Why are the benefits of the Bush tax cuts?

Sept. 10, 2004 — Q: I was wondering what exactly is the idea behind the benefits of Bush's tax cuts? I understand that there are two very opposing views on this, but maybe if someone could explain to me the alleged math behind it, I would find it a little easier to decide who to vote for. What is all this about trickle down economics and such that I'm missing?—George G.,  Little Rock, Ark.

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A: In theory, tax cuts help stimulate the economy by putting more money in peoples’ pockets, which they then spend on goods and services. The increased demand for those goods and services creates new jobs, which puts more money in those new job holders’ pockets, and around and around it goes. That’s the “trickle down” part. Economists also call it the “multiplier effect” -– one dollar in tax cuts produces more than one dollar in new economic activity.

It’s generally agreed that the Bush tax cut did have the intended impact: The economy perked up and so did job growth. The question is whether the tax cut was the best way to accomplish that goal. For one thing, tax cuts work best if they’re targeted at people who will spend the money. It’s less clear that wealthy people change their spending habits much; many simply use the tax cut to acquire more wealth, which does little to help economic growth. (Democrats argue that too much of the tax cuts were aimed at the wealthy; Sen. Kerry has proposed reversing the cuts for the very wealthiest.)

It’s also not clear how much “staying power“ the latest round of tax cuts will have.  If you give everyone a few hundred dollars to spend, things will pick up as that “tax rebate” moves through the system. But once spent, will the economy keep growing or weaken until the next tax cut comes along? Critics of tax cuts argue the money would be better spent on things like job training to give people skills to get better jobs, which help make the economy stronger. But the success of past jobs training programs has been mixed.

The staying power of this economic recovery over the next two months will be critical to the outcome of the election. That’s why everyone is focused so closely on the monthly employment numbers; they’ve been showing OK — but not great — economic growth. Keep in mind there are other economic forces at work as well; by some estimates, the recent rise in the price of oil pretty much wiped out the economic benefits of the Bush tax cut.

What’s more troubling to “fiscal conservatives” of both parties is that the combination of massive tax cuts and major new spending for the war in Iraq has destroyed a decade’s worth of work (by both parties) on balancing the federal budget. For the first time in modern history, the U.S. government in the late 1990s behaved like most U.S. wage earners — it lived within its means. But deficits are once again piling up at the rate of hundreds of billions of dollars a year. So in that sense at least, the Bush tax cut simply doesn’t add up.