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Why Tax Cuts Just Don't Work
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Why Tax Cuts Just Don't Work
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by John Peters
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One of the most enduring myths of our time is that cutting taxes, slashing public services, and freeing up markets provides the most economic opportunity for citizens and workers around the world. Recently, this myth was perpetuated again by U.S. President George Bush and Finance Minister John Manley, who respectively pledged a $670 billion tax cut over the next 10 years for Americans, and a $1.2 billion reduction for Canadian businesses.Wealth creation via tax breaks for investors, each claimed, would generate more jobs and more income for more people.But there are good reasons why we should be skeptical of such claims. If results of the past 20 years provide any evidence, it is clear that wealth doesn't "trickle down," and that "free" markets do nothing to redistribute income or help people out of poverty. Just the opposite, in fact. This is what all recent studies on income inequality, from around the world as well as from the World Bank, emphatically tell us. Pro free-market policies, they point out, haven't worked in the past. There is no reason to believe they will work in the future. Yes, they report, new wealth has been created. Yet it is only a small few who have benefited from this "more market/less government" line.Looking at total net worth or gross income over the 1980s and 1990s, each of these studies has found a number of disturbing trends. One of the most distressing is the skyrocketing gap between the top and the growing bottom in all of our societies. In the U.S., the Economic Policy Institute has found that the richest 10 per cent hold 72 per cent of all wealth, the top 1 per cent more than half of this. By contrast, the other 80 per cent of Americans had only 17 per cent of all accumulated wealth in 2000. Unsurprisingly, the U.S. now leads the way among advanced economies in having the worst rate of inequality.
Similarly, the Canadian Center for Policy Alternatives has reported that currently the richest one-fifth of families hold 76 per cent of all wealth in Canada. By contrast, the bottom half of us had only 5.6 per cent of all accumulated wealth.
And if these figures aren't jarring enough, it seems that things are only getting worse.During the 1990s in the U.S., the top 1 per cent of earners took home most of the benefits of economic growth, with their incomes growing an astounding 59 per cent. CEOs saw their bank accounts swell, their average salaries rising from a ratio of 72 times more than the wages of an average worker, to a ratio of more than 310 to 1.For young families, though, especially young single mothers, things only got worse. In the U.S., a third of single mothers live in poverty, and for the poorest two-fifths of households, incomes fell. Likewise in Canada, the average wealth of the poorest 20 per cent of households fell from $1,474 in 1970 to a paltry $150 in 1999 after adjustments for inflation. Sadly, this is the trend worldwide. Currently, four-fifths of the world's population lives below the poverty line, while the richest 1 per cent of the world have income equivalent to the poorest 57 per cent.The reasons why this is occurring are not hard to figure out. Tax cuts confer huge benefits on the wealthiest. Since they own almost all the stocks, they reap huge benefits from RRSPs and capital gains exemptions, as well as from stock dividends. For the poorest, however, tax cuts mean the exact opposite. With little or no disposable wealth, for the poor as well as for modest income earners, tax cuts have only led to a reduction in transfer income, as well as cuts to programs aimed at helping them live in security or in finding the education, training, and support needed to find better jobs. Consequently, most working people find it harder and harder to make ends meet. In addition, in the attempt to compete, businesses cinch down wages, lay off fulltime workers, and hire part-timers at lower rates. New jobs are bad jobs — part-time, low-paid, and with few benefits. If this is supposed to be the model of the "new" global economy, it is hard to imagine what a model in trouble might look like. The theory of a "trickling down" of growth and redistribution obviously has serious limits. Markets do generate wealth, but don't spread it around. They never have, and never will. Only governments can distribute wealth, income, and opportunity equitably. For people to benefit from economic growth, what is needed are effective public policies: Progressive taxation systems that redistribute income. A living wage standard that gives people enough income to live on. Training and child care programs that allow people to make a decent living. Retirement incomes that give the elderly a good quality of life.More than ever, we need policies like these to ensure that whatever wealth we generate helps all of us live better lives, and makes our world more secure and more stable. This is something neither tax cuts nor markets can do.John Peters is a research associate with the Center for Social Justice who teaches political science at York University.
Copyright 1996-2003. Toronto Star Newspapers Limited
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