Wednesday, June 19, 2019

It’s Time For Democrats To Drive A Stake Through The Heart Of Reaganomics

Donald Trump today awards the Presidential Medal of Freedom to Republican economist Art Laffer, the ‘godfather’ of supply-side trickle down Reaganomics. Laffer’s contributions have built a streak of unbroken Republican policy wrongness over a time and scale few policy entrepreneurs in history can match. Trump is giving Laffer the award because last year he coauthored a fawning tribute to President Trump and his agenda. Trump is known to habitually reward his most slavish supporters.

Reaganomics is President Ronald Reagan's conservative economic policy that promised to subsantially shrink the federal government and government spending, and reduce the government's influence on the economy.

Reagan’s legislative agenda implemented an era of laissez-faire economic policy that promoted unregulated “free markets” and untaxed “capitalism” where corporate tax rates and capital gains rates for individuals were effectively diminished, as near as possible, to zero.

Dubbed supply-side, or trickle-down, economics, President Reagan’s economic policy was to reduce, and where possible, elminate taxes on businesses and the wealthy in society as a means to stimulate business investment. Reagan’s theory of trickle-down economics held that corporations and the wealthy would directly invest the money they don’t pay to the government in taxes into business development, which creates jobs, and supports social institutions, which benefits society at large. The theory says that as companies get more cash from tax cuts, they will hire new workers and expand their businesses. It also says that income tax cuts to workers give them more incentive to work, increasing the supply of labor.

The idea of Reaganomics began in 1974, when Art Laffer walked into a bar with Dick Cheney and Donald Rumsfeld, who were working for the Ford administration at the time. Out of it came the “Laffer curve,” a U-shaped graph illustrating the relationship between tax rates and revenue.

The ends of the curve are basic enough – at a tax rate of 0, the government will raise $0 in revenue, and at a tax rate of 100, the government will still raise $0 in revenue because people won’t work without take-home pay. The curve connecting these numbers indicated that a lower tax rate could produce higher revenue. At the extremes, the Laffer curve is correct, but that doesn’t tell us anything about the points in the middle. Laffer’s idea, however, was that a “tipping point” existed on the continuum in between, where people’s incentives to work and invest in business development decreased because tax rates were too onerous.

From Laffer’s graph, Reagan and the Republican Party had the academic justification to justify slashing tax rates for corporations and the rich, who held “excess” money which they could directly invest in business development and altruistic social institutions and programs.

President Ronald Reagan adopted Laffer’s supply-side theory wholesale in his deregulatory and low-tax agenda. In the decades since, Laffer has clung to relevancy, appearing on cable news to vehemently defend the alleged benefits of slashing taxes, even when the evidence proved otherwise.

The conceptual flaw underlying Laffer’s entire premise is that people are not, in fact, utility-maximizing robots. They choose to work for reasons other than maximizing their incomes on the margin: habit, pride of craft, and so on. Tax rates below 100 percent probably produce the higher revenue at rates, but the curve does not resemble Laffer’s, and it does not increasingly approach zero as tax rates are raised.

Of course a 0% tax rate yields 0 revenue, but a 100% tax rate definitely does not yield 0 revenue. To pay for WWII, during the tax years 1944 through 1951, the highest marginal tax rate for individuals was 91%, increasing to 92% for 1952 and 1953, and reverting to 91% for tax years 1954 through 1963. For the 1964 tax year, the top marginal tax rate for individuals was lowered to 77%, and then to 70% for tax years 1965 through 1981. During this post WWII period, not only was the war paid off, the middle class of America grew in size and prosperity, as did the nation as a whole.

While Reagan succeeded in cutting government taxes and regulations on the business, investment and banking sectors, he didn’t actually lower government spending, he just shifted spending from domestic programs to defense. Lifting regulatory oversight of the savings and loans sector precipitated the savings and loans crash by the end of Reagan’s second term of office.

While Reagan slashed the corporate tax rate and capital gains rates for Wall Streeters and the wealthy, he partially offset these tax cuts with tax increases elsewhere. He pushed through taxing retiree’s Social Security benefit payouts, payroll tax increases, some excise taxes, and more, while he cut income tax deductions and funding levels for Medicaid and other social programs, that benefited middle class wage earners.

Reagan’s regressive tax and fiscal policies, supported and advanced by both Republicans and centrist Democrats from Reagan’s administration through Donald Trump’s administration has resulted in the worst inequality in this country since the 1920s. Just three of the wealthiest one percent in America have as much wealth as the bottom 50 percent. Between 1989 and 2018, the top one percent increased its total net worth by $21 trillion. The bottom 50 percent actually saw its net worth decrease by $900 billion over the same period.
Laffer predicted Ronald Reagan’s tax cuts would pay for themselves. To the contrary, the federal debt almost tripled, from $997 billion in 1981 to $2.857 trillion in 1989. When Reaganomics instead produced historic deficits, Laffer continued to claim he was right, Reagan’s tax cuts just weren’t deep enough.

