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REPORT: Supply-Side Tax Cuts Fail To Spur Economic Growth

By Pat Garofalo  

"REPORT: Supply-Side Tax Cuts Fail To Spur Economic Growth"

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john-mccain-pumps-fist-2-5-2008-small-thumb.jpgSen. John McCain’s economic plan – Jobs for America – is full of tax breaks for corporations and the wealthy. It includes a cut in the corporate tax rate from 35% to 25%, and maintaining the 15% rate on dividends and capital gains, which McCain claims will promote growth and create jobs.

Michael Ettlinger of the Center for American Progress and John Irons of the Economic Policy Institute examined the efficacy of supply-side tax cuts on corporations and high-income Americans in a new report, “Take a Walk on the Supply Side.” By comparing the supply-side eras following the 1983 and 2001 tax cuts to the years between 1993 and 2001, they find that, for the most part, supply-side policies don’t work in practice the way that they do in theory.

Among their findings:

- Real investment growth after the tax increases of 1993 was much higher than after the tax cuts of 1981 and 2001.

- Economic growth as measured by real U.S. gross domestic product was stronger following the tax increases of 1993 than in the two supply-side eras. Over the seven-year periods after each legislative action, average annual growth was 3.9 percent following 1993, 3.5 percent following 1981, and 2.5 percent following 2001.

- Wage levels also did better after 1993. Average real hourly earnings following 1981 fell at an annual rate of 0.1 percent and following 2001 rose at a rate of only 0.3 percent. Following the 1993 tax increases average hourly earnings grew by 0.9 percent per year.

- Employment growth was weaker during the supply-side eras than during the post-1993 era. Average annual employment growth was 2.1 percent after 1981, 2.5 percent after 1993, and 0.6 percent after 2001.

And of course, tax cuts lower federal revenue, so supply-side practices necessarily “lead to bigger federal budget deficits and/or spending reductions.”

As a survey of economists released by the Wall Street Journal today notes, “the next U.S. president will be confronted with slow growth, high unemployment and an economy teetering toward recession,” and thus “pumping up the economy will be the first challenge.” Ettlinger and Irons’ data shows that, if history is any indication, cutting taxes on the wealthy and handing out tax breaks to corporations will not provide that much-needed economic jolt.

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