Ralph Martire: A history lesson on tax cuts

Ralph Martire: A history lesson on tax cuts


To stimulate the U.S. economy to "levels you haven't seen in many years," President Donald Trump is proposing to cut federal income taxes, for most folks in general, but predominately for really affluent families and mega-corporations.

His proposal is so skewed to the wealthy that over the next 10 years, more than half of his multi-trillion dollar tax cut will go to the wealthiest one percent. Big business does well too, gaining an estimated $4.1 trillion tax cut during the next decade.

And that's not the only justification offered for the president's full-on, supply-side, tax cut. According to Senate Majority Leader Mitch McConnell (R-Ky.), this tax cut will "create so much economic growth, it (will) begin to pay down the nation's debt." Which sounds too good to be true — because it is.

By now, every American who is objective or can do math should know that the proposed supply-side tax cuts won't work as promised. Why expect certain failure? First and foremost is something called "history." Supply-side tax cuts have never worked as promised. Never. Second, focusing tax cuts on affluent individuals and corporations is not an effective way to stimulate private sector job growth — which pretty much explains why history has proven supply-side economic theory is bogus.

Start with history first. Top federal income tax rates for individuals were very high from the end of World War II through 1980 — ranging from 90 percent to 72 percent. During that sequence, the U.S. economy grew at an average rate of 3.8 percent per year, in real, inflation-adjusted terms. Meanwhile, income distribution slightly favored the top, with the wealthiest 10 percent realizing roughly 34 percent of all growth in income over that period, leaving 66 percent of income growth for the bottom 90 percent in earnings to share. Still, these were pretty good times, that included a strong middle class and real income growth for all earners.

Then came supply-side under President Reagan, who cut the top marginal income tax rate from north of 70 percent to 38.5 percent in 1981. President George W. Bush then cut the top rate down to 35 percent in 2001, while also cutting capital gains and dividend tax rates, which all primarily benefited the most affluent. That's nearly four decades of supply-side. And the results ain't pretty. In fact, average U.S. economic growth from the Reagan Administration through the end of George W. Bush's second term was 2.8 percent annually after inflation. That's one full percentage point lower than during the previous, high-tax era and translates to about $150 billion less in annual economic activity. There was never any trickle-down effect. Meanwhile, income inequality became much worse, with more than all real growth in income going to the wealthiest 10 percent. Everyone else earned less after inflation in 2007 than in 1980. And because the promised economic growth never materialized, federal deficits exploded.

Which should surprise no one, because tax cuts mostly benefiting businesses and affluent families can't be expected to stimulate job growth.

Here's why: the economy is primarily, as in around 68 percent, consumer spending. Tax cuts for affluent folks won't generate much new consumer spending — because individuals at the top of the ladder already have rapidly growing real incomes. In economic terms, they have a low "marginal propensity to consume," that is, they are unlikely to spend any tax relief they get. No bump in consumer spending, no job growth.

Business tax cuts also don't incentivize job creation, because businesses only hire more workers when they actually need additional capacity to satisfy growing demand for whatever they sell. It makes no sense for a business to utilize tax relief to hire folks if there's no work for them to do. Excess capacity is wasteful and cuts profits.

Which means there's literally no reason to believe President Trump's proposed tax cuts will stimulate the economy and every reason to believe they'll grow the national deficit.

Ralph Martire is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank.

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Georgia Native wrote on November 27, 2017 at 4:11 pm

Interesting, but respectfully, wrong. Let's assume the President's proposal actually does favor the rich and big corporations, which I do not concede. If the rich and big corporations have more cash, what do they do with it? They don't put it in a room and look at it, rather they spend it. On what? People would buy personal goods, travel and entertainment, real estate, stocks. Corporations would buy new machines, add manufacturing or service capacity, hire workers. All of that sounds like it would improve the economy, as those goods and services mean more and better jobs for more people. The tax rates are not the only thing that are reduced in the proposal, however. The number of ridiculous loopholes favored by special interests that most middle class earners cannot exploit is severely slashed. A really fair tax would tax everyone equally, that is each person would pay his or her share of the $1 trillion plus it takes to run the federal government. That works out to roughly $3,200 per person. Somewhere along the line, though, it was decided to tax people based on their income. Not fair (which means the same for everyone) but reasonable (ability to pay). Then the people with money decided to lobby their representatives to push through loopholes. THAT resulted in 78,000 pages of tax code. How can anything that lengthy, written by lawyers no less, EVER be fair? No, it's good for those represented by the lawyers and bad for everyone else. In addition, it takes an accountant, and a good one, to do calculate the taxes for anyone who has more than just a minimal income and no other factors to consider. Average cost of that? $450 or so, wasted just so someone who understands what should be simple can do it for you. Asking the IRS for help on taxes is a mistake. The IRS agents don't know the whole tax code, and it has been established that if they give you bad advice and you follow it, YOU, not they, are responsible for not only the additional taxes but any penalties as well. By the way, the IRS budget is $11.7 billion a year, over 1% of the total federal budget. How much of that could be trimmed if the tax code were, say, 100 pages? 50%/ More? There's savings right there! There are a few bad provisions in the tax code that almost everyone can understand. Take one example: the really really bad idea of an inheritance tax (which is cut in the proposal). The inheritance tax brings in less than 1% of the $1 trillion every year. Every cent paid to build up an inheritance was already taxed when it was earned, so taxing it again is fair? When the owner of whatever it is dies, and can no longer protect it, the government steps in and takes 40%. Not so fast! This applies only to small farms and mom and pop shops. Larger family businesses have already had their lawyers add the children in as co-owners, so that when the parents die, the business doesn't get broken up for taxes, but just passes on to the next generation. The way it should be. So, eliminate it as well. To sum up: if you lower the tax rates, eliminate as many loopholes as you can, and maybe give people a bit of untaxed income at the lower end, you will get a tax code everyone will be able to understand, everyone will agree is reasonable, and will allow people to focus on earning money rather than dodging their tax obligations through finding existing loopholes or making new ones. The tax code is very complicated, but there is no good reason it should be. Simplify and get on with important endeavors.