Taxation and Republican Talking Points

On her show yesterday morning, Diane Rehm had a conversation with Rep. Tom Cole (R - Oklahoma), the current Deputy Whip and Chair of the NRCC. As expected, he stuck to the talking points without the slightest deviation. The one that caught my attention this go-round was his insistence that American voters have a simple decision to make when it comes to tax policy and the presidential election. I won't deny that in my mind this decision is fairly simple, but I do question his framing of the discussion. According to Cole:

Option 1: A vote for Barack Obama amounts to a vote to raise the aggregate tax burden on the tax-paying population. Irrespective of the portion of the population that is asked to bear this burden, Cole claims, increased taxes will stagnate economic growth.

Option 2: A vote for John McCain amounts to a vote for lower the tax burden across the board. This move stimulates consumption in the lower-to-middle income brackets and investment in the upper income brackets thus stimulating economic growth.

The gist of it is something like this: Obama = higher total tax burden = slow down; McCain = lower total tax burden = growth. The problem here is with the middle term, a total or aggregate tax burden really doesn't tell us much about possibilities for economic growth. On the surface, it assumes that the burden is evenly distributed (or, maybe equitably distributed) and that more money in consumer/investor pockets means higher consumption/investment and economic growth.

Digging a little deeper, though, there's a further assumption in the Republican rhetoric that really drives this type of tax policy. This is the assumption that it's really the upper echelon of income earners who drive the economy. Their investment leads to job growth and rising incomes across the board. If this is the case, a lower tax burden on them will mean that they have more money to invest which will spur economic growth. This is supply side economics.

The trouble is that effective demand, not supply, drives the markets. Greater investment in times of economic slowdown would be an irrational investment strategy. Investors can't expect returns on their investments, and, if they did invest and supply did rise, there would be a glut of overproduction and a downward economic spiral would ensue. Cutting taxes on the rich in an economic downturn doesn't spur the economy, it just makes them richer. They won't invest in projects that spur the economy or innovation (they know it's irrational), instead they'll save (effectively, by investing in government securities and other stable assets).

Raising the aggregate tax burden by targeting taxes at the wealthy will not harm economic growth, but lower taxes on the middle and lower classes (as well as better government services) made up for by higher taxes on the richest of the rich will increase effective demand and ease an economy out of recession. Rehm tried to say something like this to Cole, but being a Party loyalist, he didn't budge and continued to insist that aggregate tax burdens have some meaning beyond rhetoric. He's wrong.