover, immense federal deficits in modern life are financed largely by foreign buyers of our debt. This means that the American taxpayer must work a good chunk of the year to send money to China, Japan, the petro-states and other buyers of United States debt. In effect, we become their peons.

By flooding the world with debt, we in effect beg foreigners to take our dollars, and this leads to a lower value of the dollar and a higher cost of imports, including oil. If you feel pain filling up the tank, you can partly thank those tax cuts. If you feel the sting of inflation, you can partly thank the supply siders. Deficits matter.

What to do? You appear to have changed your mind over time and have recently shown more support for the Bush tax cuts than in the past. If you become president, you can just keep up the (latter-day) Republican game of make-believe. You can propose still more tax cuts, create still more deficits and add to the debt, and say to yourself, like Louis XV, “Après moi, le déluge.”

Or, you can raise taxes. But whom to tax? The poor are, well, poor. The middle class is struggling to pay for its middle-class life. That leaves the rich. It would be lovely if we did not have to tax them. Many have worked hard for their money. Many have created useful businesses. Many of them are fine people.

But as Willie Sutton said when asked why he robbed banks, “Because that’s where the money is.” By definition, the truly rich have a lot more money than they need. If they don’t, then they are not rich by my standards. The first step toward putting our house in order, once we are past the seemingly looming recession, is much higher taxes on the truly rich and serious enforcement to prevent offshore tax evasion.

TO put it even more starkly, the government — which is us — needs the money to keep old people alive, to pay for their dialysis, to build fighter jets and to pay our troops and pay interest on the debt. We can get it by indenturing our children, selling ourselves into peonage to foreigners, making ourselves a colony again, generating inflation — or we can have some integrity and levy taxes equal to what we spend.

You are probably the bravest man to have a chance at being elected president in my lifetime. Do you have the guts to stand up to the myth makers and tax cutters and the rich? Or will you just kick the can down the road?

Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.

Next Article in Business (15 of 18) »

Ralph Deeds from Birmingham, Michigan on March 03, 2008:

I guess no explanation is possible.

How wealthy is too wealthy and how poor is too poor? And how big a deficit can our country stand before the Chinese own all our debt? And how many potholes can we stand in our roads and how many bridges must collapse before we decide to repair them?

Rich people pay more taxes because they make more money. Unemployed people whose jobs have been sacrificed on the altar of free trade pay no taxes. What's your point? Are you saying everybody should pay the same amount of taxes, or the same percentage regardless of income? No developed country in the world levies taxes that way. U.S. taxes, last time I checked, are the lowest of all industrialized countries, and we have more holes in our roads, trash in our streets, more people who go without adequate health care and more infant malnutrition.

BTW. Kamerschen has denied writing the silly parable. Snopes classifies it as an urban legend re-cycled gleefully among right-wingers, supply siders and libertarians. http://www.snopes.com/business/taxes/howtaxes.asp

archturn on March 03, 2008:

Ralph

Please read the following:

Suppose that every day, ten men go out for Ice Cream and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men ate in the Ice Cream Parlor every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers, he said, 'I'm going to reduce the cost of your daily Ice Cream by $20. Ice Cream for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still eat for free, but what about the other six men - the paying customers?

How could they divide the $20 windfall so that everyone would get his fair share? They realized that $20 divided by six is $3.33.

But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to eat his Ice Cream. So, the parlor owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay!

And so:

The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33%savings).

The seventh now pay $5 instead of $7 (28%savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 (22% savings).

The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.

'I only got a dollar out of the $20,'declared the sixth man. He pointed to the tenth man,' but he got $10!'

'Yeah, that's right,' exclaimed the fifth man. 'I only saved a $1 - it's unfair that he got ten times more than I!'

'That's true!!' shouted the seventh man. 'Why should he get $10 back when I got only two? The wealthy get all the breaks!'

'Wait a minute,' yelled the first four men in unison. 'We didn't get anything at all. The system exploits the poor!'

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for Ice Cream, so the nine sat down and had Ice Cream without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax deduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start eating Ice Cream overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.

Professor of Economics, University of Georgia

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible.

Ralph Deeds from Birmingham, Michigan on March 03, 2008:

Bush started a foolish three trillion dollar war, added drug benefits to Medicare and enacted a big tax cut for the top 2%. Bad combination. If those are Republican tax cuts you can have them. Taxes are the lowest in the U.S. of any industrialized country and our crumbling infrastructure and decaying inner cities show it. We are looking more and more like a bananna republic every day.

excellasys on March 03, 2008:

Always had my doubts about Keynesian school of thought. The fact that WWII happened when it did threw a wrench into the so called "proof". When I was in MBA school I heard arguments both ways, I tend to see the "supply side" arguments as slightly more convincing, but the true needed blend may lay somewere in the middle as is usually the case.

