Guest post: Why Tax Cuts for the 1% Are Self-Defeating

Tim had written as a guest poster for Angry Bear as ‘reader T-bone’ a few years ago and is returning to writing, currently at Polymic.  This post was published about a month ago.

Guest post by Tim Martinez

Why Tax Cuts for the 1% Are Self-Defeating

Why Tax Cuts for the 1% Are Self-Defeating
Annual U.S. income share of the top 1%.

A new GOP budget released Tuesday brings renewed attention onto the issues of tax policy and the economy. Of course, there will be debate over what effects various policy options would have on the economy, something I have previously addressed in a previous article. But inevitably, there will also be arguments made by Republicans regarding the fairness of those policies as well.

The problem with many of the GOP arguments made in regard to fairness is that they lead to a self-defeating paradox in either the logic of the argument, or in the outcomes of their recommended policy solutions.
For example, one common argument made is on the grounds that it is unfair for the wealthiest to pay higher taxes since they are already paying the most federal income tax while many people pay none at all. But this argument is flawed in multiple ways.

First of all, the logic of this argument is paradoxical. As the wealthy get wealthier while others fall behind in comparison, the share of tax burden on the wealthy would continually increase. In other words, this logic would suggest that the closer the wealthiest come to earning 100% of total income, the more unfairly they are being treated since their share of income taxes edges closer to 100% as well. And by contrast, it would be considered more fair for the wealthy if their incomes fall while others’ incomes rise, since taxes paid would be more equal.

Second, the big irony here is that the policies that would seem to make it more fair for the wealthy in the short-term (lowering their tax rates at the expense of other policy options) are policies that would tend to further increase income disparity in the long-term. This is due to these policies’ lower effect on creating demand (lower economic multiplier), which means less need for labor (a weaker labor market).
Let me explain. The wages that average working people can expect depends on the overall demand for labor. If unemployment is very low, businesses must compete harder for labor. People will find more opportunities available, more competing offers, and find it easier to change jobs. This pressures business to offer more competitive wages, among other things.

In other words, policies that facilitate strong demand and thus strong employment lead to higher incomes for labor, which narrows income disparity. This real income growth due to strong employment is something we can see happening in China, for example.

In addition, this type of stronger income growth will itself fuel stronger demand. We typical refer to this as a strong middle class. The stronger demand it generates in the economy supplants the need for demand-creating policies, which means those polices can be slowly rolled back. This can even happen automatically to an extent, as a larger, wealthier middle class pays more taxes, and that increased revenue can be used even for a tax cut for the wealthiest.

Achieving an ideal conservative vision of the economy and of government tax policy by enacting conservative-favored policies is a self-defeating paradox. Ironically, the path to this ideal conservative outcome can only be achieved by first enacting liberal policies