As the Congressional Republicans try to desperately to complete their work on their tax reform bill, it is time to dig past the political rhetoric and determine who their new tax legislation is meant to benefit. Despite their attempts to label their efforts as a “tax cut for the middle class”, their intent is obviously first and foremost to reduce the taxes of large corporations and the very rich. The non-partisan Tax Policy Center has found the tax bill passed by the House would cut taxes an average $360 a year for the middle class, $62,000 a year for the top 1%, and $321,00 a year for the top 0.1%. Donald Trump and his family would be among the prime beneficiaries of the plan since it would eliminate or would greatly reduce the estate tax and would reduce the top tax rate for the profits his real estate businesses. The nonpartisan Tax Policy Center has determined that after 2022 half the benefits of the bill will go to the top 1 percent of tax payers.
That is because Republicans in Congress have made the cuts in the top tax rate to be paid by corporations and the reductions of the estate taxes permanent, while some of the key provisions which would reduce the taxes of the middle class will expire after five years. Therefore, according to the official estimates of the Joint Committee on Taxation, in 2023 only 40% Americans will pay less taxes than they pay now while 22% will pay more. The rest will pay about the same. The Republicans are allowing the provisions which benefit the middle class to expire early to keep the tax bill from increasing the national debt by more than $1.5 Trillion over the next 10 years. If the cost of the bill were to exceed that limit the bill would require a 60 vote majority to pass in the Senate and that isn’t going to happen. This is certainly a good indication where the real motivations of Congressional Republicans.
Yet despite evidence to the contrary, Trump and the Congressional Republicans continue to claim their tax legislation will primarily benefit the middle class. Trump has even promised that that the average American will get a $4,000 raise as a result of the passage of the Republican tax plan. What are these claims based on? How will the money which is supposed to benefit the middle class materialize out of midair? George H. W. Bush once called it “Voodoo Economics”. Those more kindly disposed to the economic theory favored by the Republicans call it Supply-side Economics, or by its popular nick name, Trickle Down Economics.
Back in the early 1980’s when I was in the process of getting an MBA, my economics professors took pleasure in ridiculing the new-fangled theory of supply-side economics. The new theory was at odds with the concepts of economics that those PhD’s taught every day. It claimed that if the taxes of the wealthy and corporate America are reduced, those individuals and businesses will invest the money they saved on taxes in business, making them more capable of generating revenue. Those investments would increase business revenue to such a degree that corporations and the wealthy would end up paying the government more tax dollars than before even at the lower tax rate while at the same time stoking up the economy of the entire nation. While most traditional economists at the time firmly believed supply-side economics wouldn’t work in practice, the concept was eagerly adopted by Republicans politicians as a perfect vehicle to justify their attempts to benefit the rich and powerful.
In the last thirty plus years my economics professors were proven to be correct; supply-side economics didn’t work in the real world. Apparently however, that hasn’t kept present day Republicans from using trickle-down-economics to again claim that their tax plan will benefit the middle class even though it is clearly primarily aimed at cutting the taxes of large corporations and the nation’s wealthiest individuals.
Over the last 37 years Republicans twice gave supply-side economics an opportunity to work its magic. The first supply-side era began when President Ronald Regan signed into law a bill which lowered the top income tax rate for this country’s wealthiest individuals by 20% and cut taxes for corporations. The second supply-side era began in 2001 with the signing of a Republican tax cut bill by George W. Bush. In between we had a respite from supply-side policies when President Bill Clinton signed a major tax bill in 1993 which raised the top tax rate paid by the richest Americans and extended Medicare taxes to individuals with higher incomes.
In an article entitled “The Failure of Supply-Side Economics” noted economists Michael Ettlinger and Michael Linden compared the economic results of these three policy eras. (Michael Ettlinger is Vice President for Economic Policy at the Center for American Progress – an independent nonpartisan policy institute – while Michael Linden is Director of Tax and Budget Policy at the Center.) Here are some of the major findings of Ettlinger and Linden’s work.
Investment Growth: Please recall that one of the basic tenants of supply side economics is that when the tax rates of the wealthy and corporations are reduced, the money saved on taxes will be reinvested into the economy raising all boats. Well Ettlinger and Linden determined that it didn’t work that way in the real word. After the Bill Clinton signed the legislation which raised taxes in the 1990’s the average annual growth in non-residential investment was 10.5%. In comparison, during supply-side policy period in the 1980’s following the Regan tax cuts the average annual growth in non-residential investment was paltry 1.4%. After the George W. Bush tax cut in 2001, non-residential investment grew at 6.7% per year. Apparently the supply-side policy of cutting taxes for corporations and the wealthy is not the best way to spur new investment.
Income Growth for Middle Class Families: Now please recall that Trump promised that the average American household will get a $4,000 raise as a result of the passage of the Republican tax bill. Since the average income for the average American household is approximately $73,000 a year, $4,000 would represent a 5.5% raise. However, during the Regan 1980’s supply-side policy era, wages rose at only 1.2% a year and following the Bush tax cuts wages grew at only 1.1% a year. On the other hand, when supply-side policies were put aside in the 1990’s with the Clinton tax hikes, wages grew at a 2.3% annual rate. Again, it appears that decreasing taxes on the wealthy and corporations is not the best way to grow wage income in this country. In addition, we can certainly equate Trump’s promise of a $4,000 wage increase to more twitter cow manure.
Hourly Wage Growth: Another way of measuring how well typical Americans are faring in their jobs is to measure the amount their hourly wages increase over time. During the Regan supply-side era, the average hourly wage of American workers actually decreased at a rate of 0.5% a year while during the George W. Bush supply-side era, hourly wages showed 0.0% increase – they neither increased or decreased. However, after Clinton’s tax increase bill passed, hourly wages for American workers increased at 1.0% annual rate. The moral of this story is that if you want to increase hourly wages for the typical worker, cutting taxes for the wealthy and big corporations is not the way to go.
Growth in the National Debt: Republicans always seem to be gung ho about decreasing the national debt. They are big on issuing warnings about leaving an unmanageable national debt for our children and grandchildren, at least when they are fighting entitlement legislation. However, deficient spending becomes much more popular in their ranks when they are considering reducing taxes for the wealthy and large corporations. That’s when they hide behind the mirage of supply-side economics. Remember the theory – the money saved by the wealthy and large corporations by tax rate cuts will be invested in revering up the economy increasing tax payments even at the lower tax rate. The only problem being that it doesn’t work that way in the real world. During the Regan supply-side economics era the national debt increased 33%. After the tax increase under Clinton the national debt actually decreased 16% after which it increased again under George W. Bush when supply-side policy was reapplied.
In addition, the work of Ettlinger and Linden also established the following: Productivity growth was weaker under supply-side policies. Overall economic growth was weaker under supply-side policies. Also, employment growth was weaker under supply-side policies. The bottom line is that the trickle-down economic theory doesn’t work in the real world.
I think that George H. W. Bush had it right when he coined the phrase “Voodoo Economics”. Its magic isn’t real; it is an illusion pushed by con artists. Despite the evidence that has been building up over the last 30+ years, Republican politicians still it to try to con us into believing that reducing the taxes of the wealthiest individuals and big corporations will also ultimately be best for the rest of us as well. The problem is that if their tax bill passes, by the time we figure out we have been screwed again it will be too late.