Are Tax Cuts the Driving Force Behind Job Creation and Economic Growth?

Republican Presidential candidates would have us believe increasing taxes stifles job creation and economic growth in this country, but what does an analysis of economic indicators before and after tax cuts indicate?

Proponents of supply-side economics believe economic growth is achieved by reducing taxes.  They believe tax reductions provide workers with an incentive to work harder, encourage businesses to hire more workers and invest more.  They further believe lowering capital gains tax rates and reducing regulations benefits consumers by providing lower prices.

This supply-side economic theory was the driving force behind the major tax cuts that were put in place under the Bush administration.  Most of you are familiar with two, of the ten, tax cuts that were passed during the administration of President George W. Bush as the Economic Growth and Tax Relief Reconciliation Act of 2001, EGTRRA, P.L. 107-16, and the Jobs and Growth Tax Relief Reconciliation Act of 2003, JGTRRA P.L. 108-27.

Comparing data before and after tax cuts from one year to another during any administration is difficult when everything is not equal during the entire administration, therefore the Congressional Research Service removed the recession years from their analysis as well as the years when the tax cuts were not fully implemented.

The end result of this analysis follows:

Data Source:  Congressional Research Service – CRS calculations based on data from BEA and BLS.

The economy performed better in seven of the nine categories before the tax cuts, than after the tax cuts.

While the annual average unemployment is indicated as 5.2% for both Clinton and Bush, unemployment dropped from 6.9% in 1993 to 4.0% under the higher tax rates of the Clinton administration.  If 2008 had been included in the Bush calculations, the variance between the two annual figures would have been significant due to the number of jobs lost in 2008 [3.6 million].

From a job creation standpoint alone, it’s well documented that 20 million more jobs were created during the administration of William J. Clinton than during the administration of George W. Bush.

The number that is most noteworthy is Business Investment Growth at an annual rate of 10.3 percent under high taxes v. 5.6 percent with lowered tax rates.  The 10.3 percent under Clinton is almost double the investment growth under Bush.

It is obvious, from the CRS comparison,  that tax cuts do not grow the economy.  In the case of the Bush tax cuts, it would be fair to say they have almost destroyed the economy.

Under certain conditions short-term tax cuts are necessary to stimulate the economy, even when they are deficit-financed, which is what President Obama is currently requesting from Congress.

© Patricia L Johnson

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