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Tax cuts stimulate business which creates wealth through investment, innovation, and productivity. More people making money means more people paying taxes on more transactions and income. Net gain so long as the cuts don't run too deep too quickly.

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Supposedly, top-bracket tax breaks will result in more jobs being created, higher wages for the average worker, and an overall upturn in our economy. It's at the heart of the infamous trickle-down theory. The past 40 years have seen a gradual decrease in the top bracket's income tax rate, from 91% in 1963 to 35% in 2003.

Overall, data from the past 50 years strongly refutes any arguments that cutting taxes for the richest Americans will improve the economic standing of the lower and middle classes or the nation as a whole. To be sure, the economic indicators examined in this report are dependent on a variety of factors, not just tax policy. However, what this study does show is that any attempt to stimulate economic growth by cutting taxes for the rich will do nothing -- it hasn't worked over the past 50 years, so why would it work in the future? To put it simply and bluntly, Bush's top-bracket tax cut is an ineffective attempt at stimulus that will not cause any growth -- unless, of course, if you're talking about the size of the deficit.

The drastic change in tax policy that has taken place since the early 1960s gives us a great opportunity to study and evaluate the claims that lower taxes for the rich translate to more wealth for the average American.

Let's look one by one at comparisons of key economic indicators to the top tax rate.

1. Cutting the top tax rate does not lead to economic growth.



This graph shows the fluctuations of the real GDP growth rate over the period, indicating the performance of the U.S. economy as a whole. It is true that growth increased drastically after the 1982 tax cut, reaching as high as 7.3% in 1984. However, as the Reagan-Bush, Sr. administrations went on and taxes for the rich were slashed even further, growth fell to negative levels during 1991, at the heart of the last recession. And, two of the three years with the highest growth were during the 1950s, when the top tax rate was 91%. Overall, there seems to be no close relationship between the top tax rate and the GDP growth rate, and statistical analysis backs this up: the correlation coefficient between the two variables is 0.03, meaning that there is essentially no connection. (If tax cuts were strongly related to GDP growth, we would see a coefficient close to -1.) So much for upper-class tax cuts boosting the economy; now it's on to median income growth.

2. Cutting the top tax rate does not lead to income growth.

Again, we see inconclusive evidence for the power of tax cuts. We do see small peaks in median income growth, a good measure of how the average American household is doing, after top-bracket tax cuts in the mid-1960s and early 1980s, but we also actually see income decreases after the tax cuts of the late 1980s, and strong growth after the tax increase of 1993. It is true that in the year with the worst median income decrease (3.3% in 1974), the top tax rate was 70%. However, it was also 70% in the year with the highest median income growth (4.7% in 1972)! Once again, the lack of connection between the two measures is backed up by a correlation coefficient near zero: 0.06, to be exact. And yes, yet again, the coefficient is positive, indicating that income has gone up slightly (though negligibly) more in years with higher taxes. Two strikes. How about hourly wages?

3. Cutting the top tax rate does not lead to wage growth.



Not surprisingly, we have mixed results yet again! Growth in average hourly wages did increase during the 1980s following the first Reagan tax cuts, albeit two years after the cuts took effect. But, just like GDP growth and median income growth, hourly wages decreased following the late 1980s tax cuts, and spiked upwards after the 1993 tax increase.

Furthermore, wages grew at a level of at least 1%, and usually much more, all throughout the period when the top income tax rate was 91%. In fact, it isn't until 1972 that we see a wage growth rate of less than 1%. However, if we look at the 19 years of the study period when the top tax rate was 50% or less, we see that 8 of the years saw an increase in wages of less than 1%. Thus, it seems that hourly wages grew more when taxes were higher - indeed, the correlation coefficient is 0.34, indicating a mild positive relationship between higher taxes for the rich and higher hourly wages. This finding flies in the face of the conservative theory. As if that's not enough, now let's see about what President Bush claimed would be the biggest result of tax cuts - job creation.

4. Cutting the top tax rate does not lead to job creation.



Here, we see the change in the unemployment rate laid against the top tax rate from 1954 to 2002. Thus, negative values signify a decrease in unemployment -- in essence, job creation. Once again, while the top tax rate trends downward over the period, the annual change in unemployment doesn't seem to trend at all! Although the largest increase (2.9%) did occur in 1975, when the top marginal tax rate was 70%, three of the four largest decreases in unemployment occurred in years when the top rate was 91%. The mixed results do not bode well for those who see tax cuts for the richest as a sparkplug to incite job growth. The correlation coefficient between the variables here is 0.11 -- meaning that there have been slightly more jobs created in years with lower top tax rates, but this pattern is negligible -- nowhere near strong enough to signify a relationship.

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Reagan's policies did more than simply cut income taxes. A large number of tax loopholes were written into the tax code that catered to special corporate interests. In fact many of the current scandals involving companies such as Enron are rooted in laws that were passed during the Reagan administration that gave these companies more legal legroom to work with and less oversight.