Laffer predicted Bill Clinton’s attempt to reduce the deficit by raising taxes on the rich would backfire (“I think the plan will fail. It entails price controls, which have never worked. It calls for tax increases, and that’s exactly the wrong way to go. It makes no sense to raise taxes on people who work and pay more to those who don’t work. This is the Reagan revolution in reverse.”) Instead revenue growth exceeded projections and the nation was on its way to eliminating its debt.

Laffer likewise predicted President Obama’s plan to stimulate the economy out of its Great Recession — precipitated by Pres. Bush following Laffer’s policy — would “destroy the economy.” Obama did not destroy the economy, he rescued it.

Laffer predicted that President Trump’s trickle down tax cuts would “pay for itself many times over.” It has not paid for itself at all, the national debt is rapidly ballooning.

A report from the International Monetary Fund (IMF), authored by five economists, presents a scathing rejection of trickle-down economics, arguing that the monetary philosophy has been used as a justification for growing income inequality over the past several decades. "Income distribution matters for growth," they write. "Specifically, if the income share of the top 20 percent increases, then GDP growth actually declined over the medium term, suggesting that the benefits do not trickle down."
The Trump-McConnell Tax Law Has Failed The American People

At the end of 2017, Republicans passed a tax law that President Trump promised would be a “middle-class miracle,” despite all indications to the contrary. Now, new reports show that while the benefits to corporations and the wealthiest few are even larger than anticipated, workers saw little to no benefit. Even worse, big corporations touted by President Trump and Sen. McConnell as tax law success stories are now laying off American workers.

The facts are clear: the Republican tax bill that was sold as “rocket fuel” for the economy and a boon to the middle class. Instead, the vast majority of the benefits have gone to corporations and the wealthiest few.


DMN: Corporate America used their tax cut windfall on over $800 billion on company share buybacks - not higher employee wages or business development - last year, pushing stock buybacks to their highest level ever.

For example,Texas Instruments’ effective tax rate dropped from 39% in 2017 to 17% last year, thanks to corporate tax cuts approved in late 2017 by Republican lawmakers and President Donald Trump. The company used its tax cut windfall to repurchase $5.1 billion worth of shares in 2018. []

Axios: More Spent On S&P 500 Buybacks Than All 2018 R&D. “Total research and development spending in the U.S. last year totaled $608 billion, according to data from the Federal Reserve, while corporations in the S&P 500 spent $806 billion buying back their own stock. The total for all companies was well over $1 trillion. What it means: In 2018, the 500 biggest U.S. companies spent 33% more on their stock buyback programs than the country is investing in research and development. The trend looks to be continuing this year as the U.S. is on pace to spend $642 billion on R&D in 2019 and poised to surpass last year's $1.085 trillion total in buyback spending.” [Axios, 6/19/19]

WSJ: Bonuses Drop, Signaling Tax-Cut Payouts Were A One-Time Windfall. “A boom in employee bonuses handed out by some companies in the wake of the 2017 Republican tax cut proved to be temporary, Labor Department data released Tuesday showed. Private-sector companies’ spending on nonproduction bonuses fell 24% in the first quarter of 2019 from a year earlier, the largest decrease for the category of benefit costs on record back to 2005. Those bonus payments jumped in late 2017 and early 2018 after Congress approved its package of tax cuts. Walmart Inc., AT&T Inc. and Wells Fargo & Co. were among prominent employers that announced bonuses in the wake of the new tax law. President Trump and other Republicans touted the bonuses as an example of how the law benefited everyday workers. Those gains appear to largely have been a one-time windfall.” [WSJ, 6/18/19]

Politico: Big Businesses Paying Even Less Than Expected Under GOP Tax Law. “Federal tax payments by big businesses are falling much faster than anticipated in the wake of Republicans’ tax cuts, providing ammunition to Democrats who are calling for corporate tax increases. The U.S. Treasury saw a 31 percent drop in corporate tax revenues last year, almost twice the decline official budget forecasters had predicted.Receipts were projected to rebound sharply this year, but so far they’ve only continued to fall, down by almost 9 percent or $11 billion.” [Politico, 6/13/19]

JUST Capital: Looking Back On Tax Reform: Workers Aren’t Winning. “We estimated that 56% of tax savings were headed toward shareholders in the form of stock buybacks or direct distributions, while just 6% directly benefited workers, with more than half of that in the form of one-time bonuses instead of permanent raises or benefits. This is in direct opposition to what the American public told us when we asked them how they thought companies should allocate their tax windfall – with respondents agreeing that 24% of savings should go toward workers and just 10% toward shareholders.” [JUST Capital, 6/6/19]

