Tax Cuts for the Middle Class and Poor STIMULATE The Economy, But Tax Cuts for the Wealthy HURT The Economy

George Washington's picture

By Washington’s Blog


Preface: There is an argument for repealing all taxes. I have a strong libertarian streak, and there are arguments that government is wasting our tax money on imperial wars which weaken our national security and other shenanigans. There are also various legal arguments alleging that income taxes are illegal. This essay focuses on how taxes - if we do have them - effect the economy.

Extreme conservatives push for tax cuts ... but just for the wealthy.

Extreme liberals are against all tax cuts, believing that we need higher taxes to pay for government programs ... and that taxes somehow won't create any drag on the economy.

Both extremes are wrong.

In fact, tax cuts for the middle class and poor stimulate the economy, but tax cuts for the wealthy hurt the economy.

This is actually a very simple concept, although some politicians and economists unintentionally or intentionally muddy the waters.

As Ed Harrison notes today:

Bruce Bartlett, a Republican political appointee and domestic policy advisor to Ronald Reagan, points out that:

Taxes were cut in 2001, 2002, 2003, 2004 and 2006.


It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. Real G.D.P. growth peaked at just 3.6 percent in 2004 before fading rapidly. Even before the crisis hit, real G.D.P. was growing less than 2 percent a year...


According to a recent C.B.O. report, they reduced revenue by at least $2.9 trillion below what it otherwise would have been between 2001 and 2011. Slower-than-expected growth reduced revenue by another $3.5 trillion.


Spending was $5.6 trillion higher than the C.B.O. anticipated for a total fiscal turnaround of $12 trillion. That is how a $6 trillion projected surplus turned into a cumulative deficit of $6 trillion.

Bartlett offers this killer chart as a summary of the numbers:


Changes in CBO projections 2001-2011


If you recall, it was George W. Bush’s father, GWH Bush, who, when campaigning against Reagan, called supply side economics’ claims that tax cuts pay for themselves Voodoo Economics. And Bush was proved right when deficits spiralled out of control and both Reagan and Bush were forced to raise taxes.




The Bush tax cuts accrued disproportionately to the wealthy. The Tax Policy Center shows that 65 percent of the dollar value of the Bush tax cuts accrued to the top quintile, while 20 percent went to the top 0.1 percent of income earners.


If you want to talk about redistribution, there it is.

The New York Times reported in 2007:

Families earning more than $1 million a year saw their federal tax rates drop more sharply than any group in the country as a result of President Bush’s tax cuts, according to a new Congressional study.


The study, by the nonpartisan Congressional Budget Office, also shows that tax rates for middle-income earners edged up in 2004, the most recent year for which data was available, while rates for people at the very top continued to decline.


Based on an exhaustive analysis of tax records and census data, the study reinforced the sense that while Mr. Bush’s tax cuts reduced rates for people at every income level, they offered the biggest benefits by far to people at the very top — -especially the top 1 percent of income earners.

The Economic Policy Institute reported in June:

The Bush-era tax changes conferred disproportionate benefits to those at the top of the earnings distribution, exacerbating a trend of widening income inequality at a time of already poor wage growth.




The top 1% of earners (making over $620,442) received 38% of the tax cuts. The lower 60% of filers (making less than $67,715) received less than 20% of the total benefit of Bush’s tax policies.



The Bush-era tax cuts were designed to reduce taxes for the wealthy, and the benefits of faster growth were then supposed to trickle down to the middle class. But the economic impact of cutting capital gains rates and lowering the top marginal tax rates never materialized for working families. Inflation-adjusted median weekly earnings fell by 2.3% during the 2002-07 economic expansion, which holds the distinction for being the worst economic expansion since World War II.

This isn't complicated. Rampant inequality largely caused the Great Depression and the current economic crisis (and see this). Cutting taxes on the middle and lower classes reduces inequality and stimulates the consumer economy. But cutting taxes for the wealthy reduces aggregate consumer demand.

