Taxes –
something is not right
Shannon Bohrer
(4/2019) April is a good time to
discuss the promises of reducing our taxes and how this
affects us. We often hear from political candidates about
cutting taxes and how it will solve our problems.
Additionally, the way the tax cuts are presented one would
think that any problems we have can be cured with a tax
cut, which is not true. April 15 is also the deadline for
us to reap the rewards of the tax cuts from the previous
year.
We have been told that tax cuts
will spur the economy with higher employment and better
wages. That does make sense. If people have more money,
they could spend more. Businesses could sell more products
and therefore we have a better economy and business could
pay better wages. We have also been told that with lower
tax rates, the government will collect the same and/or
more revenue because of the growth. Hence, we keep more of
our earnings without reducing the government’s revenue.
This has been a standard message for about 40 years.
However, the expected growth of
the revenue from economic gains with tax breaks - has not
always occurred. Deficits for the last two years, after
our "big" tax reductions, have exploded. Last year’s
budget deficit was 779 billion, the largest since 2012.
This year’s projected deficit is 897 billion, a 15.1
percent increase from last year. Our national debt is more
than 22 trillion, which is more that the economic output
for the whole country last year.
After the 2017 tax cuts, the
speaker of the house and the speaker of the senate, both
suggested that the government should be looking to reduce
entitlement programs. The reason for this was the
increases in annual deficits. The entitlements mentioned
by both leaders were Social Security and Medicare. We have
heard this message for many years, that we cannot afford
entitlements. Of course we have also heard that tax cuts
will grow the economy and reduce our deficits. Something
is not right.
The question we should be asking
is; if tax cuts really spur the economy and create more
government revenue, why is the treasury collecting fewer
dollars? The spending for the first two years of this
administration, along with reductions in tax revenues, has
added significant long term debt, over a trillion dollars
for each year. That is not sustainable.
The notion of tax cuts spurring
the economy started with President Regan. His
administration is often credited with the idea of "supply
side economics", which would create a "trickle- down"
effect. The "trickle-down effect" says that if the taxes
on the wealthy are reduced, the wealthy will invest more
in business and industry and the middle class will
benefit. So, when the wealthy benefits, some of those
benefits trickle-down to the middle class.
When President Reagan was elected
the federal debt was about half of what it is today, when
examined as a share of the economy. His first tax cut was
huge, reducing the top rate from 70 percent to 50 percent.
It was predicted that the tax cut would pay for itself,
but it did not. The Treasury later reported that federal
revenues fell about 9 percent during the first two years,
and at this time inflation was close to 10 percent.
With President Regan’s tax cuts,
his administration also increased spending, which put
additional pressure on the deficits. As a direct result of
increased deficit projections, Congress raised taxes in
1982, 1983, 1984 and 1987. However, during his second
term, Reagan pushed another major tax rate cut, reducing
the top rate to 28 percent. For the next five years, which
included President George H.W. Bushes term, we experienced
a small economic recession. Because of this small economic
recession and the growing deficits, President George H.W.
Bush raised taxes in 1990. He was vilified for doing so
and some attribute the tax increase to his loss in the
next election.
From early on in the tax cutting
frenzy atmosphere, there were economists that disagreed
with the idea that reducing taxes would spur the economy,
especially reducing taxes on the wealthy. The idea that
"trickle-down" theory would create economic growth and
reduce our deficits - has never materialized.
President George H. W. Bush later
referred to President Ronald Reagan's economic policies as
"Voodoo economics." The term was widely used along with
"Reaganomics."
Under President Clinton, the
marginal tax rate was raised from 28 percent to 39.6
percent. The economy posted slightly above average growth
for the ensuing five years. Not only did the economy grow,
for his last two years in office the annual budget was
balanced and we paid off some debt. The last time we had a
balance budge (not adding to our national debt) was when
Eisenhower was president.
When President Bush Jr. was
elected, we returned to the "supply -side-focused" tax
cuts again. Remember, when he took over the economy was
good and we were paying down the debt. Not long after the
tax rates were reduced, the economy stalled. The economy
then contracted before crashing in 2008. While many
attribute the recession (a near depression) at the end of
his term to his tax cuts, the repeal of banking
regulations also contributed.
"Reagan proved deficits don’t
matter" - Vice-President Dick Chaney"
In 2012, the Congressional
Research Service concluded that there was "No correlation
between top tax rates and economic growth." The findings
were posted in a paper and the Congressional Republicans
protested. They argued that the Congressional Research
Service paper contained errors and "didn't account for the
long-term benefits of tax rate cuts." The problem with
their logic is that no one has found benefits of long-term
of tax rate cuts – at least for the top rates.
POLITICO studied the changes in
top income tax rates for five years, comparing it to the
GDP per capita growth rate. The results mirrored the
Congressional Research Service findings: "changing the top
income tax rate does not have a predictable effect on
economic growth." Of course it does affect our deficits.
When President Barack Obama was
elected the economy was tanking with banking problems. He
extended the Bush tax cuts in 2010, which is when they
were to expire. In 2012, the president and congress
allowed the top marginal rate to return to 39.6 percent,
the same as it was in the Clinton era. For seven years the
economy grew slowly and we avoided a long-term recession.
Lowering and reducing the top
marginal tax rates –does not lead to economic growth. What
does happen is that we experience more deficits and our
leaders then tell us they need to cut social security and
Medicare. Something is not right.
Read other articles by Shannon Bohrer