Theory: tax cuts always create jobs.
Neo-conservatives argue that putting tax dollars in the hands of private citizens stimulates the economy because private citizens have more money to spend, and so spend it. This produces a ripple effect -- those people who sell consumer goods now have more money to spend, and they spend it (on suppliers, workers, their own luxuries), and so on.
The cycle of spending is limited only by how much money individuals tend to save (this takes money out of the economy) and how much is spent on basic necessities (where the flow of cash basically stops upon the purchase of a good). Economists tend to prefer it if we spend our money on complex consumer goods -- items where a lot of labour and resources are required to produce, because these goods supply the greatest cycling of money in the economy. If we lower taxes, taxpayers will spend more money on these goods and we'll all be happy.
Or so the theory goes.
Practise: Since wiping out several hundred billion dollars in government revenues and adding to the U.S. debt, the Bush Administration has seen the United States lose over 1.7 million jobs. The administration has tried to paper over this uncomfortable fact, claiming that the recession would have been deeper and longer had the tax cuts not happened.
This, however, still leaves another uncomfortable fact: that Canadians, paying higher taxes than their American counterparts, have avoided the U.S. recession. This despite the incredible dependence the Canadian economy has on exports to the United States. Unlike America Canada has seen a substantial increase in jobs over the past year, and the gap in our unemployment rates has been the narrowest in over three decades. The last time Canada avoided a recession that Americans experienced was 1958, during the Eisenhauer Administration.
Clearly, it is simplistic to say that cut taxes always mean increased jobs. For one thing, are taxes really being cut? The Harris Tories cut provincial income taxes by 30% since coming to power in 1995, but the average Ontarian is not much better off. For one thing, the taxes themselves weren't cut so much as passed onto the province's municipalities in the form of downloaded services. Ontarians may be paying less income tax, but they are paying more user fees and higher property taxes, limiting any economic benefits the cuts have to offer.
Since 1999, however, the Federal Government has also cut taxes, and has done so in a moderate way, without a parcelling off of services to another jurisdiction (that was done in the early-to-mid 1990s with the cuts to provincial transfer payments). So, these tax cuts have been real, and have put money in Canadian pockets without taking it away elsewhere. The result might just be the increase in spending necessary to keep Canada's economy moving forward in the face of American collapse.
Neo-conservatives tend to see taxes as a black hole, where money disappears from the economy. The truth is that the money that government takes in taxes is spent on its workers and the people who receive the services they offer. These workers, and those others who receive the tax money spend it themselves, putting money in the pockets of the same producers of consumer goods, who spend it themselves, and so on, growing the economy as well as, if not better than, the low-tax model.
In countries where government departments are grossly corrupt and inefficient (like your average dictatorship), the tax monies do fall into a black hole, money is squandered and spent inefficiently. However, the past twenty years have extracted great efficiency gains in the Canadian and American civil services, with fewer workers working on more projects.
It's important to note that inefficiencies happen throughout the economy, not just in government. Indeed, given all of the spending that the Canadian Auditor General notes is spent inefficiently by the federal government, most Canadians spend a greater percentage of their money in frivolous ways than their governments. Even by the most liberal estimates, the total amount of government spending that can be called outright waste amounts to less than 1% of the government's revenues. For an average Canadian earning $40,000, such efficiency means spending no more than $7.70 per week on frivolous things, like eating out, or buying chocolate bars and lattes.
Thus brutal tax cuts of the sort seen in Ontario and Washington no longer result in government workers doing more for less, but in government workers joining the ranks of the unemployed, and the services they provide dropped. As a result, the money that they cycled through the economy vanishes, offsetting the benefits received by handing that money over to the average taxpayer. Again, the post-1999 federal tax cuts occurred without cuts in federal government services, and so more money was added at one end without taking it away at the other, and again possibly explaining why our economy continues to grow... unlike the economy of the United States.
Then there is the deficit question. Conventional (Keynesian) wisdom suggests that governments should spend more than they take in during bad times and make back that money in good times in order to smooth over the peaks and valleys of the average economy. However, due to structural changes in our economy taking place over the last thirty years, all the G7 nations and their sub-national jurisdictions have accumulated substantial debts. The debts themselves aren't a problem, but the interest payments on those debts are. This seems to have been forgotten by Keynesian economists, but then they only theorized on governments having to run a deficit three-or-four years at a time, not twenty or more.
Interest payments on debt can be a drain on the economy. The money paid does not get used by taxpayer, government worker or government recipient. The money goes to the bondholder, who can spend the money in such a way as to stimulate the economy, but who tends to use it to purchase more bonds. And if foreign nationals hold portions of your debt (and 16% of Canada's debt and a staggering 43% of America's debt is foreign owned), then that money is exported from the economy altogether. You could increase your deficit in order to spend more money on government services (as was done in Canada during the 1980s), or to pay for tax cuts (as is being done by the Bush Administration), but that serves only to increase debts, increase interest payments on those debts, and increase this drain on the economy. Governments that maintain balanced budgets or run surpluses (as the Canadian government does and as the Clinton Administration did) reduce debt, reduce interest payments on that debt, and free up more money to be either spent on government services or given back to taxpayers. This could be a third reason why Canada has avoided America's recession.
Finally, there is the taxpayer himself. Is he primed to spend the money? Only if he does so will the economy benefit. But Ontarians coming out of a deep recession in 1995 had large personal debts to pay off; Americans, on average, carry over $6000 in credit card debt from month to month. Thus, monies freed up by tax reduction tend not to get spent, but set aside to pay for purchases already made. The net benefit to the economy is thus significantly reduced.
Tax cuts do work to stimulate the economy, but only if (a) taxpayers are not already in debt, and are thus willing to spend the money received rather than save it; (b) government efficiencies are such that tax cuts can be supplied without reducing government services at a corresponding rate; (c) the government doesn't go into deficit in order to supply the tax cuts, especially if a large portion of the government's debt is owned by foreign nationals and (d) interest rates are low (to limit the problem debts and deficits cause).
Element D is all that the United States has going for it at the moment.
Given that Americans were heavily in debt in the year 2000, and were expected to go deeper into debt following the attacks of September 11, it's no accident that the Bush Administration's tax cuts did nothing to stimulate the American economy. Given that the United States is over $6 trillion dollars in debt (43% of that foreign owned), increasing the deficit to pay for these tax cuts will hurt far more than it helps. The taxpayers themselves are not primed to spend the money the government hopes to give back to them, and by cutting off government services and adding to the load of interest already hampering the nation, further tax cuts are just going to make the current situation worse.
But the Bush Administration and Neo-Conservatives like them refuse to see these facts. For them, it's a mantra: tax cuts always mean jobs. Tax cuts always mean jobs. It's a one-to-one ratio.
They don't. You would think that Neo-Conservatives, with their love of the free market economy would know that the economy is far more complicated than that, and solving the problems of high unemployment and high debt loads is going to take far more than a few more dollars in a taxpayer's pocket.