Tax cuts may not have the desired effect, expert warns

The argument that reducing taxes will be beneficial for employment and the economy is flawed, according to former policy advisor Bruce Bartlett.

While tax cuts may reduce unemployment under the proper circumstances by making it cheaper for employers to hire workers at a given salary level, such an approach is unlikely to be effective under current economic circumstances, Bartlett argues. The federal government has not implemented a major tax increase on workers since 1983, he states, while it has passed a variety of tax breaks including the recent making-work-pay tax credit and subsequent payroll tax cut.

This examination of history suggests that low employment is not currently being caused by and cannot be repaired by changes to tax policy, according to Bartlett. This analysis is supported by Congressional Budget Office reports that federal revenues currently account for a historically low percentage of GDP.

It is possible that one reason changes to the tax code have not been effective in stimulating employment growth is because so many provisions passed by lawmakers are temporary. Recent changes have often been designed to last as few as one or two years, and businesses may be reluctant or unwilling to make plans around such provisions when they could disappear so soon, Bartlett notes. In that case, tax reform may have to take a longer view to have any clear effect.

This suggests that tax cuts could lower revenue without significant benefit, if Bartlett is correct. Given the government's current financial situation, that could end up encouraging or even forcing lawmakers to adopt higher taxes in the long run, adding momentum to the pushes for higher capital gains taxes and other changes which negatively impact day traders.