For two decades, it has been an article of faith, at least within one potent sector of the Republican Party, that tax cuts are ipso facto good (and tax hikes are ipso facto bad) for the economy, for the financial markets and thus, for all of us. For two decades, as well, taxes have gone up and down, and so have the economy and the financial markets. So how do theory and reality compare?
Other things being equal, a tax cut, by stimulating consumption and investment, can help the economy. But many things besides taxes affect the level of economic activity. And then there’s the little problem of paying for the nice tax cut. As long as Congress is unwilling to offset revenue losses with real spending cuts (not the vague promises of future rectitude that have been the mainstay of every “historic balanced budget” package since 1981), a cut in taxes means a bigger federal budget deficit. And that, in turn, can drain investment capital, alarm an inflation-wary Federal Reserve Board, raise interest rates, and unnerve financial markets.
So, are tax cuts good for the economy and tax hikes bad? Take a look at the record, from Ronald Reagan’s famous 1981 tax cut through Bill Clinton’s famous 1993 tax hike, and judge for yourself.
Of course, President Clinton has since repented his tax-boosting ways. Only last month, he signed off on another big tax cut. Uh-oh.