In addition, the small “income-tax cuts” that were given to the middle and lower income tax brackets were countered with new taxes that were directed at middle and low income individuals

There is no realistic way for "Trickle-Down" economics to work to increase the income of the working classes of America. In fact I am certain that the developers of the theory of "Trickle-Down" economics were fully aware of this and that "Trickle-Down" has in fact worked as intended. This means that the intent behind implementing "Trickle-Down" was to benefit the wealthiest Americans at the expense of working class Americans. "Trickle-Down" hasn't failed, as many modern economists have suggested, it has succeeded in its goals, which is the increase of economic inequality and the shift of a greater portion of America's wealth into the hands of the wealthiest Americans.

The effects of "Trickle-Down" policy are evident. As would be expected from the policy, the largest beneficiaries of the "Trickle-Down" system have been the wealthy.

Individual earnings inequality as reported by the U. S. Census Bureau was falling or stable from the 1960s through the 1970s, however, beginning in the 1980s, along with the economic reforms of "Trickle-Down" policy, income inequality began to rise and has continued to rise dramatically ever since.



This next graph shows an even longer range view. This shows after tax income in 2000 dollars going back to 1913 for the top 1% and the average for the remaining bottom 99%.



The truth is that "Trickle-Down" was never intended to help middle income and poor Americans; it was intended to help the wealthy and Corporate America.
The economic policies of the Reagan era increased the trade deficit and provided easier ways for companies to "hide" money.
1980 the top 1% of tax filers received 8. 45% of American AGI (Adjusted Gross Income) and in 2000 that figure had risen to 20. 81% of the national AGI. Today the over 50% of the national income goes to the wealthiest 20% of Americans. This is the first time since 1935 that such a large portion of the national income has gone to such a small portion of the population. In 1967 the wealthiest 20% only accounted for 43% of the nation's income. The trend began in 1982. Between 1967 and 1982 middle-income households were gaining a larger share of the economy. What this means is that between 1982 and 2001 the bottom 80% of Americans have lost share in the nation's economy. This was the inevitable result of Reaganomics. It was an intended result. Political control and economic control go hand in hand. If the control of the economy is not in the hands of the majority of Americans then neither is political control.

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Trickle-down economics "is the view that to benefit the wealthy is to benefit the middle classes and even the poor. Essentially, high taxes prevent upper-income taxpayers from spending and investing. By freeing them from high tax rates, their expenditures will have a "trickle-down" effect that will benefit lower income earners. However, Republican economic policies have demonstrated trickle-down economics offer no revolutionary effect. Instead, the resulting wage, investment and job growth is on par or below levels associated with an economy that uses higher-marginal tax rates on upper-income earners.

Comparable Growth in Investment Spending
OK - corporations and individuals have more money. They must be investing that in the US to make us more productive, right?
Wrong. (All of these statistics are from the Bureau of Economic Analysis GDP reports). During the 1990s, the median level of total investment spending as a percent of GDP in the US was 15.97%. During the 2000s, the total is 15.91% -- a statistically insignificant difference. What is interesting is the median amount of non-residential investment spending was higher in the 1990s coming in at 11.18%, whereas that number is 10.45% for the 2000 expansion. In other words, nonresidential investment is less in the 2000s when pro-investment policies should have spurred higher investment spending.

So, there is no evidence that supply-side tax cuts spur a statistically meaningful increase in total domestic investment. In fact, nonresidential investment spending is lower so far for this expansion, repudiating the idea that supply-side tax cuts increase investment spending.

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Recent evidence that the economy has weakened significantly has sparked discussion of possible fiscal stimulus measures. To be effective, such measures must be timely, targeted, and temporary.

• Timely measures are those that, once triggered, stimulate new spending quickly so that businesses do not have to cut back on production or lay off workers due to weak demand.
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• Targeted measures include those aimed at people who are most likely to experience hardship in a weak economy, since they are most likely to spend quickly the bulk of any new resources they receive. Targeted measures also include those aimed at entities that would quickly spend any relief they receive, such as fiscally strapped state governments. If measures are not targeted, any stimulative effect is likely to be relatively ineffective.
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• Temporary measures are those that expire once the economy improves. Measures that are not temporary will increase long-term deficits, weakening the economy over the long term — and possibly in the short term as well, if the prospect of greater long-term deficits causes interest rates to be higher than they otherwise would be.

Some policymakers appear to assume that tax cuts are inherently stimulative, while spending increases are inherently less desirable as economic stimulus. Such assumptions do not withstand scrutiny. Both spending measures and tax cuts can be effective — or ineffective — as stimulus, depending on their nature and design.
As Nobel laureate Joseph Stiglitz and now-CBO director Peter Orszag wrote in late 2001, “Basic economic analysis indicates that increased government expenditures can indeed be stimulative, and, in fact, are often more effective as stimulus measures than tax cuts.” Similarly, two senior Federal Reserve economists found in 2002 that increases in government purchases tend to have a greater stimulative effect than tax cuts that have the same cost, because more of the increase in government spending will translate quickly into an increase in total spending in the economy, while a substantial part of a general tax cut will typically be saved.

