Economic myths

Kevin Drum had a great piece about 6 economic myths.  Not surprisingly, these are myths consistently pushed by the GOP and therefore falsely believed by a lot of people.  My favorite is myth #3:

There’s no greater orthodoxy in the Republican Party than unconditional fealty to tax cuts. In a recent GOP debate, when the candidates were asked whether they’d walk away from a deficit deal that included just $1 in tax increases for every $10 in spending cuts, every single hand shot up

But do lower taxes actually spur economic growth? Bruce Bartlett, an economist in the Reagan administration, has compared tax rates in various rich countries in 1979 to each country’s growth rate since then. His conclusion? There’s virtually no correlation.

Recent US history backs this up too. Bill Clinton raised tax rates in 1993, and Republicans insisted it would cripple the economy. Instead, the economy boomed. In 2001 and 2003, George W. Bush lowered taxes and Republicans insisted the economy would flourish. Instead, we got the weakest expansion of the past century. Republicans are simply wrong about taxes: Within reason, high tax rates don’t hinder growth, and low tax rates don’t stimulate it.  [emphasis mine]

Key point there– within reason.  The truth is raising our top marginal rate from 35% to 70% would quite likely be a bad thing for the economy.  But nobody’s talking about that.  We’re talking about a return to Clinton-era rates of 39.6%.  Likewise, cutting somebody’s top rate from 35% to 22% is not going to unleash astounding economic growth.  Now, a cut from 70%- 50% might really help, but that’s not the sort of changes we’re talking about.  At the margins we’re talking about, tax rates just aren’t that important a factor in the health of the economy.  Drum explains further:

But don’t high taxes reduce the incentive for people to work? Actually, no: For ordinary wage earners, participation in the job force and total hours worked barely respond to taxes at all. (According to tax specialists Joel Slemrod and Jon Bakija, this is “a rare example of a question on which there is a broad consensus among economists.”) The same is true for rich people. As a trio of prominent economists concluded last year after reviewing the literature, “there is no compelling evidence to date of real economic responses to tax rates” (PDF).

This is important stuff, it’s backed up by plenty of data and plenty of economists, but Republicans just keep blithely pretending otherwise.  The worst part is they seem to have snowed a good portion of the American public along with themselves.

The other myths are good, too.

About Steve Greene
Professor of Political Science at NC State

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