Back in the 1980s, Jim Bakker and his wife Tammy Faye managed to make
themselves very rich through their preaching. To the uninitiated, this couple's
pitch sounded pretty much like "send us money and the Lord will make you
rich." Apparently, large numbers of viewers sent these televangelists their
money, since they managed to accumulate considerable wealth with this approach.
It's not clear that their followers did quite as well.
President Bush and other proponents of tax cuts for the wealthy seem to be
following in the Bakkers' footsteps. The basic story is that if we just give
more tax cuts to the rich, then the economy will grow more rapidly, and we will
all be rich. These folks claim that if we give the rich incentive to get even
richer - through lower taxes - then they will work harder and save more, and we
will all benefit.
You would have to take this one on faith, because there surely isn't any
evidence that lower taxes for the rich means more economic growth. The tax rate
on the rich peaked in the '50s and '60s, which were also the decades in which
the nation enjoyed its most rapid growth and widely shared prosperity. Tax rates
on the rich were lowest in the '80s, which also happened to be the slowest
decade of growth in the postwar era. President Clinton raised taxes on the rich
in 1993, and through the rest of the decade the economy saw its best period of
growth since the '60s.
This slice of history is not sufficient to prove that higher taxes on the
rich lead to higher growth - but it does make it necessary to perform serious
intellectual gymnastics in order to argue the opposite case. Of course since the
rich have a disproportionate voice in our political system, there is no shortage
of intellectual gymnasts who are prepared to perform such feats, in spite of the
evidence.
Just to complete the picture, it is easy to tell a story as to why more tax
cuts to the rich don't necessarily lead to more growth. First, it is important
to remember that the money for the tax cuts comes from somewhere. If the rich
pay less in taxes, then it means that someone else must be paying more. Whatever
amount of money we decide we need to run our government, the smaller the portion
that comes from the rich, the greater the tax bite on the middle class or
working poor. And, if we accept the argument that higher taxes on rich people
reduce their incentives to work and contribute to economic growth - then higher
taxes must also reduce incentives for middle-income and poor people.
It is also possible that we will cut forms of government spending that
directly contribute to growth as a result of tax cuts for the wealthy. During
our period of rapid growth in the '50s and '60s, the government spent large
amounts of money to build up the infrastructure of highways and airports. It
also vastly improved the nation's education system, making college affordable to
the middle class for the first time. In addition, the government funded research
into computers and other cutting edge technologies, which had enormous payoffs
in subsequent decades. If the government had instead given tax breaks to the
rich in 1950, it probably would not have undertaken such an ambitious investment
agenda.
There is one final reason - well known to economists - that more tax breaks
to the rich might not help the economy. If you give them more money, they may do
less: The rich may just retire early, satisfied that they had all the wealth
they needed.
A long range of experts, from Douglas Holtz-Eakin, the current director of
the Congressional Budget Office and former Bush advisor, to the investor Warren
Buffet, have presented the case that cutting taxes for the wealthy will not
increase growth. Lacking evidence, like the Bakkers, President Bush prefers that
we accept his tax cut on faith.
