Tax cuts don’t cause growth

Written By: - Date published: 6:51 am, May 24th, 2010 - 27 comments
Categories: budget 2010, economy, tax - Tags: ,

Tories claim that tax cuts “cause growth” in the economy. They “grow the pie”. How much growth exactly? How much growth from the budget tax cuts?

The Budget tax package is conservatively forecast to add about 1% to the size of the economy by 2017, says English.

1% ? By 2017 ? Pardon me if I am underwhelmed. That’s not even a real prediction of growth, that’s margin of error. Keith Ng:

This is actually a tax cut. It will cost $1.085b in the next four years. The only reason they can say it’s ‘revenue positive’ by 2013/14 is by adding a line called ‘Adjustment for macroeconomic effects’. That is, they argue that tax cuts will spur economic growth, and therefore the economy will grow faster, and so it’ll be revenue positive by 2013/14.

It would be unfair to call this magic money, but at the very least, it’s entirely theoretical money. Not only can we not know whether it’s real or not now, but we won’t know whether it’s real or not in 2013/14.

The reason the Nats aren’t predicting real growth is that they know it isn’t true. “Growth” is just one of the lines they run to keep us nodding dumbly while they hand huge cuts to the rich. Tax cuts don’t cause growth. Gordon Campbell took them to task on this:

Will the tax cuts deliver economic growth, savings, jobs and higher wages? For decades, right wing economists have claimed both here and overseas that tax cuts are a crucial engine of economic growth. Reality, as often as not, has begged to differ.

Here in New Zealand during the mid 1980s, a major package of tax cuts was followed by years of little or no growth, and ultimately, by a recession. In the early 1990s, Bill Clinton’s tax hikes immediately preceded the longest and most sustained economic boom in the US since the Second World War.

In 1998, the true believers in the National government were predicting that tax cuts would foster savings fully one third of that round of tax cuts, Treasury predicted, would be saved. They weren’t.

In 2000, the incoming government hiked up the top tax rate and this neither caused, nor prevented, a prolonged bout of economic good times. Ultimately, there is no essential link, either way, between tax cuts and economic growth.

Tax cuts haven’t caused growth historically in America:

The highest period of growth in U.S. history (1933-1973) also saw its highest tax rates on the rich: 70 to 91 percent. …

A review of American history makes the opposite case that conservatives would like it to make: high growth usually coincides with high taxes. During both world wars, taxes soared to record heights. And the supercharged economies that resulted produced high growth for decades afterwards. World War I was followed by the Roaring 20s; World War II was followed by the boom times of the 50s and 60s.

Tax cuts haven’t caused growth recently in America:

Myth 3: The economy has grown strongly over the past several years because of the tax cuts. Reality: The 2001-2007 economic expansion was sub-par overall, and job and wage growth were anemic.

Members of the Administration routinely tout statistics regarding recent economic growth, then credit the President’s tax cuts with what they portray as a stellar economic performance. But as a general rule, it is difficult or impossible to infer the effect of a given tax cut from looking at a few years of economic data, simply because so many factors other than tax policy influence the economy. What the data do show clearly is that, despite major tax cuts in 2001, 2002, 2003, 2004, and 2006, the economy’s performance between 2001 and 2007 was [far from] from stellar.

And in 2008? The American economy, despite all the recent Bush tax cuts, simply imploded.

The truth is that tax cuts come and go. Growth comes and goes. Sometimes cuts and growth coincide, sometimes they don’t. But no honest review of the long term historical picture can sustain the claim that “tax cuts cause growth”. They do not. So let’s not put up with this lie anymore!

27 comments on “Tax cuts don’t cause growth”

  1. The further problem with the tax cuts is that they will exacerbate the country’s balance of payments problem.

    Far too much of the shareholding in our listed companies is owned by overseas interests. The company tax cut will see the flow of dividends overseas increase.

    And the wealthy are fairly predictable in their spending habits. Give them extra money and they will either import more or take more overseas trips. Both types of behaviour will again cause the balance of payment problem to worsen.

  2. Bored 2

    Lets just see the tax cuts for what they really are, a massive transfer of the collective pool of cash earmarked for public expenditure) too the rich. What this means is less of any of the things we collectively use, such as health and education services for all etc etc.

    ROB is right, this is never going to deliver growth, the rich are grasping so hard for tax cuts because they have reached the limits of growth, or easy ways of gaining “productivity” in NZ. The mobile nature of capital means that those who get the greatest returns will invest in Somali factories, Honduran sweatshops and Phillipine call centres by way of international corporate shares.

    Which means we shall see declining services and more calls for efficiency and cost cutting. Meanwhile if you are a million dollar income person, who cares, you just buy what you need and damn the rest of us.

  3. Name 3

    Tax cuts can grow a nation’s economy if they stimulate it – ie if they are spent or invested on the means of production within it. New Zealand does not have that kind of economy.

    New Zealanders getting tax cuts are not going to spend the extra cash on the things New Zealand produces – who is going to buy more milk, butter, cheese, meat or seafood than they did before? And even if they did that would merely divert to the home market goods which would otherwise be exported and earn foreign exchange. To the extent tax cuts are spent on consumer goods they merely increase employment and profits in China, India, the US etc.

