The Fallacy Of Using Tax Cuts To Fix Recession

One major question echoed from the halls of Congress to the talking heads on TV is: Can tax cuts actually stimulate the economy? Financial writer David Cay Johnston talks with Steve Inskeep about the value of the tax cuts in President Obama's stimulus package.

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STEVE INSKEEP, host:

More than one third of the economic stimulus package that Congress just passed comes in the form of tax relief - some of it for individuals, some for businesses. Investigative journalist David Cay Johnston spent years reporting on tax policy for The New York Times, and we've invited him now to weigh in on how effective these tax cuts might be. Mr. Johnston, welcome to the program.

Mr. DAVID CAY JOHNSTON (Investigative Journalist): Thank you, Steve.

INSKEEP: Okay, so how effective are tax cuts in creating new jobs, which is the stated goal of the stimulus here?

Mr. JOHNSTON: Well, there's zero evidence that they've done this when we've used them over the eight years. You'll recall that last year, we had a stimulus tax cut, and we continued to lose jobs.

INSKEEP: Wait a minute here, because it seems rather straightforward. If you cut taxes, you put more money in people's pockets, and whether they're a business or an individual, they spend more.

Mr. JOHNSTON: They may save more, as well. It's unlikely you're going to hire people. I'm also the chairman of the board of a small company. We don't hire an extra worker because of a tax cut. We hire an extra worker when there's more demand for our services and we need someone to do the work.

INSKEEP: Just to be clear here, is there any tax provision currently part of this bill that seems likely to put money in a consumer's pocket in a way they could conceivably spend it?

Mr. JOHNSTON: Well, there's about $142 billion of tax credit relief. The problem is we know from the Bush tax cuts of this kind that people tended to save that money, not to spend it. There's a provision in here that will let you deduct the sales tax if you buy a vehicle under $50,000. Well, the majority of taxpayers don't itemize and won't get this benefit, and what it will tend to do is simply encourage someone who is going to buy a car after this period would end to move it up a few months into this period. That'll help a little bit, but fundamentally, that's not really helpful. The point of a stimulus bill is not to encourage tax savings, but to encourage spending, which is what we need in the short run in the economy.

INSKEEP: Can I ask if it would be so bad if people did take their tax credits and save them? I mean, people have been complaining for years that there isn't enough saving in this country.

Mr. JOHNSTON: We've a serious problem with inadequate savings by individuals, people not having nest eggs. Fewer than half of American taxpayers have any taxable interest income, which means they don't have any savings in the savings account. That's a serious problem. But the crisis we have right now is one of inadequate demand, excessive supply, inadequate demand, and the focus of our efforts should be on priming the pump, on getting spending going so that people stay employed.

INSKEEP: I'm just listening to you and thinking what a conservative economist or a Republican lawmaker might say. They might say, look at Ronald Reagan's tax cuts in the '80s. We had an economic boom.

Mr. JOHNSTON: Well, you know, we've turned tax cuts into something of a secular religion, that tax cuts will solve our problems. The fact is that we have a government that is spending far more than it levies, and it is becoming a huge drag on our economy now because we have spent money we don't have. This year, the equivalent of all the income taxes that you pay in January, February, March, April and part of May just go to pay interest on the national debt. We fundamentally need to reform our system so that our tax policies are in line with the economy we have today and they grease the wheels of commerce instead of throwing sand in the gears. But tax cuts by themselves are not the solution to our problems. They have become a dogma that is unquestioned in Washington.

INSKEEP: David Cay Johnston, I want to ask about something else. You have made a skeptical case here about the tax-cutting portion of this bill. Is there any indication that the spending programs, these shovel-ready projects - highways and bridges and so forth - that those were going to have any larger effect on the economy in the short term?

Mr. JOHNSTON: Well, much of the spending on infrastructure is delayed, and we don't need spending in 2010. We need spending today. There are things we can do immediately that will help with stimulus spending, for example, keeping money going to the states so that they don't lay off nurses, schoolteachers, firefighters. We could dramatically increase the amount of money that we're spending on medical research. When you do big medical projects, you employ not just doctors and biologists, but lots of clerks, graduate students, and you build to the human knowledge. And after all, at the end of the day, our wealth and wellbeing in the long run economically is based on our increasing knowledge of how to make use of what we have here on this planet.

INSKEEP: David Cay Johnston, thanks very much.

Mr. JOHNSTON: Thank you, Steve.

INSKEEP: He's author of "Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill)."

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