What do you do when a senior policy adviser in the Reagan and George H.W. Bush administrations tells you that tax cuts won’t increase employment? You listen. Bruce Bartlett in this morning’s Economix blog goes a long way to dispelling the current conservative mythology about the stimulative effect of slashing taxes (especially for the rich). As he argues, it all boils down to the “tax wedge” — the difference between the cost to an employer of employing a worker and the after-tax reward that the employee receives. Conservatives argue that cutting taxes decreases the tax wedge and frees up employers to hire more workers. This theoretically seems sound, but Bartlett argues that the real-world scenario is quite different:
One problem with the tax-wedge theory is that taxes are at a historical low as a share of the gross domestic product. According to the Congressional Budget Office, federal revenues will be 15.8 percent of G.D.P. this year. The postwar average is about 18.5 percent, and taxes averaged 18.2 percent during the Reagan administration; indeed, at their lowest point in 1984, federal revenues were 1.5 percent of G.D.P. higher than they are now.
Bartlett also points out (contrary to what Republicans have been proclaiming) that Obama has not in fact instituted significant tax increases since taking office. In fact, he’s passed tax breaks that directly target working-class Americans.