    No-one in their right mind will invest in New Zealand’s moribund stock market, which is anyway small enough to be played and creamed by even a moderately-sized hedge-fund. And who with any kind of mind at all would be stupid enough to invest with a Finance Company now?

    So about the only thing – apart from foreign jobs – that New Zealanders can spend their tax cuts on is their mortgage, which means everyone will be able to afford a bigger one, which means that property prices will go up across the board to soak up the extra buying power.

    • Zaphod Beeblebrox 3.1

      So true, be interesting to see what the effect of tax cuts will be on the Current Account deficit. Since the wealthy mainly consume things not produced in NZ, I’m tipping it will be fairly ugly.

      [Zaphod – there’s lots of junk in the name field when you write a comment – I keep deleting it – can you check – ta — r0b]

      • Draco T Bastard 3.1.1

        The junk in the name field seems to happen at the servers end. It seems that it automatically puts “http://” in the web address field for instance.

    • Draco T Bastard 3.2

      Tax cuts can grow a nation’s economy if they stimulate it ie if they are spent or invested on the means of production within it. New Zealand does not have that kind of economy.

      No country does. It’s really only the government, operating as the peoples administrators, that direct investment to grow the economy (and even then it will only be a socialist government that will do so). Individuals will only take the best option for them and that means, in this globalised economy, investing somewhere else where growth can be tapped for interest. NZ, and many other industrialized countries, don’t have that growth potential.

  4. randal 4

    rob you must kneow that the simple minded need some sort of myth legend slogan mantra to repeat ad nauseum. all leaders know that the purpose of propaganda is not to ensure compliance to the idea but to make sure that everyone is singing from the same songsheet and to ferret out backsliders.
    this sort of jingoistic tripe from national is tailor made to let the idiotes in the national party believe that they are actually doing something when all they are really doing is providing cover so the real issues are never examined. lets have the evidence of this assertion but you know and I know there is no evidence but as long as the gnats are in power they will just keep trotting out the same old tripe.

  5. nzfp 5

    Hey r0b,
    When you report “Tax cuts don’t cause growth” it really depends on the context of the cut. I understand as will the rest of your readers that you are refering to the tax cuts in the recently released National budget. However, it is important to remember that the National tax cuts – without appropriate land tax and regulation on the housing market – will very likely cause growth in the NZ housing market.

    Without land tax and regulation any available capital will be soaked up by the Banks as mortgage capitalization. Upper, and upper middle income earners with more cash, now have more capital available to them to bid up the prices of property which in turn increases spending (debt) which is the key indicator of GDP. The effect will be to worsen housing affordability and push house prices further out of reach of avearage New Zealanders, forcing families into requiring two incomes, greater debt and risk.

    Of course if the tax cuts took the form of high income taxes, land and economic rent tax and financial transaction taxes then we would see a stimulation of our economy. However, tax reforms such as these would result in the majority of the tax burden shifting from labour onto the rich and the banks which is exactly the demographic our Prime Minister, Deputy Prime Minister, and most of the sitting MP’s from any party are placed.

    There’s a couple of great coloquialism that go something like “don’t $#!t where you sleep” and “pigs might fly”.

  6. TightyRighty 6

    if tax cuts don’t grow the pie, is it not a good thing that more of the pie remains in the hands of those who have earnt it?

    it isn’t really a given that the only form of investement outside of property is in the stock market in the form of individual stocks per se. a lot of kiwisaver funds, and even the cullen fund, are indexed against the NZSX and other foreign stock exchanges, and those portions of the funds can show a healthy return. In fact, investing in an indexed fund can show a better return on investement than property, without the absolute risk of investing in one company.

    So if a private individual with more of their income left in their pocket invests in one of these freely available indexed funds, and it shows a return, that grows the individuals pie right? now multiply that by all the individuals in the market, does that not grow the whole pie?

    • Bright Red 6.1

      “if tax cuts don’t grow the pie, is it not a good thing that more of the pie remains in the hands of those who have earnt it? ”

      Are you saying that because you earn less than me, you don’t work as hard tighty? You lazy bugger.

      “blah blah blah, does that not grow the whole pie?”

      No, it doesn’t, the facts show it doesn’t. Sorry. Want to know why? Because the moeny for the tax cuts didn’t come out of thin air. If the tax cuts are spent or invested it’s only because others couldn’t spend or invest the money instead.

      • TightyRighty 6.1.1

        i take it your first point is sarcasm, pretty weak sarcasm at that.

        Your second point though, well. Tax cuts are a reduction in revenue to the government, this is matched by an increase in after tax income for the individual and business that pay tax. it’s a book keeping thing.
        “If the tax cuts are spent or invested it’s only because others couldn’t spend or invest the money instead.” so it’s a bad thing that workers get to decide whether or not to consume or invest the difference in their income after tax cuts, as opposed to someone else doing it with their money?