As economics professor Robert Reich notes:

First, the rich spend a smaller proportion of their wealth than the less-affluent, and so when more and more wealth becomes concentrated in the hands of the wealth, there is less overall spending and less overall manufacturing to meet consumer needs.


Second, in both the Roaring 20s and 2000-2007 period, the middle class incurred a lot of debt to pay for the things they wanted, as their real wages were stagnating and they were getting a smaller and smaller piece of the pie. In other words, they had less and less wealth, and so they borrowed more and more to make up the difference. As Reich notes:

Between 1913 and 1928, the ratio of private credit to the total national economy nearly doubled. Total mortgage debt was almost three times higher in 1929 than in 1920. Eventually, in 1929, as in 2008, there were “no more poker chips to be loaned on credit,” in [former Fed chairman Mariner] Eccles' words. And “when their credit ran out, the game stopped.”

And third, since the wealthy accumulated more, they wanted to invest more, so a lot of money poured into speculative investments, leading to huge bubbles, which eventually burst. Reich points out:

In the 1920s, richer Americans created stock and real estate bubbles that foreshadowed those of the late 1990s and 2000s. The Dow Jones Stock Index ballooned from 63.9 in mid-1921 to a peak of 381.2 eight years later, before it plunged. There was also frantic speculation in land. The Florida real estate boom lured thousands of investors into the Everglades, from where many never returned, at least financially.

Tax cuts for the little guy gives them more "poker chips" to play with, boosting consumer spending and stimulating the economy.

As Reich noted last year:

Small businesses are responsible for almost all job growth in a typical recovery. So if small businesses are hurting, we're not going to see much job growth any time soon.

On the other hand (despite oft-repeated mythology), tax cuts for the wealthiest tend to help the big businesses ... which don't create many jobs.

Indeed, economics professor Steve Keen ran  an economic computer model in 2009, and the model demonstrated that:

Giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch [than giving money to the big banks and other creditors].

And as discussed above, Reich notes that tax cuts for the wealthy just lead to speculative bubbles ... which hurt, rather than help the economy.

Indeed, Keen has demonstrated that "a sustainable level of bank profits appears to be about 1% of GDP" ... higher bank profits lead to a ponzi economy and a depression. And too much concentration of wealth increases financial speculation, and therefore makes the financial sector (and the big banks) grow too big and too profitable.

Government policy has accelerated the growing inequality. It has encouraged American companies to move their facilities, resources and paychecks abroad. And some of the biggest companies in America have a negative tax rate ... that is, not only do they pay no taxes, but they actually get tax refunds.  Indeed, instead of making Wall Street pay its fair share, Congress covered up illegal tax breaks for the big banks.

No wonder Ronald Reagan's budget director David Stockman called the Bush tax cuts the "worst fiscal mistake in history", and said that extending them will not boost the economy.

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r101958's picture

How about we go back to this rate. Guess what year?

1.0% $0 $20,000

2.0% $20,000 $50,000

3.0% $50,000 $75,000

4.0% $75,000 $100,000

5.0% $100,000 $250,000

6.0% $250,000 $500,000

7.0% $500,000 -

The year is 1913 (ring any bells?)

Tax Foundation


i-dog's picture

I liked 1912 better:

0%  $0 - 500,000+

Worked well for the 300 years from first settlement, while all the railroads and city infrastructures were being built. Since then, nothing but wars and depressions.

El Viejo's picture

All these ideological whiners! Pahleeze. This is not about ideology. This is about making the economy work again and that requires practical solutions. It requires targeted responses like Tagamet for ulcers. It was hailed as a miracle drug. This article tells it like it is: Two intractable ideological extremes.