-e-

vreccc from Concord, NH on February 21, 2008:

Interesting conversation here. I'd like to chime in. No one here is asking the question of what kind of model of taxing and spending is sustainable. For example, the US (I'm an American) likes to be the world's policeman. I don't think this is a sustainable policy. Take Iraq for example. By going in unilaterally, we only reassured the world that we would gladdy step in and foot the bill whenever a world crisis occurs. This is baloney! It's no wonder that NATO countries, or any others for that matter, don't agree to go to war with us. They know we will do it. I'm not a pacifist, but one country fighting all the wars for this world is not sustainable policy. I can't believe that there is talk of unilateral military force with Iran.

Who's the slow learner here?

I work for an urban school district here in the states that is considering getting those $200 laptops, originally made for children in developing countries, for all it's $1300 teachers because the district has no money to buy 'real' laptops. Can't find $1,300,000 for laptops for teachers. The taxpayers would scream if we spent that on laptops. But no one seems to care about the billions and billions we are spending in Iraq and Afganistan.

Anyway, my point is, it is not only spending policy, it's what we choose to spend the money on. Education spending is sustainable and eventually raises our tax base by graduating more kids with higher educations.

Joanie Ruppel from Texas on February 18, 2008:

I agree, in the end they both have to generate deficit spending in order to stimulate the economy. It just a question of what we call the deficit.

LIP from United States on February 12, 2008:

Kane above makes a good point. Both tax pretty much the same its only difference is where they put it. Although going from a huge surplus to a 5-6x negative deficit is horrendous, and exacly what Bush has done, not only ruined the country but his party as well. I for one dont think he should be bashing another party but working with them. Uniter my ass. 2009 cant come soon enough.

SimPlySuPerfluous on February 06, 2008:

Very interesting read! :)

Definitely an edifying hub..

PK.

lid on January 18, 2008:

its very infomational!

Ralph Deeds from Birmingham, Michigan on January 11, 2008:

David Brooks on supply-side tax policy in the NYTimes 1-11-08:

"Supply-side economics had a good run, but continual tax cuts can no longer be the centerpiece of Republican economic policy. The demographics have changed. The U.S. is an aging society. We have made expensive promises to our seniors. We can't keep those promises at the current tax levels, let alone at reduced ones. As David Frum (of "axis of evil" fame) writes in 'Comeback,' his indispensable new wook: 'In the face of such a huge fiscal gap, the days of broad across-the-board middle class tax cutting are over.'"

Chuck, have you never met a tax cut you didn't like? What programs are you prepared to cut or eliminate? Medicare? Social Security? FDA? SEC? EPA? Homeland Security? DEA? OSHA? NASA? Unemployment compensation? Or what?

barranca on January 05, 2008:

I thought Republicans believed in fiscal discipline....that is, don't spend what you haven't raised in taxes. The Republicans, starting with Reagan have been on spending binges and relied on Democrats to save our national bacon. Republicans accuse democrats of being "Tax and Spenders" the absurd irony is now it is Republicans who are "Borrow and Spenders". Any idiot knows what the ultimate result is of Borrow and Spend. This kind of policy is the height of irresponsibility. Republicans give lipservice to limiting government spending and then far outspend what democrats ever dreamed of spending.

Chuck Nugent (author) from Tucson, Arizona on December 16, 2007:

Kane, Thanks for visiting my HubPages and for your comment.

While I agree that as far as uncontrolled spending and wasting of tax dollars goes there is no difference between Republicans and Democrats. For all practical purposes there is no such thing as SPENDING CUTS with regard to either party. With rare exceptions the closest either party in Congress ever comes to cutting spending is to reduce the amount of increase in spending for a given program. In other words, if a program or agency's budget was increased by 10% last year and only 8% this year that is what passes for a spending cut - and when we are talking about a 2+ trillion dollar budget an 8% increase over the previous year is not pocket change even if it is 2% less than last year's increase.

But tax cuts, despite the fact that they are neither as frequent nor as deep as I feel they should be, are real and have been enacted by both parties in the past half century. What I tried to explain in this hub was the different theories behind the tax cut policies of liberals and conservatives. Since the 1960s both parties have both enacted and opposed tax cuts and the logic behind their actions in both cases was consistent with the theories each was using.

