Bush’s Tax Cuts and Trickle-Down Economics

Despite the tantrum thrown by the Democrats in Congress, I am afraid that the agreement between Obama and the Republicans to renew Bush’s tax cuts for two years is going to be approved. I say that I’m afraid because there are many arguments against the renewal of the cuts for people with an annual income over $250,000.

To begin with, even conservative economists warn that it will significantly increase the public deficit, when one of the messages sent from the polls last Nov. 2 was to do whatever possible to reduce it. It is calculated that the cost of extending the tax cuts for people with high incomes during the next 10 years will be around $700 billion, an amount nearly as large as that of Obama’s criticized economic stimulus package.

Secondly, from a moral point of view, it does not seem right that those who are best weathering the storm of the crisis – or have even profited despite having caused it, such as the CEOs of the big Wall Street banks – should not have to tighten their belts like those who have lost their jobs or have had their salary decreased.

Also, it should not be forgotten that Bush’s tax cuts disproportionately benefited the rich. In fact, the amount of these tax cuts increases as you go up the income scale.

However, even from an economic point of view, the most common of the Republican arguments — the renewal — does not seem to make much sense. The conservatives base it off of the “trickle-down” theory, which assures us that if the rich have more income available it will generate new investments and therefore more jobs, making it the best way to help those who have lost the most during this crisis: the unemployed.

Now, then, the problem is that the data from the last few years in the United States does not support this theory. How is it possible that during the growth period after 2001, when the tax cuts were approved, the income in the majority of households was stagnant? Shouldn’t the people lower down on the scale also get help? If the tax cuts are so essential why haven’t they prevented the crisis from being so severe?

The answer is that the theory is based on false premises. The destination of the tax cuts for the rich does not always have to be productive investments; rather, it could be the purchase of luxury items, such as a new car, a yacht or a trip to the Caribbean. Also, the portion that they do invest is not allocated entirely in the United States, but also abroad in search of higher profitability.

If what is really wanted is to foster small businesses to increase their investments to create more jobs, a tax cut could be created specifically for these companies. However, it seems like that hasn’t occurred to anyone or that no one cares.