Thought Theater

Rudy Giuliani, in an apparent effort to assert his relevance in the Republican presidential primary, has introduced a new ad in Florida (see below) in which he touts his tax cutting prowess and promises to propose trillions of dollars in reductions on his first day in the White House.

Rudy has argued that tax cuts will actually increase the revenues the government collects. In saying as much, the former Mayor of New York ignores the actual dynamics behind his misleading oversimplification. Clearly, if one looks at tax rates in the context of one year...say 2008...a reduction in tax rates will not magically, within that year, raise the revenues paid to the government.

The only way tax cuts can increase revenues is if the money that isn't paid to the government is reinvested such that it stimulates economic growth and jobs. If that happens, then the assumption is that corporations will have more income and more individuals will have jobs which will facilitate more tax revenues being paid in the future. Hence, there is a lag during which the government will likely experience reduced revenues...and there's no guarantee the tax cuts will produce the added revenues promised.

Lost in the Giuliani strategy is any analysis of where the money from these tax cuts is actually being spent. In the new global economy, wherein American corporations are quickly becoming multi-national giants, the trend is to move jobs to cheaper labor markets in foreign nations. Hence, granting tax reductions to these corporations (I believe Giuliani want's to reduce the corporate rate from 35 to 25 percent) may actually facilitate their efforts to shift manufacturing and service industry jobs out of the country.

If tax cuts are used in this manner...the concept of supply side economics...or what many used to call a trickle down strategy...there are reasons to doubt their potential to increase future revenues or jobs as expected in the past. Yes, the bottom line of some corporations may increase and possibly result in higher tax burdens. However, that ignores the many tax loopholes available to corporations. Even worse, given the shifting of investment capital and jobs to other nations, the stateside job creation necessary to generate higher revenues for the government isn't apt to materialize.

In the end, that means the tax cuts aren't likely to produce the added government revenues Giuliani is promising in his campaign rhetoric. The fact that corporations are prone to funding campaigns whose policies will benefit them serves as an incentive for politicians to make such promises...and then deliver them once elected.

A brief look at the Bush tax cuts and the economy during his tenure support my contention. By and large, the economic growth of the past five years has been the result of artificially low interest rates which allowed homeowners to spend their equity in order to bolster the economy. Below I've included a second video clip containing Ron Paul's observations on the economy and interest rates. I don't agree with the congressman on a number of issues, but he's on the mark with regards to this issue.

Further, public sentiment (consumer confidence and polling) has never fully reflected the Bush administration's assertions that the economy is robust. This results from the fact that the average citizen doesn't believe that higher incomes and meaningful job growth were part of this recent period of economic expansion. Simple math tells us that energy costs alone have offset the meager tax cuts afforded to the average citizen.

Not only were the Bush tax cuts inconsequential to most Americans, they did little to create a growth economy. Did they soften the last recession? Probably...but they didn't translate into the intended long term stimulus and there isn't any reason to believe Giuliani's will either. It's time to dismantle this oft heard GOP canard.

Like decorations on a Christmas tree, the allure of tax cuts is compelling. Unfortunately, a misguided focus on pretty trimmings may lead one to ignore the fact that the tree is brittle and vulnerable to calamity. While Rudy Giuliani would have us believe that his huge tax cuts will ignite our economy, he may actually be pouring fuel on an unhealthy economy that lacks the root structure to insure steady and sustainable growth. Rudy's plan may well be the match that starts a fire we're not prepared to extinguish.