Ideologically, fiscal conservatives (not to be confused with Republicans who during the present administration and their most recent 6 year control of Congress have proved themselves to be anything but fiscally conservative) tend to favor tax cuts and associated spending cuts as a part of their philosophy of limited government. Most modern day liberals, on the other hand, tend to look upon tax cuts simply as a temporary tool to stimulate consumer demand during an economic downturn. I say most because some, like the late John Kenneth Galbraith and Princeton economist Paul Krugman, are opposed to tax cutting on principle. That principle was clearly stated by Galbraith in his writings (The Affluent Society, and other works) when he described his vision of a nation where taxes were high and economic activity was directed by elites like himself. In Galbraith's mind the job of the masses was to labor and produce while bureaucratic elites would spend the fruits of the workers' labor on what they, the bureaucratic elite, felt was best. Galbraith opposed President John F. Kennedy's tax cut (which was blocked by Republicans in Congress but passed under President Lyndon B. Johnson during Johnson's honeymoon following Kennedy's assignation) with the argument that, even though Keynesian economic theory prescribed such a cut to pull the nation out of the recession that we were in at the time, it was bad policy because, once people experienced a tax cut (and there hadn't been one since the Administration of Calvin Coolidge) there was a possibility that they would get used to the cut and not only oppose future tax increases (which was the flip side of the Keynesian theory which called for tax increases when inflation was the problem) but demand more tax cuts as well.

Galbraith, whose years of prominence occurred during the years between the Roosevelt Administration (where he held a high level economic enforcement position) through the Carter years when big government types had a near monopoly on academia, the media and government (Democrats controlled both houses of Congress and most state and local legislatures during the better part of that era), could propose such undemocratic policies without fear of serious criticism from the predominantly left wing media and academia. Today, Professor Krugman and others like him have to be more subtle as a vibrant opposition has now developed in the media and academia as well as in politics (look at Ron Paul's surprising popularity in the Presidential race https://hubpages.com/politics/Ron_Paul_The_Overloo... ) and such positions would be quickly challenged. Even as early as the 1960s opposition was developing against big government and high taxes which is one reason why President Kennedy is said to have appointed Galbraith as Ambassador to India – a sufficiently prestigious position for a person of Galbraith's stature in the Democratic Party but far enough away from Washington to keep him from meddling in economic policy.

Thanks again for your comments.

Kane Bauer from Michigan, U.S. on December 15, 2007:

Isn't it true though that there is really no such thing as tax cuts? the money just gets shuffled around depending on political beliefs. For instance, Dems are tagged as taxers and Reps are supposedly not, but in reality neither spend "bigger" or "smaller," nor tax more or less. The only difference is where dems put the money versus where reps put the money ie. programs vs defense, health vs. corporat investment.

Ralph Deeds from Birmingham, Michigan on December 12, 2007:

The other side of the story here, by economist Robert H. Frank of the Cornell Business School:

http://www.nytimes.com/2007/12/09/business/09view....

Chuck Nugent (author) from Tucson, Arizona on December 11, 2007:

William, thanks for the follow up comment. Obviously we are at opposite ends of the spectrum in terms of how we view this.

However, I have a simple suggestion for those who prefer not to have their taxes reduced and that is to point out that the taxes as levied are simply the minimum amount that we are required to pay. The IRS, and I presume state and local tax authorities as well, welcomes gifts of additional money from citizens who would like to pay more. So even thought tax rates are cut anyone is free to continue paying at the old rate. As a guide, I believe that in the 1960s and 1970s (pre-Regan cuts) the top rate in the U.S. on incomes in excess of $70,000 was 90% and in Great Britain prior to the Thatcher era the top rate on incomes over either 90,000 or 100,000 pounds sterling (the exact point escapes me) was 102%.

Thanks again for visiting my hub and for your comments.

William F Torpey from South Valley Stream, N.Y. on December 11, 2007:

Chuck, with all due respect your explanation of a deficit is a new version of Voodoo Economics. Bush inherited a surplus, not a deficit. When you cut taxes on the wealthiest of Americans you're inevitably going to spend more than you collect in taxes. On top of that, you drive up the cost of government when you spend vast sums of money "off budget" and lose billions of dollars to private contractors -- funds that aren't even accounted for, i.e., "lost." On top of that you don't save money by "privatizing" huge government operations, rather that just reduces or even eliminates needed services to taxpayers. Just compare Bush's horrendous record to that of Bill Clinton's: Clinton "achieved" a surplus; Bush "promises" to reduce the deficit after he leaves office.

Chuck Nugent (author) from Tucson, Arizona on December 10, 2007:

William, Thank you for your comment. However, the Federal Deficit is simply the difference between the federal government's current tax receipts and its spending. It is short term and no different from an individual charging purchases to a credit card and then paying it off at the end of the month.

Only when the government is unable to clear up the deficit and is forced to refinance it with long term borrowing does it become the National Debt which is what people are referring to when they talk about the debt burden on our grandchildren.