This economy needs consumers. The consumers are in debt and arn't buying. They were driven in debt by most of the tax breaks going to Bushes rich buddies. Tax breaks for the rich indeed do favor producers. The one thing we don't need is capital for producers. We have far more productive capacity now than we need. This situation is the opposite of the 70s. In the seventies we had way more demand than we had productive capacity so we had inflation. We now have corporations with hoards of cash and plants running at half capacity. Sure profits are up - they layed off workers. The economy has reset to a lower energy level. The unemployed are just surviving. They are not buying anything. The get the GDP back up there we need growth. To get growth we need demand. So George Washington is exactly correct. We need tax breaks for the consumers. The Rich don't consume anywhere near like the middle class and they do not create jobs. They invest in hedge funds. Too much money in the markets creates instability just like LTCM did in the 90s. (pure Minsky economics 101) And when they failed what happend? 50 hedge funds sprang up in their place. We are flushed with capital now and not constrained. What happens when there is too much capital to be loaned out? Well interest rates drop. When will you Darwinian right wingers be happy? When interest rates are negative? The small businesses and innovative self employed create jobs when they incorporate and HIRE. The self employed are the most taxed group in the country. (remember the software guy that flew his plane into the IRS building in Austin?) You can thank Ronald Reagan for that. He was responding to the complaint from corporations back then about being hamstrung with corporate taxes(see inflation a few sentences back) Now we need those consumers of the 70s again. With rehiring there will be less unemployment that means smaller deficits. GDP will also improve.

All this political ideological whining just makes me want to puke. Its just idol worship. The rich got there Bush tax cut extensions. Obama caved. Now its time they coughed up or the next leg down will take the rich peoples money anyway and we will have nothing to show for it - just like when Clinton didn't use the surplus on our country's infrastructure and now we will not see it for some time to come. This country is going down and you can blame it squarely on the rich.

Chart of top 1% income:

Cap Gains Tax Rates:

JW n FL's picture

All of these Republicans Bitching about the Tax Code.. that George was quoting..

George didnt write the Tax Code..

Call Your Senators with your complaints about $250k or $150k to $380k is a bracket misrepresented within the Tax Code based on market or sub market.. see if they will re-write the book until you are happy.

George! in case you had forgotten how stupid these ignorant fucks are.. please, let this be a reminder.

midtowng's picture

It's amazing how many people here actually think they are rich.

Vashta Nerada's picture

What's amazing is that some people here think they have the right to other people's money.

LRC Fan's picture

Stimulating the economy is probably the most loaded phrase used in politics/economics today.  It can mean anything to anyone.  QE was supposed to stimulate the economy and it made things worse.  If you ask Republicans, tax cuts stimulate the economy.  Democrats simply want to spend tons of money we don't have to stimulate the economy.  As usual, all sides are completely wrong.

Cut taxes to 0.  For everyone.  Geithner, Obama, GE, the poor lady down the road, Bill Gates, me, you, and my local barber.  Cut cut cut cut cut taxes and don't just talk about it. 

tree_of_liberty_1791's picture

Think the most important part is being over looked. It is your money, not the governments, and the marginal income tax should be replaced by consumption tax. It is the most equitable form of taxation and would do away with cap gains, estate, and of course no income tax.

So rather then argue about who got what it should be realized were all getting screwed when the government steals your property at the gun point. At least the consumption tax is a voluntary tax and gets the people away from giving the gov a fixed % of their labor.

Vashta Nerada's picture

I heartily agree.  Consumption taxes are much less intrusive than having an IRS pore through your income data.  Also, unless the rich suddenly start enjoying eating rice and beans, living in hovels, and driving ten year old Fords, they will still be paying more in taxes. 

A consumption tax also has the benefit of getting revenue from those that currently earn their income on the black market and pay no income tax.

Vashta Nerada's picture

This argument is ridiculous on its face.  The tax cuts of the past 20 years accrued to the wealthy because they are the ones that actually pay taxes.  When half of the popluation pays no taxes but have a vote to determine how much the other half pays in taxes (which gets doled out to the bottom half) you have a recipe for disaster.  We don't have a taxation problem, we have a spending problem.  As has been noted, if we had not increased government spending by over 50% in the past decade (30% in the past two years), we would not be having a debt ceiling discussion today. 