Congressional Research Service:“During the passage of the tax revision and in the immediate aftermath, some argued that firms would use these funds to pay worker bonuses (as discussed in the previous section on wages). Subsequently, a number of firms announced bonuses, which in some cases they attributed to the tax cut. One organization that tracks these bonuses has reported a total of $4.4 billion. With U.S. employment of 157 million, this amount is $28 per worker. This amount is 2% to 3% of the corporate tax cut, and a smaller share of repatriated funds.” … “Much of these funds, the data indicate, has been used for a record-breaking amount of stock buybacks, with $1 trillion announced by the end of 2018.” [Congressional Research Service, 6/7/19]


Charlotte Observer: Wells Fargo Shifts Many Jobs Overseas Following Layoffs In The US, Documents Show. “Wells Fargo has laid off hundreds of U.S. employees during the past year as it pushed many of their jobs overseas, according to an Observer analysis of federal documents. In the Charlotte metro area, the bank’s largest employment hub, mortgage jobs eliminated this year have also been sent overseas, Wells confirmed. The bank slashed hundreds of such workers in the area but would not disclose how many of those jobs it has sent outside the U.S. The documents, published online by the U.S. Department of Labor, shed light on how Wells Fargo has shifted work out of the country. Many of the U.S. layoffs have affected call center operations, including about 460 employees cut last year when Wells Fargo announced the closure of a site in Pennsylvania.” [Charlotte Observer, 12/25/18]

Financial Times: Wells Fargo Plans To Close 900 Branches Despite $3.4bn Tax Boost. “Wells Fargo plans to close about 900 branches as part of efforts to cut costs in the wake of its mis-selling scandal even though the bank’s profits received an immediate $3.4bn boost from the US corporate tax cut.” [Financial Times, 1/12/18]

Dallas Morning News: AT&T To Cut Nearly 2,000 Jobs, Telecom Labor Union Says. “About two years after Dallas-based AT&T championed corporate tax cuts and pledged they'd lead to job creation, the company plans to cut nearly 2,000 jobs, according to the telecom union that represents its workers. Officials from Communications Workers of America say AT&T began notifying employees Thursday about the upcoming cuts. It will eliminate 1,880 jobs by the end of September in 23 states, including Texas and Oklahoma, the union said. The cuts are aimed at technicians, such as those who do home installations or lay fiber optic cable. About 400 of those jobs are in Texas, CWA communications director Beth Allen said.” [Dallas News, 6/17/19]

Charlotte Observer: Walmart To Lay Off Hundreds Of Corporate Employees In Charlotte After Outsourcing Work. “Walmart will lay off nearly 570 corporate employees at its facility near Charlotte’s airport as the retailer transitions its finance and accounting services to a third-party vendor. The layoffs will begin in September and will continue in waves through early 2020, Walmart said in a Worker Adjustment and Retraining Notification Act (WARN) notice filed with the state last week. All affected workers have been notified, Walmart said.” [Charlotte Observer, 6/17/19]
Not content to botch his analysis of the federal budget, he has parachuted into several state governments and prodded Republicans into adopting his utterly false worldview. In Kansas and Louisiana, Republican governors listened to Laffer and produced fiscal catastrophe so comprehensive and undeniable Republicans in their state revolted.
Laffer’s theory just so happens to serve as the basis for every terrible tax cut that Trump and the Republican party have passed for decades.

The Laffer curve has done immense damage to the US economy in the 40 years since its inception. It also ignores a fundamental reality: tax cuts for the rich don’t work.

Each and every time state or federal governments have tested Laffer’s trickle-down theory, deficits balloon, rich folks hoard their wealth at the top, and average Americans suffer.

The greatest periods of growth in our country, such as the 1950s and 1990s, have coincided with decisions to raise taxes on wealthy individuals and corporations.

If we want to return to those periods of prosperity, instead of letting inequality continue to rise unchecked, we must demand our elected leaders acknowledge that trickle-down economic policies don’t work.

Modern-day Republicans seem to be hell-bent on perpetually ignoring basic economics in order to cut taxes for their rich friends, but that doesn’t mean the rest of us have to acquiesce.

This country's fate was sealed when our government slashed taxes on the rich back in 1980. There's nothing "normal" about having a middle class. Having a middle class is a choice that a society has to make, and it's a choice we need to make again in this generation, if we want to stop the destruction of the remnants of the last generation's middle class.

Despite what you might read in the Wall Street Journal or see on Fox News, capitalism is not an economic system that produces a middle class. In fact, if left to its own devices, capitalism tends towards vast levels of inequality and monopoly. The natural and most stable state of capitalism actually looks a lot like the Victorian England depicted in Charles Dickens' novels.

