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Contrary To McCain’s Assertions, Tax Cuts Do Not Spur Business Growth

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"Contrary To McCain’s Assertions, Tax Cuts Do Not Spur Business Growth"

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Recently, Sen. John McCain (R-AZ) has been criticizing Sen. Barack Obama (D-IL) for his plan to let the Bush tax cuts expire on the top two federal income brackets. McCain claims that this will hurt small businesses, and cause them to cut jobs:

[H]is tax increase would impact 50 percent of small business income in this country, and the jobs of 16 million middle class Americans who work for those small businesses. My opponent’s massive new tax increase is exactly the wrong approach in an economic slowdown.

McCain’s economic plan centers on making the Bush tax cuts permanent and cutting corporate taxes. However, as Princeton professor Uwe E. Reinhardt points out in the New York Times, business investment actually rose following President Clinton’s tax increases and fell following the Reagan and Bush tax cuts.

private-investment-as-percent-of-gdp.jpg

According to the Center on Budget and Policy Priorities, “only 1.9 percent of filers with any small-business income are projected to face either of the top two income tax rates in 2009,” and thus the effects of Obama’s tax increases on small businesses would be almost negligible. Furthermore, as Reinhardt pointed out, even rich business owners won’t expand their businesses if no one has money to spend:

Specifically, I would challenge supply-siders to explain why the owners of small businesses — say, restaurants — would expand the capacity of their establishments or build new restaurants at a time when customers stay home, even if they were given a tax cut on the income from their restaurants.

Echoing a slew of prominent economists – including Nobel Prize winner Paul Krugman – Reinhardt advocates domestic stimulus “to rebuild the nation’s tattered infrastructure.” Indeed, this is the path that should be taken, instead of cutting taxes for the rich and America’s corporations.

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