Akrunner907's picture

I am so glad GW is letting his socialist persona come out.  Taxes are a redistribution of wealth, and there is about 50 percent of the population that don't pay taxes at all.  The premise is utter BS, and painfully sad at the stupidity of GW.  Damn, I wish some people would grow the fuck up and start realizing that the entire tax code is so f-ed up that it has nothing to do with JOB stimulus. 

Analysis-Paralysis's picture

This article is right on.  I understand concerns of right; I don't like taxes or big government either.   But the arguments and data presented here are solid.  The past 10 years have seen historically low taxes on the highest income earners, which have absolutely resulted in destructive speculative bubbles along with the widening income gap between rich and poor, higher crime rates, etc ad nauseum.   And when we bailed out the banks we essentially robbed our medicare and social security systems to help out our richest aunts, biggest investors, and bankster pensions.  I pay six figure taxes but the only thing I begrudge is the corruption and inequities in taxation at the top.  Americans need desperately to wake up and fight for our middle class.  OUr greatness depends on the integrity of our people and institutions.  Bill Gross has the right idea in his July letter (Pimco).

mayhem_korner's picture

Thank you, Senator Reid.

Bubbles are more a function of negative real interest rates than of tax structures.  Bailing out the banks was the second tier of the malfeasance...the first was the fractional reserve banking system coupled with central policies that enabled a boatload of ill-advised loans.

Vashta Nerada's picture

No, we did not rob medicare and social security to bail out the banks.  Medicare and social security funds have not existed since the 1960's, when they began taking the excess funds out annually to hide the deficit.

tip e. canoe's picture

Gdub, with all due respect, if you really want to explore solutions to this issue from a progressive POV and not just ignite class divisions like the puppeteers want you to do, you really need to start venturing outside the pyramid.  i would suggest Henry George for a start.  fwiw.

mayhem_korner's picture

Bush is outta office, yet we still get stats that extend into 2011.

Let's eliminate all income and property taxes and go for only consumption taxes.  That way, the central planners can no longer give away the "tax cuts." 

High Plains Drifter's picture

rubber bullets fired at americans. i am not sure if i have ever heard of police firing rubber bullets at americans before. interesting no?

Hedgetard55's picture

This post gets the award for most inane idea of the month.

El Viejo's picture

The rich don't create jobs they invest in hedge funds and that destabilizes markets just like LTCM did in the 90s(pure Minsky economics). The self employed and small business create jobs and self employed are one of the highest taxed groups in the country. (You can thank Reagan for that)

gwar5's picture



The bottom 50% already don't pay taxes..... let that sink in first. OK, so let's stimulate by making it 60% so unemployment will be an even 20%? 

Carter's top rate was 70% and the top earners only paid 19% of total revenues. After tax rates were lowered, they paid 39% of total revenues, about where it is today. 

Tax rates and tax revenues are two different things.  The government has enough revenue, they just don't have enough spending restraint with other people's money.

In 2006, the debt ceiling was $8.2 Trillion when the donkeys took over congress. Today we're talking about more than doubling it to $16.7 Trillion in just 5 years.

If we just froze government spending, no cuts, the CBO would score it today as $9.5 Trillion in savings. This is due to automatic spending increases from the new baseline spending levels now built into our spending.

The US government has already confiscated 13% of everything in the last 2 years, not just their income, through inflation theft.  Now they want more?

Businesses aren't stupid and know that today's US debt and deficits = higher government taxes tomorrow = no US jobs = more jobs overseas, greener pastures.

Demonization and scapegoating along class, race, and intergenerational themes are all symptoms of overspending by politicians who take our money, skim off the top, and then make the electorate fight each other over how the scraps are re-allocated.