        I know you like to attack the ideaology behind a message rather than the message itself, which was politically neutral, but can’t you see the reasoning of the message? if the cullen fund should not have had it’s contributions stopped, as the cullen fund is growing it’s pie, why shouldn’t tax cuts be able to grow the pie if they leave individuals extra income available for investing?

  7. Draco T Bastard 7

    And in 2008? The American economy, despite all the recent Bush tax cuts, simply imploded.

    It’s probably more accurate to say that the US economy imploded because of the tax cuts.

    • TightyRighty 7.1

      really? why? there seem to be several underlying factors to the bust in 2008. some can be traced back to the clinton era. and yet tax cuts caused the whole thing? i find it hard to believe that you can draw a plausible link between workers have more of their own money in their pockets and the implosion of an entire economy.

      • Because, like here, the tax cuts went to the wealthy in Bush’s handout, not workers. Instead of having money to spend, American workers were encouraged to borrow to live the dream and it was that reckless lending that knackered the US economy.

        There is every chance that something similar will happen here, as workers borrow to cover the gap the Nats’ tax hike has created. Not to mention that the cuts in public services that will partially pay for this backhanded bung will impact most heavily on workers as well. Its Win/Win for the wealthy, Lose/Lose for the many.

        • TightyRighty

          what tax hike for the workers? do you mean the adjustment to where the tax dollars come from to a more equitable tax on consumption rather than a regressive income tax? so that people can have a choice as to whether they want to consume everything now, or save a portion and be able to consume more in the future?

          • What choice? What savers? Consumerism is compulsory in western society, haven’t you seen the ads? The tax cut on wages will be less than the increased outlay on the current NZ household budget with the new tax increase on consumption. And the promotion of consumption is what capitalism depends on. No spending, no capitalism.

            The simple fact is that workers will pay more tax under this bludgers’ budget, because the vast majority of us spend our income and more. The rich have choice, because they have more disposable income above that needed for daily sustenance by the rest of us. There is no point pretending this tax increase gives working people a choice. If you want to give them real choice, give them a wage rise. Hell, give ’em the company! Could hardly do worse than some of the plonkers running firms here, bleating that they can’t make a profit in the one of least regulated, lowest taxed business environments in the Western world.

      • Draco T Bastard 7.1.2

        i find it hard to believe that you can draw a plausible link between workers have more of their own money in their pockets and the implosion of an entire economy.

        The money didn’t go to the workers but to the capitalists which increased the amount of hot money looking for a a high return investment in the financial economy. This was to the tune of a few hundred billion per year. It was this demand that increased the amount of high risk debts and fed the US housing bubble. I’d say it fed into ours as well.

  8. The only reason they can say it’s “revenue positive’ by 2013/14 is by adding a line called “Adjustment for macroeconomic effects’

    This is amazing. In other words put in an extra line for something which you have no proof will happen and essentially call it profit.

    It is the sort of thing that Merrill Lynch would do.

    Is there someone in the Government that used to work for ML?

    • Zaphod Beeblebrox 8.1

      Maybe the NZ government can take out a deriviative on the increased income they think they will have in 3 years. Mr Merrill Lynch could then convert NZ inc. into a giant ponzi scheme. Not a bad way to buy an election- just keep putting off payment until you are out of power!

  9. ianmac 9

    Tax cuts might be the least of our problems.
    Just been talking to an Economist and its way outside my ken. But the gist is that he believes that there is a huge shift happening that is greater than that any since cave-men or cave women. The cyclic pattern of boom and bust is about to implode in our lifetime. Causes such as peak oil, and the effects of global warming, and overpopulation could precipitate a massive collapse. These changes are unique to our era.
    To me as a non-economist it could be the big picture that we are missing; the elephant in the room sort of thing.

    • Zaphod Beeblebrox 9.1

      Errr.. might pay for you to read the latest IPCC report. Unless we act now its almost a sure fire guarantee that food, water and fuel shortages will constrain future economic growth

      • Draco T Bastard 9.1.1

        Actually, it’s already guaranteed. Peak Oil does that all by itself. AGW just adds to the calamity.

    • handle 9.2

      More please, Ian

  10. Peter Martin 10

    Interestingly the Angrybear blog has just done a post along these lines :’ Government Spending and Economic Expansions’.

    It was summarised …’while there were weren’t all that many recessions during which federal government spending as a share of GDP fell, those recessions tended to produce shorter, slower expansions than other recessions….Now… consider last week’s post, which showed that recessions during which marginal tax rates were followed by underperforming expansions. The two findings seem to suggest that when it comes to getting the economy moving again during and just after a recession, government spending seems to be more important than private sector spending.’

    • Pascal's bookie 10.1

      Anyone would think that during and coming out of a recession, the private sector is more concerned with cutting costs and getting debt under control than investing in growth. That they are not confident about short term future sales so they retrench. And that especially when exports are also shakey that maybe the government can assist by providing some demand in the economy.

      • handle 10.1.1

        And lo, Bill English behaves as if he’s the private sector, not the government – just like he did in the late 90s. Silly scared lad that he is. We need grown-ups in charge.

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