Reagan's Trickle-Down Economics Doesn't Work: Thom Hartmann

As the fall election approaches, it is important that Americans begin to understand what the "reagan revolution" and the follow-up free marketarian takeover of America has meant to all of us.  McCain's policies are pretty much a continuation of the same old right-wing economic song and dance--a claim that cutting taxes doesn't hurt the country (but it does, since owing too much leaves us less in control of our own destiny), that spending can be controlled (but it never is), that government doesn't need to do so much (but it does, if we want clean air, clean water, clean food, jobs, decent health care, and good public infrastructure).

I commend this piece by Thom Hartmann, August 6, 2007: Roll Back the Reagan Tax Cuts.  The gist of the piece is the contrast between the FDR approach--tax the wealthy and use that money to put Americans to work building American infrastructure that will help the economy grow--and the Reagan approach--give all the breaks to the wealthy, and let the rest of the country get whatever it can from any overflow, but stop using government to do for the people what needs to be done.

After the Republican Great Depression, FDR put this nation back to work, in part by raising taxes on income above $3 to $4 million a year (in today’s dollars) to 91 percent, and corporate taxes to over 50% of profits. The revenue from those income taxes built dams, roads, bridges, sewers, water systems, schools, hospitals, train stations, railways, an interstate highway system, and airports. It educated a generation returning from World War II. It acted as a cap on the rare but occasional obsessively greedy person taking so much out of the economy that it impoverished the rest of us.

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Reagan promptly cut income taxes on the very rich from 70% down to 27%. Corporate tax rates were also cut so severely that they went from representing over 33% of total federal tax receipts in 1951 to less than 9% in 1983 (they’re still in that neighborhood, the lowest in the industrialized world).  The result was devastating. Our government was suddenly so badly awash in red ink that Reagan doubled the tax paid only by people earning less than $40,000/year (FICA), and then began borrowing from the huge surplus this new tax was accumulating in the Social Security Trust Fund. Even with that, Reagan had to borrow more money in his 8 years than the sum total of all presidents from George Washington to Jimmy Carter combined.

In addition to badly throwing the nation into debt, Reagan’s tax cut blew out the ceiling on the accumulation of wealth, leading to a new Gilded Age and the rise of a generation of super-wealthy that hadn’t been seen since the Robber Baron era of the 1890s or the Roaring 20s.  And, most tragically, Reagan’s tax cuts caused America to stop investing in infrastructure.

Comments

[James Kroeger]

Shout it from the mountain tops!

The problem with the Tax Cuts = Economic Stimulus notion is that it gives economic neophytes a patently false understanding of the role that tax cuts actually play in the world of fiscal policy. Currently, the only reason why tax cuts are said to be expansionary is because it is assumed that the government's spending will be maintained through borrowing. But there is no reason for us to assume that this will always occur. Indeed, there are a lot of people hanging out at the Club For Growth website who claim that the true benefits of cutting taxes can only be reaped when government spending is reduced by the amount of the tax cut. Balanced budget tax-cutting is their ideal.

It doesn't take a genius to see that if tax cut dollars are matched by spending cut dollars, no net economic stimulus (increase in aggregate spending) is possible. If all of the tax cut is spent on consumption, then the total increase in consumption spending will be matched by an equal reduction in government spending. No net stimulus occurs. If any of the tax cut is saved, then the end result is a reduction in aggregate spending. In other words, the net effect is contractionary.

Now if the government were to increase taxes on consumption in order to pay for additional government spending, then there would be no net economic stimulus (because the increase in government spending would be exactly matched by a reduction in consumption spending). No net stimulus can be produced with this kind of tax increase. But if any amount of the revenue the government collects from a tax hike would have been saved instead of spent, then the result is an increase in aggregate spending and economic growth. That's right, except for the single exception that I just mentioned, income tax INCREASES are an indisputable example of expansionary fiscal policy.