Tom and Bob were discussing their employers over lunch. Tom's boss was a real prick. But Bob explained that his boss had given him health insurance, paid vacations, time off for family crises, flexible work hours, and performance bonuses. As they were talking, a one-legged waiter came over and refilled their coffee. Tom whispered that it was remarkable the waiter managed so well hopping on just one leg.

Bob said, "Be sure to leave him a big tip, that's my boss, working a second job to make ends meet now that Obama is president."

Tom, "So what's up with the missing leg?" 

Bob said, "Oh, well, a boss like that you just don't eat all at once."




LowProfile's picture


When you include all the various little taxes (e.g. fuel, communications, property, FICA, unemployment, energy, sewer, water, etc.) and other ways they take your money (fees, surcharges, petty fines, etc.), and INFLATION, the poor and middle class pay far more in taxes.

Nice try though!

tip e. canoe's picture

Demonization and scapegoating along class, race, and intergenerational themes are all symptoms of overspending by politicians who take our money, skim off the top, and then make the electorate fight each other over how the scraps are re-allocated.

well said gwar.   another nutshell for us plebes.

ncdirtdigger's picture

I frankly don't care about the effects of taxes on anyone but me. I earned the money, it belongs to me first and foremost. I am smart enough to earn it, I am smart enough to invest it. if you want to fund the poor or middle class, go ahead and start your charity up and you write the first check. Leave me out of it. 

Analysis-Paralysis's picture

But unless you have a "fair system" where people can "make it" honestly through hard work; you'll have to build walls and hire body guards to keep your riches.   .... I'd rather not live in Columbia....


sumo's picture

Naughty naughty. By insisting on "honest" hard work, you distort the market by discriminating against clever violent psychopaths,

thereby introducing inefficiencies in the free flow of capital (drugs, guns, money). The fully efficient narco-economy, in

progress in Mexico, but not yet at full potential, will show us how free markets really work when rugged individuals are allowed

to do what they do best.


Upswaller's picture

Um, SPENDING????????

This liberal tripe, backed up by selective statistics, just doesn't fly.

Widgeon's picture

Your premise is BS.


Who defines rich---you?


 Is a husband and wife making 250,000 togehter living in New York, with 2 kids in college rich?

How about someone with a growing business, requiring capital input, with 2 kids in college..........

Stop it with the BS. Statistics can say just about anything you bend them to say.

Our natural rights, which should be protected by common law, are what made this, and any other nation which follow this system, successful. This would demand a tax be applied equally to all.




oldmanagain's picture

A tax applied equally would mean that after taxes what is left to the tax payer would be equal.

A multi billionaire can invest, compound this wealth, eventually dwarfing the system.  The system will try to compensate, partly by inflation, but the power of compounding of the few eventually wreck the system.

Dangertime's picture

Inherently wrong.

You are suggesting that when one makes money, they are denying it from another.  That is not the case at all.

hardcleareye's picture

So who defines "equal", you????

Is equal, everyone pays the same amount? Perhaps equal is everyone pays the same percentage?  But then some would argue that is not "equal"....  etc etc...

falak pema's picture

The correct notion is not equal, but equitable. That's what the consesus should be about. What is equitable? It has to be some sort of sliding scale based on revenues/incomes correlated to tax rates. How we do this is the role of congress/government dialogue to reach consensus. This dailogue does not currently exist. That is not acceptable. Period.

darteaus's picture

You can't give a tax cut to someone who doesn't pay taxes.

The bottom 50% of wage earners pay 4% of the collected income tax.

Just another hyperpartisan article aiming to stimulate class envy warfare.

wherewasi's picture

Serious question...

Do you or anyone else have access to the income data?  For example, I keep hearing about the lower 50%.  I'm curious to know what the pool of money is that is represented by these 50%.  (Or any anlysis that shows total income by range of income)


1911A1's picture

The data that I have seen comes directly from the IRS:,,id=133521,00.html

The available data only goes through 2008.

oldmanagain's picture

It is not about tax cuts, but avoiding a collapse of purchasing power.  It cannot be a monopoly game where the King is crowned and everyone else eventually is out of the game.  Or put in prison.

