Tax Cuts or Spending: What's the Best Way to Rescue an Economy?

It's hard to believe that all conservatives have to offer right now is the Bush tax-cut agenda, but indeed - that's really all they have. Watch this MSNBC clip of Steve Forbes [1], one of the right's leading economic thinkers:

Forbes is given a hanging curveball to bash out of the park, and he ends up striking out on the claim that the way to fix the economy is to slash corporate tax rates. His rationale? The ol' myth about America having the second highest corporate tax rates in the world.

This sounds familiar, right? It should - it's been the right's talking point since I first wrote Hostile Takeover [2] and likely long before that. In fact, only a few months ago, I got into a heated argument on Fox News about the issue [3], finally being drowned out by music as I kept reminding viewers that America has the second lowest effective corporate tax rate in the world.

But as Forbes shows, the myth persists. Here's the real facts, as excerpted from a previous post I did on the issue [4]:

It sounds like a credible storyline, especially considering that officially, our corporate tax rate is somewhere between 35 and 39 percent. But, as always, the devil is in the details.

To know how high - or low - the effective tax rate is, you have to go beneath the top-line rate and account for all the loopholes, subsidies and write-offs - and the way to do that is by looking at corporate tax revenues as a percentage of a country's GDP. That way, you know how much corporations are actually paying as a share of your overall economy - in other words, you know the real corporate tax rate, not the fake one advertised by top-line numbers. And when you look at America's tax structure through this lens, you see that even the Bush Treasury Department admits we have the second lowest effective corporate tax rate in the industrialized world (see page 42 of this report [5]).

Indeed, this explains the dissonance between Republican claims of "highest corporate income tax rate in the world" and the recent Government Accountability report [6] showing that most corporations pay no corporate income taxes at all. The latter is the truth - most corporations don't pay any taxes because of loopholes, writeoffs and subsidies that allow them to effectively reduce that 35 percent corporate tax rate to zero. In fact, many profitable corporations actually collect tax rebates [7].

OK, let's say you accept the reality that Forbes is misleading people with his specific claims about the corporate tax rate - but nonetheless think his overall argument about tax cuts is right: namely, that cutting taxes is the best way to stimulate an economy. Why do you think that?

My guess is because you've heard it for so long from people like Steve Forbes that it has become an underlying assumption in the American psyche. After all, it can't be because of concrete facts. As I reminded Grover Norquist on CNBC last week [8], Bill Clinton raised taxes on the wealthy as the nation was struggling with a stagnating economy in 1993, and the economy subsequently boomed. George W. Bush repeatedly cut taxes on the wealthy over the last 8 years, and this has been one of the worst economic eras in modern history. I'm not saying tax policy is the single causative factor - but I am saying we know better ways to stimulate an economy than cutting taxes.

As CAF's Isaiah Poole has reported [9], financial experts acknowledge that public infrastructure spending provides a much bigger boost to an economy than tax cuts. The Economic Policy Institute has convincingly argued that the more spending on programs that help those who need it most, the more boost to the macro economy. That makes perfect sense - if the goal is to stimulate an economy, what better way than to pump money into the programs that will spend it the fastest and on priorities that have a dual public benefit?

Sure, both Forbes' ideas and public spending ideas aren't new. Conservatives have long been arguing that tax cuts are the panacea, and have now resurrected their ludicrous claim [10] that public spending during the New Deal exacerbated - rather than mitigated - the Great Depression. Meanwhile, progressives have long been arguing that spending on public priorities is a better path to long-term economic growth. And while I know conservatives believe facts have a progressive bias, it is a truism that only one of us - progressives - actually has history and facts on our side.