Tuesday, March 20, 2012

New Budge Proposal Failed to Learn from History

(I'm sorry. Font size is all messed up and I was not able to make it uniform)

House Republicans unveiled a budget proposal that cuts national spending and encourages tax reduction for the wealthy today. Budget Chairman Rep. Paul Ryan (R-Wis.) authored the proposal. The proposal aims at cutting federal spending by $5.3 trillion and will undermine mainly health programs, including Medicare, Medicaid, and entitlements for the poor, if approved. Ryan proposes to replace the current tax structure with a 10% rate for lower income people and a 25% for upper income people; meanwhile, he suggests that tax policy be easier to understand. With a spending cap on future retirees, Ryan expects to balance deficit by 2040. House Speaker John A. Boehner (R-Ohio) supports the idea of spending cap, while opponents criticizes that the proposal protects the rich at the expense of the poor (Washington Post).

This article was released at 1pm today and it already received over 5000 comments so far. I read through the comments of this proposal and found that many readers are disappointed because they think the proposal is selfish in protecting the upper class’ living standard and does not care about the poor. Other observers point out that spending on environmental disasters and world politics issues should also be taken into account. Although many people dislike this proposal, commentators have a general dissatisfaction about the slow economic recovery and questions about President Obama’s leadership.

Even though the proposal is unlikely to become law because of the Democrat controlled senate would not approve it, Ryan claims that the proposal might help set an agenda for Republican candidates in this year’s election. However, tax policy should not be a selling point of candidates and the impacts brought by tax policies always come after minor economic progress has been made.

I researched the relationship among tax rates, presidents’ approval ratings, and GDP growth from President Jimmy Carter to President Obama (1977-present). I conclude that it is not necessarily the case that the lower the tax is, the higher the GDP is, and the more popular the president is.

Major tax deductions happened during Ronald Reagan and George W. Bush Administrations. Before Reagan Administration, average tax rates ranged from 14%-70% for lower income and higher income people under President Jimmy Carter. During Reagan Administration, tax deduction happened graduation with a relative sharp deduction in tax rates in 1987 and 1988, dropping to 11%-38% in 1987 and 15%-28% in 1988. During George W. Bush Administration, tax rate for the wealthy dropped by 4%, changing from 39% to 35%. Looking at the GDP record from 1980 to 2010, however, the periods during which GDP grew rapidly or steadily were not the periods when dramatic tax cuts happened. For example, during 1982-1984, the economy started moving out of recession and has a steep GDP growth on the graph, but the tax rates within these three years stayed from 11%-50% with a 1% minor change in 1984. Also, during1991-1992, there is rapid growth in GDP under President George H. W. Bush Administration, but he continued using President Reagan’s tax rates when he assumed office even with a slight tax increase for the wealthy. Moreover, during President George W. Bush Administration, even though there is a steep increase in GDP from 2001-2004, Bush tax cut did not enter into force until 2002 and continues after 2004, but the GDP growth started slowing down after 2004. These evidences show that there is a lack of immediate relation between tax deductions and rising GDP, so tax deduction may not be an effective solution to boost the domestic product.

Furthermore, tax policy should not be a selling point of presidential candidates because history of the past three decades shows that the public is normally less sensitive about economic changes unless there is a huge improvement. During the aforementioned periods when U.S. GDP grew, then presidents’ approval ratings actually experienced decrease. During 1991-1992, 2001-2004, and 2009-2010, presidents’ approval ratings were worse then the GDP increased, with the exception of President Reagan. However, President Reagan experienced a steady increase of approval rating from 1981-1989, but his approval ratings peaked in 1985-1986, a period during which neither the highest GDP during Reagan Era occurred nor a tax deduction took place. Instead, it is a period when the economy was making steady improvement and performing stably. As a result, actual growing GDP does not lead to immediate increase in political leaders’ popularity, and people usually do not feel better about the economy until the growth is stabilized after a year or two.

The attempt of Ryan that challenges Democrats’ approach to recover the economy by introducing a budget proposal that is not expected to be approved presumes that lower tax rate will boost the economy and that better economy will increase the popularity of political leaders, but the presumption is a slippery slope that does not always follow.

All the reference data I used could be found here:





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