Support Intelligent, In-Depth, Trustworthy Journalism.
In House Speaker Paul Ryan’s words, the Republican tax reform plan is “our best opportunity in a generation to deliver real middle-class tax relief, create jobs here at home, and fuel unprecedented economic growth.”
But the plan — a Trump-era version of Reaganomics — leaves several crucial questions unanswered, starting with how economic growth will actually take place. Who will work harder? Which group of the underemployed will get decent-paying full-time jobs? Which businesses are likely to invest more? The economist Paul Krugman was right when he called the fantasy economy conjured up in the GOP proposal “voodoo economics.” (The economist Joe Stiglitz recently made the same argument as well).
For a closer look at the problems with the proposal, let’s start with the potential impact on the middle class? It’s true that the middle class has been hollowed out in recent decades. But the Republican plan won’t provide enough relief to make a real difference for middle class tax payers.
Take a median household of two earners with an income of $59,000. The best estimate is that their after-tax income will increase by 1.2% or by $704. To be sure, that is nothing to scoff at. It is twice as much as their income gains during the previous 17 years but it is hardly enough to be a game changer for them. Their likelihood of affording college for their kids will not increase, for example. Their consumption will be not increase the economy’s aggregate demand appreciably either.
In contrast, the super-rich will become amazingly even richer. If the GOP had its way, the top tax rate would decline from 39.6 percent to 35 percent for a married couple earning more than $470,000. Take a typical CEO of a major corporation who earns, say $20 million. With a typical effective tax bill of 25.6 percent for someone in that position, their take home pay currently would be around $14.8 million. Under the new plan, the tax bill would decline by 4.6 percent, or roughly $900,000. However, according to the nonpartisan Tax Policy Center, the gain would be even more — roughly $1.2 million.
Either way, in this scenario the windfall would leave the CEO with disposable income of around $16 million. This would certainly be enough to buy some political influence. So, the tax cuts feed a vicious circle that lead from the windfall to political power and the ability to influence the public’s worldview and thereby gain further profits and additional power both political and economic.
That was the consequence of Reaganomics as well as that the tax cuts put in place under former President George W. Bush. The trickle-down effect had the viscosity of molasses: it stuck with the ultra-rich, the top 1.2 million wealthiest households in the country. Even the 90th percentile got only a tiny bit of the crumbs. What did the country get overall from the Reagan tax cuts? The GDP per capita grew during the 1980s at roughly 2.5 percent per year, which is respectable, but only 0.1 percent above what it was in prior and subsequent decades. That does not seem like a big enough dividend for the $2 trillion increase in the government deficit and the hollowing out of the middle class.
READ MORE: A major sticking point in the Republican tax plan, explained
During the best years under George W. Bush, from 2002 to 2007, the economy might have grown at 3 percent per year but the top 1 percent captured fully 65 percent of that growth. The bottom 99 percent of the population, on the other hand, saw its income grow by only 1.3 percent. Those heady days were based on bubble prices and unsustainable finance, and we all know how that story ended.
Furthermore, the deficit increased — even before the Great Recession started — by $1.5 trillion. Combined, the three Republican administrations before Obama’s accounted for an unheard-of increase in government debt of $3.5 trillion. And what did the U.S. get for it? A rise in economic inequality, an erosion of the social contract, and political dysfunction.
The connection between increasing inequality and political power should not be overlooked. Under the current GOP plan, middle class families will not gain any significant political power through their $704 increase in disposable income whereas the top 1 percent will most certainly take advantage of their windfall. The dangers of this ought to be obvious. Even former Federal Reserve chairman Alan Greenspan, a free-market aficionado, admitted as much ten years ago, when he warned: “if you have an increasing sense that the rewards of capitalism are being distributed unjustly, the system will not stand.”
The GOP tax plan also ignores the fact that relative incomes matter a lot. A further rise in inequality means that the 99 percent will have a more difficult time keeping up with the Joneses. That’s why so many people went deeply into debt in the run-up to the last financial crisis, and why savings rates have declined so markedly. It’s much harder to keep up with the social norm when inequality rises. So by tipping the scales of inequality even further, the GOP would make it more difficult for everyone else to keep up with the social norms as defined by the upper echelons of society.
As for overall economic growth, the prospects are not good. Cutting corporate tax rates is central to the tax plan, and the GOP argument that lower rates will spur the economy. But why should businesses invest more at a time when there is excess capacity? According to the Federal Reserve Bank of St. Louis, 24 percent of industrial capital stock is idle. In other words, firms could increase production by 24 percent without undertaking further investment. Their problem is not taxes.
Indeed, many iconic corporations pay no taxes anyhow even though they earn profits. The list includes GE, Boeing, Verizon between 2008 and 2013, Corning 2008-1012, Pfizer 2010-2012, Honeywell 2009-2010, Merck 2009 and 2010, Bank of America and Citigroup 2010, FedEx 2011. All of these companies actually received a subsidy from taxpayers in those years. Rather, the problem U.S. corporations have is a lack of demand for their products. And funneling more money into the hands of the wealthiest individuals and companies will not increase demand for U.S. goods.
According to Krugman, “history offers not a shred of support for faith in the pro-growth effects of tax cuts.” The Tax Policy Center agrees. The center predicted no acceleration in growth and a sea of red ink as a result of the GOP tax reform plan. Even the business-friendly Wall Street Journal referred to the tax-growth relationship optimistically as “tenuous”.
At its core, the tax plan was made by the 1 percent for the 1 percent. Apparently greed has no limits. Make no mistake about it: this is nothing less than class warfare. And as Warren Buffett, the second richest man in America, so astutely recognized, “my class has won,” We were fooled by Reaganomics. We were fooled by George W. Bush tax cuts. Will the 1 percent fool us again? Or will Abraham Lincoln be proved was right, when he said that you can’t fool all of the people all of the time.
John Komlos is a professor emeritus of economics and of economic history at the University of Munich, and the author of the new textbook, “What Every Economics Student Needs to Know and Doesn't Get in the Usual Principles Text.” He’s also taught at Harvard, Duke and the University of Vienna.
Support PBS NewsHour:
Subscribe to Here’s the Deal, our politics newsletter for analysis you won’t find anywhere else.
Thank you. Please check your inbox to confirm.