Even if it is difficult for economists to utter the words, "Tax cuts are contractionary", it shouldn't be too difficult for them to embrace the statement, "Tax increases are either (A) stimulative, or (B) ineffective in stimulating the economy." One thing that will never occur as a result of a tax hike---all else equal---is a contraction of the economy.

Why? With respect to (B), if the drop in consumption caused by the tax hike is matched by an equal amount of new government spending, then no economic stimulus whatsoever is possible, ceteris paribus. But if any of the money the government collects in taxes would otherwise have been saved by some of the taxpayers, the final outcome of the tax hike is indisputably predictable: an increase in aggregate spending occurs. That's economic growth resulting from an increase in government spending, financed by a tax hike.

If one can concede this point, then it should be easy to see why a "paid for" tax cut is contractionary. The only time when a paid-for tax cut is not contractionary is when all of the tax cut money is given to people who will spend ALL of it. In that special case, a tax cut is neither contractionary nor expansionary. It is simply ineffective in affecting aggregate spending because the increase in consumption will be exactly matched by a decrease in government spending.

It would be nice if 'Democrat economists' would take the lead in utterly discrediting the Republican Party's mythology re: tax cuts.

[Brooks Gracie III]

The conservative goals since Reagan took office have been, to a large part, driven by the Davos group and other like-minded "global citizens" who lack allegiance to U.S. domestic prosperity. Instead, they increase their wealth mainly through wage arbitration, transfer pricing abuses, and opaque tax shelters.

What we really need is a payroll tax on foreign labor resulting from offshored jobs. This payroll tax will decrease wage arbitration, by bringing payroll costs abroad closer to domestic payroll costs.

Another good idea is to require all domestic defense contractors to be incorporated in the U.S., and all of their income should be subject to U.S. taxes. Also we could prohibit transfer pricing issues by requiring any defense contractors to certify that at least 80% of their employees and material costs be of domestic origins. If they want to employ foreign labor, then make such wage costs non-deductible.

[LindaMBeale]

The Davos group and the drive for globalization (which has an immediate effect of lowering the standard of living in the US) are indeed a big part of the neoconservative economic story with which we should all be familiar.

[Acai Powder]

Nice bog you have here. I pretty much lurk the internet when I'm bored and read all I can about the organic lifestyle, but I really liked you view on things. I'll bookmark the site and subscribe to the feed!

[Matt]

LOL I love proponents of wealth redistribution. I'm sorry, but if you can't succeed in a capitalist market, don't blame the government and just keep your minimum wage paying job to at least stimulate the economy a little. For all of the socialists here, please take macroeconomics at your local community college and learn about the leffer curve and what it has done for so many countries.

"...since owing too much leaves us less in control of our own destiny"

Are you serious lady? Do you even read the inane garbage you blog about? You probably don't and that is just a function of why your blog and life is failing in general.

[LindaMBeale]

Well, Matt, like so many who have bought into the right-wing freemarketarian crap, you don't have any sound arguments to make and so resort to name calling and insults. My advice to you is 1) learn to learn and 2) stop the insults, because they only reveal your lack of any basis for a sound rebuttal.

P.S. It's the "Laffer curve". It's pure bunk that no respected economist thinks is more than a hunch about a theory about economics. It is based in ideology, not empirical evidence or a logical extension of accepted theories.

P.S.S. There is in actuality no such thing as a pure "capitalist market". We don't have one; nor does any other major power. We (and they) have ALWAYS had considerable government intervention in the economy--the railroads were built with huge government subsidies that made Stanford and his ilk rich; the highways were built by the government, making the trucking industry competitive with the railroads and making the carmakers rich; the savings & loan institutions were bailed out by the government; the derivatives industry and all that it entails (both good--ability of businesses to hedge commodity prices--and bad--ability of financial institutions to take huge speculative risks without actually owning anything); quasi-monopolies that Big Business lobbies for all the time; the ability of oil companies to extract resources from publicly owned properties paying only a pittance of the amount that should be paid to the people--all those are aspects of the "markets" that in fact are not merely buyer-seller arrangements but active government infrastructure creation and intervention that make markets possible and often favor particular industries in the markets over other industries.