In an ideal world, Congress would cut spending along with taxes and thereby keep things in balance. However, even if they don't cut spending, cutting high marginal tax rates will result in economic growth (see my hub on "How Tax Cuts Work" https://hubpages.com/education/How_Tax_Cuts_Work ) which will increase tax revenue and clear the deficit as is now happening as a result of the Bush tax cuts. Do a Google search on "Federal Deficit 2007" and you will see that the deficit is falling. It would fall even more and be eliminated if Congress, both Republicans and Democrats, was not so irresponsible and insisting on increasing spending as fast or faster than the tax revenues are increasing.

In this case Republicans have proved that they can pander to special interests as well as the Democrats and waste tax dollars as fast as Democrats. That is one reason why many of us voted against the Republicans causing them to lose control of Congress in 2006 - we weren't voting for the Democrats but were rather voting against the Republicans by either abstaining, voting Libertarian or Democrat - anything to defeat the big spending Republicans and, hopefully, teach them a lesson.

Thanks again for your comment.

William F Torpey from South Valley Stream, N.Y. on December 10, 2007:

Political theory is fine, but as a practical matter, a deficit is nothing more than a tax increase in which the taxes will be paid by our grandchildren. Don't you think Bush was aware of the fact that Congress would be unlikely to put through "tax reform"?

joe silverman on December 23, 2006:

i enjoyed your piece on differing approaches to tax cuts. in contrast, the commentary on your piece illustrates what we see on most op-ed pages---political cant. it's sad that so many people are unable to think about public issues without parroting partisan myths.

Jason Menayan from San Francisco on October 30, 2006:

Unfortunately, deficits are nowhere close to disappearing, as they did under Clinton, which just goes to show you that today's Democrats are the real fiscal conservatives, while "Bush's son", who has never seen a piece of spending that he didn't like, is deficit-spending like no other previous administration, Democrat or Republican.

AMT was set up to extract tax revenue from tax-dodgers. I have a feeling it will eventually replace our existing tax code, which, with its countless writeoffs and loopholes, distorts business, public and personal spending.

Chuck Nugent (author) from Tucson, Arizona on October 29, 2006:

Here we go again.

You are right about the first President Bush, he did dismiss supply side theory and then went and raised taxes after promising not to raise them. We retaliated by sitting home and letting him lose the next election – I think his son got the message.

As to the Alternative Minimum Tax, you are right, it is a big problem. But this is just another one of the liberals class warfare tactics that is now backfiring and hitting some of them. Republicans have been trying to get rid of this tax, but the tax is so ingrained in their ideological dogma that they can't bring themselves to abolish it. By the way, this tax is more of a problem for people in the more liberal eastern states with their high state and local income taxes and property taxes which cannot be deducted in calculating AMT due. In Arizona and other parts of the west this is not as much of a problem as we quickly dispatch politicians to the unemployment line when they try to raise these taxes in our state.

And, thanks for the quote from the New York Times, after a lifetime of listening to them push every tax under the sun it is refreshing to hear them cry crocodile tears about a tax hits their own wallets. I believe the term for this is “poetic justice.”

Ralph Deeds from Birmingham, Michigan on October 29, 2006:

"Supply side" economics doesn't have much credibility among academic economists. Comparing "suppply side" economics and orthodox economic theory is setting up creationism up as an alternatie scientific theory alongside evolution. George Bush's father called supply side "voodoo economics." It's designed to get politicians elected and to shrink the government, returning the country to social Darwinism.

Here's what the NY Times lead editorial today said about George Bush's tax cuts and the future tax outlook::

FUTURE TAX SHOCK

One of President Bush's be-very-afraid lines this campaign season is the Democrats, if elected, will raise taxes. What he doesn't say is that if you are one of the tens of millions of Americans who make between $75,000 and $500,000 a year, your taxes are already scheduled to rise starting next year--because of laws that Mr. Bush championed and other actions he failed to take.

The higher taxes stem from the alternative minimum tax, a levy that is supposed to snare multimillionaires who would otherwise get away with using excessive tax shelters to wipe out their tax bills. But these days, the alternative tax is snaring many upper-millde income filers.

Mr. Bush set the trap in 2001--and in 2003, 2004 and in 2006. In each of those years, he flogged for new tax cuts without requiring corresponding long-term changes in the existing rules for the alternative tax. It was well known that failure to update the alternative tax would create perverse interactions with the new tax cuts, causing filers' tax bills to drop because of the cuts, only to shoot back up again from the alternative levy.

Mr. Bush said he would vanquish the problem throught tax reform. Didn't happen. Congress never wrestled with lasting solutions. The truth is, the president and lawmakers are paralyzed. To fix the alternative tax while keeping the Bush tax cuts on the books would result in the loss of some $800 billion in revenue over 10 years, blowing a hole in the fe