Wage earners do pay(roll) taxes, on almost everything.  Right now, without help of some sort, a worker cannot handle health costs as one example in our current setup.  

TaxSlave's picture

Did  you sorta miss the fact that the decline in purchasing power is fueled by creating money out of thin air, and that this hidden tax hurts the poor the most?

Did you sorta miss the fact that the air-money is created as debt, which is now unpayable but chains us into perpetual servitude to pay it back?

Did you sorta miss the effects of driving capital offshore, gutting our manufacturing capacity?

THAT is what caused the concentration.  They sucked the value out of the economy, like marrow from our bones.

And now we read this tripe calling for more punitive taxes, which enrich bureaucrats and guarantee serfdom for all but the super-rich.

Capital is surplus, savings from previous production.  Go ahead, make those with savings stop investing and transfer their wealth out of the reach of your grubby little hands.  See how well that works. 

Dangertime's picture

This article is full of shit.

Consumers stimulate the economy???  Are you telling me that investments do not?

The rich received 38% of the tax cuts?  You mean to say that the rich had 38% less of their money stolen from them by the point of a Government gun!

I have seen the definition of "Poor" lately, have you?  Check the link below and you will find that being poor means you still have a 55" flat screen tv and the latest gaming system.

Take your "Poor" and shove it up your ass.


centurain's picture

This article is yet another smoke screen or half truth.  Since this country has 1 tax bracket for everyone making $180K-$380K and only 1 bracket for $380K and above this liberal (rich don't pay their fair share) argument is garbage.  Is middle class the median income +20%?  Or is it a small business that could easily fall into the highest tax bracket?  I live in D.C. and although my wife and I make $250K a year we are middle class here, if I still lived in Iowa where I grew up I would be living high on the hog.  Not to attack you personally but there is no substance or context to the articles you write, reminding me everytime I read one of a wanna be Paul Krugman...

oldmanagain's picture

You miss the point centurian.  A system that eventually concentrates, like feudalism, topples mathematically.  Now with headwinds of resource depletion and work as we know it becoming obsolete we are not adapting. Krugman is much more correct than Laffer. The report card is unfolding and requires adaptation.

weinerdog43's picture


Learn what the word "marginal" means when we speak of taxes.

New_Meat's picture

GW, you missed a histogram--do the same scales and quintiles for the proportion of income taxes PAID.

- Ned

{and when S-Corporations are considered, the concept of "rich" takes on a new meaning.  But that would not fit your class-warfare bias.}

RockyRacoon's picture

Don't fall for the old fable about S-Corps being small business owners.   Many very large companies use the S-Corp form to remove money from the Corp structure.   I used to have list of some very well known companies that were structured as S-Corps.

Most corporations have annual revenues of less than $5 million per year. And, many corporate owners remove substantial profits from their companies. For these companies, the S-corporation structure works well

pupton's picture

-1 to your entire bullshit thesis GW! Taking money out of the economy does not strengthen it.

BigDuke6's picture

I'm sure you've seen ths GW.

Some interesting/depressing stats.


i-dog's picture

Tax cuts for the poor fuel consumption.

Tax cuts for the wealthy fuel the means of production.

Consumption without production fuels inflation.

Get rid of taxes altogether and the central planners can't fuck with the economy!

Squid-puppets a-go-go's picture

"tax cuts for the middle class and poor stimulate the economy, but tax cuts for the wealthy hurt the economy"

C'mon Georgieboy. Let's not be so reductionist.

That might be true in a consumption based economy. But let's say your economy is emerging from decades of communist rule and excessive regulation. Tax cuts for the rich would be good at that historical junction. Let's say you have a modern western economy that has collapsing infrastructure as a result of historically low middle/poor taxes. You may not be able to improve the infrastructure (that can facilitate trade and the social stability needed for it to flourish) without raising taxes.

all things in balance. 'all axioms have their failings - even this one'