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? asked in Business & FinanceTaxesUnited States · 1 decade ago

Do tax cuts cause a recession?

I've seen many libs blame Bush tax cuts for deficts...and the recession. First, tax revenue went up after the tax cuts took hold....but spending outpaced revenues.... does allowing people to keep more of their money...lead to a recession...specially when revenues go up??

1 Answer

  • 1 decade ago
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    Tax cuts don't per se cause recessions or deficits. Spending outstripping revenue causes deficit.

    Tax cuts may help enable the conditions for recession, however. Here's how: Bush gave huge tax cuts to everyone, however, it was the wealthiest and the highest wage earners who benefited the most. They got to keep enormous sums of money! In keeping this money, they invested it more aggressively into risky ventures such as residential (but especially commercial) real estate and into the stock (equity) market.

    But because there was no intrinsic value in these markets that warranted the investment (e.g. there was not adequate consumer demand), mere bubbles were created; they were unsustainable! When these "hot air" bubbles ultimately and inevitably popped, we got our recession and then we learned that the things we thought had intrinsic value - such as the ability of homeowners to all pay their mortgages - had no real value. Thus, a recession that followed a bubble.

    This has repeated itself many times throughout human history.

    For proof, note that during the '40s, '50s and '60s, when taxes were quite high - especially on the highest earners - there were no recessions of much consequence. The economic slowdowns that DID occur during those decades were relatively mild.

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