Rich get richer, poor get poorer and the middle goes nowhere
Currently in Congress, the Republicans are working on a tax reform plan. Like juggling glass vials of nitroglycerin, in this volatile realm of the national economy, a misplaced hand can cause the nation’s finances to blow up.
Since the beginning of the Trump administration nine months ago, Congress has been ineffective at passing any of the president’s objectives.
Factionalism and disunity has afflicted Congress and rendered it innocuous.
Mistakenly, with the election of the GOP nominee Donald Trump, in concert with Republican majorities in both the upper and lower houses of Congress, some legislative progress was anticipated. Regardless of their individual righteousness, thus far no campaign promises have been fulfilled. No immigration laws have been reformed. The Affordable Care Act has not been rescinded. The international southern border wall has not commenced construction. No international trade agreements have returned to the Congress’ scrutiny for modification. In short, our federal government’s performance is pathetic.
Culpability for this lackluster showing has been hoisted upon the administration by Congress, and conversely assigned to Congress by the administration. Passing the buck is commonplace within the beltway. As our 35th President John F. Kennedy once said, “Victory has 100 fathers and defeat is an orphan”. Such is the case with the sad ineffectiveness thus far in the present government.
To change this trend, the Republicans in congress want to solidify a win for both the congress and the president by passing a sweeping tax reform law.
However, the proposal that they are formulating is based upon failed economic theories. What these legislators should be doing is examining how similar tax reform laws in prior administrations have effected the economy long term.
Moreover, it is beneficial to review how similar reforms in past presidencies have fared. The inescapable conclusion from tax reform history is sadly unavoidable. This type of tax redistribution of burden does not work!
Unfortunately, comparisons with Congress and the Keystone Cops of silent movie fame are inevitable. In other words, with everything they have attempted since Donald Trump was inaugurated, nothing has succeeded. Now it seems there might be actual coordination between the president and the split caucuses within Congress. The president just wants a win of some way, shape, or form, so as not to be deemed a failure. Simultaneously, the GOP dominated congress wants to deliver a lesser tax burden to the hierarchy of society who are campaign donors.
So, let us examine a general synopsis of what is in the GOP plan. In regard to individual taxes the following changes are proposed: The estate tax would be repealed outright. This move would alleviate more of the tax burden for the top 20 % of wealth earners than the bottom 80 %, nevertheless everyone would realize a gain if they were an inheritor. Also, the standard deduction would almost double to $12,000 for those who file the 1040 long form tax return. Further, the number of tax brackets would be honed down from seven classifications to three classifications, and the range would be reconstituted from 12% on the low side to 35 % on the high side. This move would raise the burden on low wage earners and lower the burden on high wage earners directly.
Most harmful to working families would be most tax deductions, including state and local tax deductions would be eliminated.
On the corporate side, the corporate tax rate would be reduced to 20 %. For the last decade, the annual equalized corporate tax rate paid has been actually around 13.8%. This is because offsets and loopholes affect the final rate that corporations pay. Some major corporations pay no tax at all due to research and development deductions. So, the claims that the existing 35% rate is thwarting business growth are debatable.
Both the Tax Foundation and the Business Insider estimate that if the bill is passed as proposed, the national debt will increase at least one to two trillion dollars over the next decade.
Why would our already astronomical national debt increase so dramatically? The answer lies in the basic defective economic theory that these modifications are based on. These misconceptions are attributable to the theories of economist Arthur Laffer. The idea that tax cuts will stimulate the economy enough to create sustained growth averaging over 3% consistently is a “pie in the sky” wish that has never transpired in history.
Equally unrealistically hopeful, is the notion that the aggregate number of taxpayers contributing tax revenue would increase greatly (known as the Laffer Curve). Thus this notion creates the erroneous assumption that these new taxpayers will add enough to overall tax revenue to offset the breaks to the highest echelon of wealth earners.
History tells a different tale.
In 1981, the Economic Recovery Act (Kemp-Roth Tax Cut or ERTA) was passed. The top end marginal tax rate was lessened from 70% to 50% and the low-end rate was slashed from 14% to 11%. Estate taxes were reduced and corporate taxes were reduced in a complex set of altered deductions. As a direct result of this tax reform, the deficit ballooned and interest rates rose from 12% to 20%. Sadly, a recessionary period restarted and the national debt increased.
Similar events occurred during the presidency of George W. Bush. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA or egg-tra) was passed. This tax reform law was pushed by many conservative groups, especially the Heritage Foundation, which claimed that the passing of the law would eliminate the national debt within a decade. This law included changes in income tax rates, estate tax rates, gift tax exclusions, and retirement taxation. Despite the many claims of benefits to the national debt, during the eight years following its passage the national debt jumped from 4.3 trillion to 11.3 trillion. Furthermore, according to the Federal Reserve Board, Survey of Consumer Finances, the concentration of wealth narrowed greatly. From 2000 to 2013, the percentage of overall wealth in America showed 13 % of citizens owning more than 50 % of the wealth at the end of the period, versus 28% of the citizens owning more than 50 % of the wealth thirteen years before. During the same period the middle class (an average family income of 76,000 annually) had contracted substantially. Stagnant wages added to the dilemma, a significant reduction in unionized workers had a derogatory effect, and prorated for the intrinsic value of a dollar; average wages did not increase a dime.
Republicans in Washington should take a lesson from President Dwight D. Eisenhower. When pressed by GOP majorities in both houses in 1953 Ike would not relent from his core economic principles. Ike said: “We cannot afford to reduce taxes and reduce (tax) income” and “(not) until we have in sight a program of expenditure that the factors of income and outgo will be balanced”. During Ike’s years, the top end marginal tax rate was 91%. The average Gross Domestic Product was consistently between 2.5% and 3%, which was tremendously healthy by any economist’s yardstick. Inflation was close to zero. Interestingly, the national debt was almost non-existent. Most impressively, the average personal income of the middle class increased forty-five percent in Ike’s eight years. Every American paid something in taxes if they made a wage. No one was excluded from paying an appropriate burden of tax due in accordance to their level of earnings. And in a truly definitive and “progressive” tax system, if you were at the top you paid more.
Yet, Ike was able to create our nuclear defense systems and build the national highway system to boot.
To our GOP leaders in Washington learn this lessen from our 34th president. Arthur Laffer was wrong. “Trickle Down” economics does not work. We cannot add to our already dangerous level of national debt. With your plan, the rich win, the poor lose, and the middle continues to stagnate. You are not fooling anyone. Find another issue your legislative body and President Trump can claim as a win. You’ll do way too much damage to the country with this one!