At the top there is a very small class of superrich. Below them, there is a slightly larger, but still very small, "middle" class of professionals and mercantilists - doctor, lawyers, shop-owners - who help keep things running for the superrich and supply the working poor with their needs. And at the very bottom there is the great mass of people - typically over 90 percent of the population - who make up the working poor. They have no wealth - in fact they're typically in debt most of their lives - and can barely survive on what little money they make.

So, for average working people, there is no such thing as a middle class in "normal" capitalism. Wealth accumulates at the very top among the elites, not among everyday working people. Inequality is the default option.

You can see this trend today in America. When we had heavily regulated and taxed capitalism in the post-war era, the largest employer in America was General Motors, and they paid working people what would be, in today's dollars, about $50 an hour with benefits. Reagan began deregulating and cutting taxes on capitalism in 1981, and today, with more classical "raw capitalism," what we call "Reaganomics," or "supply side economics," our nation's largest employer is WalMart andthey pay around $10 an hour.

This is how quickly capitalism reorients itself when the brakes of regulation and taxes are removed - this huge change was done in less than 35 years.

The only ways a working-class "middle class" can come about in a capitalist society are by massive social upheaval - a middle class emerged after the Black Plague in Europe in the 14th century - or by heavily taxing the rich.

French economist Thomas Piketty has talked about this at great length in his groundbreaking new book, Capital in the Twenty-First Century. He argues that the middle class that came about in Western Europe and the United States during the mid-twentieth was the direct result of a peculiar set of historical events.

According to Piketty, the post-World War II middle class was created by two major things: the destruction of European inherited wealth during the war and higher taxes on the rich, most of which were rationalized by the war. This brought wealth and income at the top down, and raised working people up into a middle class.

Piketty is right, especially about the importance of high marginal tax rates and inheritance taxes being necessary for the creation of a middle class that includes working-class people. Progressive taxation, when done correctly, pushes wages down to working people and reduces the incentives for the very rich to pillage their companies or rip off their workers. After all, why take another billion when 91 percent of it just going to be paid in taxes?

This is the main reason why, when GM was our largest employer and our working class were also in the middle class, CEOs only took home 30 times what working people did. The top tax rate for all the time America's middle class was created was between 74 and 91 percent. Until, of course, Reagan dropped it to 28 percent and working people moved from the middle class to becoming the working poor.

Other policies, like protective tariffs and strong labor laws also help build a middle class, but progressive taxation is the most important because it is the most direct way to transfer money from the rich to the working poor, and to create a disincentive to theft or monopoly by those at the top.

History shows how important high taxes on the rich are for creating a strong middle class.

If you compare a chart showing the historical top income tax rate over the course of the twentieth century with a chart of income inequality in the United States over roughly the same time period, you'll see that the period with the highest taxes on the rich - the period between the Roosevelt and Reagan administrations - was also the period with the lowest levels of economic inequality.

You'll also notice that since marginal tax rates started to plummet during the Reagan years, income inequality has skyrocketed.

Even more striking, during the same years since Reagan took office and started cutting taxes on the rich, income levels for the top 1 percent have ballooned while income levels for everyone else have stayed pretty much flat.

Coincidence? I think not.

Creating a middle class is always a choice, and by embracing Reaganomics and cutting taxes on the rich, we decided back in 1980 not to have a middle class within a generation or two. George H.W. Bush saw this, and correctly called it "Voodoo Economics” during the 1980 campaign cycle. And we're still in the era of Reaganomics - as President Obama during his administration pointed out, Reagan was a successful revolutionary.

This, of course, is exactly what conservatives always push for. When wealth is spread more equally among all parts of society, people start to expect more from society and start demanding more rights. That leads to social instability, which is feared and hated by conservatives, even though revolutionaries and liberals like Thomas Jefferson welcome it.

And, as Kirk and Buckley predicted back in the 1950s, this is exactly what happened in the 1960s and '70s when taxes on the rich were at their highest. The Civil Rights movement, the women's movement, the consumer movement, the anti-war movement, and the environmental movement - social movements that grew out of the wealth and rising expectations of the post-World War II era's middle class - these all terrified conservatives. Which is why ever since they took power in 1980, they've made gutting working people out of the middle class their number one goal.

We now have a choice in this country. We can either continue going down the road to oligarchy, the road we've been on since the Reagan years, or we can choose to go on the road to a more pluralistic society with working class people able to make it into the middle class. We can't have both.

And if we want to go down the road to letting working people back into the middle class, it all starts with taxing the rich.

The time is long past due for us to roll back the Reagan tax cuts. Even so, Republicans continue to prescribe Reaganomics to make America great again. President Donald Trump, 2012 Tea Party followers, and other Republicans advocate it as the solution the economy needs.

References: Salon: Reaganomics killed America's middle class.

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