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Untangling Sherrod’s Keynesian Nonsense

Posted by Brian Garst on December 1, 2010

Nancy Pelosi was rightly mocked for her nonsensical assertion that subsidizing unemployment is the best way to stimulate the economy.  Unfortunately, as we pointed out at the time, such claims reflect nothing more than standard Keynesian economics as understood by so many politicians.  Now Sherrod Brown’s saying the same thing:

“Congressman Cantor (R-VA) either failed English class or failed logic class or failed history class because these tax cuts for the rich that Bush did twice, in ’01 and ’03, resulted in very little economic growth. We saw only one million jobs created in the Bush years, 22 million created in the Clinton years when we reached a balanced budget with a fairer tax system,” Sen. Sherrod Brown (D-Ohio) said on MSNBC.

“There is no real history illustrating that these tax cuts for the rich result in jobs. It’s extending unemployment benefits that creates economic activity that creates jobs, not giving a millionaire an extra ten or twenty or $30,000 in tax cuts that they likely won’t spend,” Brown said.

It’s easy to scoff once again at the silly notion that subsidizing unemployment “creates economic activity that creates jobs.” There are reasonable humanitarian arguments for some form of safety-net, sure, but there’s no pro-growth argument for extended unemployment benefits. But there’s a lot still to untangle here.

First, the  Bush era tax cuts were an amalgamation of a number of different approaches, including both a lot of gimmick handouts and a few good supply-side cuts. We know the gimmicky rebates in 2001 didn’t do anything, just as they didn’t when both Bush and Obama tried them again in 2008 and 2009, but that’s also the type of policy Sherrod implies he would support when he articulates, by scoffing at the “tax cuts that they likely won’t spend,” the common misconception that the benefit of low tax rates comes in the form of increased consumer spending (our latest video can explain more fully the fallacy of this Keynesian approach).

The 2003 cuts, on the other hand, contained some better policies, such as lower marginal tax rates on income and reductions in the capitals gains tax. The benefits from these lower rates comes not from increased consumer spending, but because they reduce barriers on saving and investing.

Due to the nature of their earnings, taxes on the so-called rich are more often than not taxes on capital, which slows economic growth because capital is the lifeblood of a capitalist economy. The rich, moreover, can more easily determine the manner and timing of their income, which makes them more responsive to marginal tax rates than other brackets. High tax rates on anyone is bad, but there are few faster ways to drown an economy than trying to “soak the rich.” This is why it is imperative that we not raise those rates now, or ever.

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