Taxes and the Economy

There has been renewed attention recently to whether business tax cuts lead to increased economics activity. The Bush Administration and Congressional Republicans believe it does, and they have extended their tax cuts to investors. Ezra Klien points to problems within the Conservative's agenda that lead to a supply-side hiatus. The math doesn't add up. As Paul Krugman notes, 1+1 does not equal 4 (as the Bushies claim). The tax cuts to businesses and investors lead to increased corporate profits and higher incomes for Paris Hilton (and those who live on dividend/cap gain income, but it fails to translate into wage growth. This is partly a result of the decline of union participation. When unions are a party in wage negotiations, average wages and benefits rise, even if the unions don't cover an entire industry. However, in situations that exist currently, where unions represent less than 10 percent of the private sector workforce, wages and benefits suffer. The data have agreed. Wages over the past 5 years, have been lower than the rate of inflation, and while worker productivity has soared. Labor costs over the past year fell by 1 percent. This has created an economy in which productivity is rising and wages are falling (in real terms). While I would hate to sound Marxist (in the prediction of the 'immiseration of the working classes'), most people are losing out from Bush's policies. In economic theory, the driving force in raising living standards (in both developed and developing economies) is increases in productivity. That is not happening. They may only be temporarily de-linked and, while the effect of tax cuts on this is unknown, passing legislation that provides no incentive for higher wages will not help workers and may well end up harming them. In general, those who have dividend and capital gains income are higher up in the income spectrum (I certainly don't). As much as Republicans hate to admit it, Keynes was right in postulating a decreasing marginal propensity to consume. Based on such an assumption, increasing the income of those who have lower incomes will, on a per dollar analysis, have a larger effect in consumption (and general economic benefit) than giving to those who are richer. It may not be a perfect subsitute for raising employment, but it will provide stimulus for increasing employment.