Components of an Effective Stimulus Package

An effective stimulus package — one that meets the above criteria — should include four elements:

• Strengthened unemployment insurance. Temporary increases in unemployment insurance (UI) benefits are particularly effective as stimulus: the benefits go to workers who have lost their jobs, so the added income is likely to be spent quickly. As CBO director Orszag recently told the House Budget Committee, “research has shown that the unemployment insurance system is among the most effective dollar-for-dollar economic stabilizers that we have in terms of counterbalancing periods of economic weakness.”

• State fiscal relief. As of late-January, half the states already were reporting that they face budget shortfalls for fiscal year 2009 (which begins for most states on July 1). Nineteen of them have quantified their projected shortfalls, which total at least $32 billion for these states alone. Both the number of shortfalls and the size of the combined shortfalls are expected to rise sharply in coming weeks as more states complete budget reviews and governors unveil their 2009 budgets.
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Because states must balance their budgets each year, the drop in revenues that results from an economic slowdown causes serious problems, forcing states to raise taxes or cut spending in the middle of a recession and thereby further weakening the economy. States typically institute hefty cuts in health care, education, and aid to local governments during economic downturns. Temporary fiscal relief can enable states to minimize these budget cuts and tax increases. In the last recession, Congress provided $20 billion in fiscal relief to the states.
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• Temporary increase in food stamp payments. Dollar-for-dollar, this is one of the most effective forms of stimulus available. Virtually all of an increase in food stamp benefits would be spent, since food stamp households — about 90 percent of whom live below the poverty line — generally spend all their resources to meet their daily needs. Martin Feldstein, chairman of President Reagan’s Council of Economic Advisers, recently joined those calling for a temporary food stamp increase, noting that it would be stimulative because it would provide resources to people with a high propensity to consume.

Moreover, increased food stamp benefits would be injected into the economy much more quickly, and could be implemented much more easily, than almost all other forms of stimulus. Increased food stamp benefits can be issued within 60 days after enactment, and about 80 percent of all food stamp benefits are redeemed within two weeks of issuance. Some 97 percent are redeemed by the end of the month. Moreover, the administrative costs of a temporary benefit increase would be negligible. In contrast, temporary expansions of most other programs except unemployment insurance would take additional months to actually show up in the economy and, in many cases, would entail increased administrative costs.

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The income gap between the richest and poorest Americans grew last year to its widest amount on record.

A different measure, the international Gini index, found U.S. income inequality at its highest level since the Census Bureau began tracking household income in 1967. The U.S. also has the greatest disparity among Western industrialized nations.

"Income inequality is rising, and if we took into account tax data, it would be even more," said Timothy Smeeding, a University of Wisconsin-Madison professor who specializes in poverty. "More than other countries, we have a very unequal income distribution where compensation goes to the top in a winner-takes-all economy."

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Income growth in dollars, by quintile. Note the highest income group (Q5) has risen at a much higher rate than the other quintiles.

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Sure some want to raise taxes on the rich to fund their pet social experiments like ObamaCare

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but there is almost universal agreement that raising taxes on everyone would be really, really bad.

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A majority of those polled by Gallup agree with President Obama that Bush-era tax cuts for the rich should be phased out.

Forty-four percent of those polled want tax cuts for individuals making less than $200,000 and families under $250,000 to be extended, but favor phasing out tax cuts for people who earn more than those thresholds.

Another 15 percent favor allowing the tax cuts for the rich to expire along with the middle-class tax cuts, according to Gallup.

That means 59 percent favor ending the tax cuts for the rich.

Thirty-seven percent of those polled by Gallup want to keep all the tax cuts in place.

A large number of Republicans disagree with Boehner, according to the poll.

Thirty-two percent of Republicans favor allowing the tax cuts for the rich to expire. Another 11 percent of Republicans polled think all of the tax cuts should be allowed to expire.

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John Boehner (R-OH) invoked the elections to justify his unwillingness to budge on the Bush tax cuts. "We made clear that we believe that all the current tax rates should be extended for all Americans and permanently," Boehner said. "And the American people spoke on election night. They elected Republicans in droves."

But reality tells a different story. For the past several months, polls have consistently found that the majority of Americans want to end the tax cuts for the wealthiest Americans. Moreover, there is no evidence that the "shellacking" Democrats suffered in the elections had anything to do with tax rates for the top 2 percent of earners; in fact, exit polling still found that most Americans support allowing the upper-income tax cuts to expire.

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President Bush has the worst track record for job creation since the American government began keeping records in 1939. The Bush administration created just 1.1 million jobs net, while the Clinton administration created 22.7 million

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In the last year of the Bush administration, the monthly job loss numbers built steadily to a peak which then began to reverse itself during Obama's first year.

Now, whether this was the result of Obama's and Bush's policies... or whether it's just a matter of timing, is obviously open for debate.

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being unemployed under Bush was worse then being unemployed under Obama

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