Tax policy is social engineering. Make no mistake about it. It tells us who we are as a nation, and what we value.
The GOP ideologically have been convinced, since before Reagan, that "Trickle Down", aka "Supply Side" economics, works. Five years ago, when Romney was running for President, they were bold enough to ask the impeccable Congressional Research Service, a nonpartisan congressional service that is above reproach. They asked them to prove that lowering tax rates improved savings, investment, and economic growth. They came back and showed that there was NO correlation at all. So, what did the GOP in congress do? They tried to kill the report.
What did the report conclude?
The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.
However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.
Yet that didn’t stop them, five years later, when the economy is running in high gear, from ramming through this tax law anyway.
And this conclusion is absolutely true, and I will make this point in a bipartisan manner. The truth is that when you think, historically, of a time when the economy was running on all cylinders, you might think of the 1950's. That's when "What was good for GM was good for America," a phrase that became somewhat ironic when Obama was President and Romney was running against him. The economy was thriving under Eisenhower Republicanism. We built the interstate highway system with tax dollars back then, we were comfortably home from the war, and, while we had the constant threat of the Cold War, and the start of the Civil Rights Movement, the economy was terrific.
And how much did the federal government take, not of all income over $250K, but of only $100K? It took 90%. AND, the economy was booming.
Why? Because of priorities. With the marginal tax rate at 90% for income over $100K, CEO's didn't attempt to cannibalize the company by siphoning billions in compensation while laying off workers. Because the marginal tax rate was so high, deferred compensation was crucially important, and, with incentives to save tax dollars, both corporations and individuals invested in defined benefit pension plans, not 401(k)'s. Instead of paying the top executives millions and laying off workers to maintain their lifestyles, the CEO's recognized that the best way to avoid taxes was to pay employees a living wage and invest in their companies' own infrastructure.
So what happened to this country as we used to know it?
I would argue that three events, eight years apart, created the economic discrepancy we have today, that will only be exacerbated when the new tax law comes into effect.
The first was the 1978 Supreme Court decision, “Marquette National Bank of Minneapolis v. First of Omaha Service Corp." This case threw out usury laws, and allowed states to set interest rates as they saw fit, offer credit cards to anyone breathing, and changed the course of American Business from Industrial Manufacturing to Financial Services.
In 1978, inflation was 6%. In 1979, it was 14%, and remained double digits into the 1980’s. I would argue that the relaxation of usury laws allowed interest rates to climb, and inflation to climb with it.
Think of America in the 1970’s. Yes, we were in one recession after another. Yes, the oil crisis was hurting businesses, and many were going under. But the vast majority of American businesses were manufacturers. We made stuff. But why get a 10% return on an investment in a factory when we could get 18% just by sending someone a credit card with a high credit limit?
Second, around that the same time, someone figured out that Internal Revenue Code section 401(k), originally created to limit executives from deferring too much income away for themselves, could also be used by employees to defer income. So in the early 80's, companies realized that they could shift the burden of retirement pensions off of their books and have it become the responsibility of the employees.
Then, third, Reagan and Tip O’Neill lowered the highest marginal tax rate to 50%, then to 28% in 1986. Prior to that, there was a disincentive to earn a lot in one year. We had income averaging (Schedule G) on the tax returns, which allowed an unusually high income year to be averaged in with prior tax years, and the big focus was deferred compensation. It was a smart move to defer your income over time, in the form of a pension or equivalent, so you didn’t give it all away to the government at once.
The 28% rate in 1987 changed all that. Now, we had nouveau riche. We started to watch Lifestyles of the Rich and Famous on TV. Arbitrage, Leveraged buy-outs, junk bonds, they all hit the economy, as management started to cannibalize its own businesses in order to pay themselves and cash out. With the transition away from manufacturing to financial services, factories started closing here with increased frequency, and moving overseas, with the globalization that came with the increase in focus on the finance industry. America became a country that stopped producing goods, but started instead growing money from money, and reducing the rest to the service industries to support everything else.
Prior to that, excess profits went into salaries and the physical plant, to avoid higher taxes. Now, it went into the pockets of those extolled by Robin Leach.
With low tax rates, and low capital gains rates, the US has shifted from an economy that produces goods and services to an economy that produces financial instruments. And, as the report says, that doesn't improve "savings, investment, and productivity growth." It simply concentrates the wealth in the hands of fewer and fewer.
To understand why this is true - why trickle down economics does not work - let's take $20 million dollars. Let's give $10 million to one, I dunno, hedge fund manager, or CEO of a Fortune 100 company. Let's divide the other $10 million among 25 guys each earning $200k each, and another 50 people earning $100k each. So we have 1 guy earning $10 million, and 75 people splitting the other $10 million. I'm having these 75 people earn a decent salary, so that we don't confuse the issue by dividing it among people who earn $9 an hour. These 75 people are reasonably well off.
Even so, my question is this: which $10 million will better stimulate the economy? How many more cars, refrigerators, dinners out, movie tickets, etc., etc., will one $10 million purchase compared to the other? Most likely, the guy who earns the $10 million himself won't spend much of it. He or she will probably do some, maybe by a car or two, but will primarily invest it, which means that he or she will exchange the money for a different means of exchange - a stock or bond on the secondary market, for example. He or she might just sock it away in the Cayman Islands. It's the concentration of the wealth among a smaller and smaller population.
Henry Ford, in his genius, knew that he had to figure out a way to pay his workers enough to buy his cars. Having more people earn that $10 million will cause more cars to be bought. Having fewer people earn that $10 million concentrates that money into fewer hands, and there are only so many cars, refrigerators, homes and dinners out that one family can purchase in a year, compared to 75 families, let alone more, if we spread it out a bit.
I have a good friend who is a libertarian, who asked me, then, "How much should we tax people earning over $250K?" Maybe it should be 90%, as it worked well under Eisenhower. Or 70%, as it worked well under Kennedy - who had a balanced budget - and LBJ, when the economy was soaring as well. Or 39.6%, which was where it was under President Clinton, when, once again, the economy was booming.
The issue is not tax rates, nor taxes collected. Not by itself. Nor is spending. The issue is two-fold: One is, what should the relationship be between the tax revenue raised and the spending of that revenue? And the other is, what kind of society do we want to be?
This brings us to regulations, and my favorite investigative journalist, Greg Palast. In his book, Vulture’s Picnic, which he wrote years ago, he notes:
Regulation, the rules they tell you to hate, are the way we apply democracy to the economy. Votes versus dollars. I think you can understand that. Yes, I know, the government is deeply fucked up. That's the U.S. government, the UK government, and let's not even talk about the Chinese, Malaysian, and Tanzanian governments. People have been belly-aching about rules and regulations ever since Moses schlepped the first ten down from Mount Sinai.
But the Big Problem with government is that we don't have enough of it; the rules aren't tough enough to stop BP from blowing Cajuns to Kingdom Come. Or the rules are corrupted, made by politicians who are greased....
If you're screaming for the "guvmnt to git off" your back, I see your point. But you're still a loser, a cheap mark, a decoy duck, a dim, unwitting stooge for forces even more powerful than that ugly guvmint, a toy for powers who are shitting on you while telling you it's raining chocolate.
But then, who regulates the regulators? Well, Shaw Construction for one. Shaw is now constructing a plant that will turn plutonium from old atomic bombs into nuclear plant fuel. The Nuclear Regulatory Commission exempted Shaw's bombs-to-nukes plant from anti-terrorist security measures. A commissioner who voted for this take-a-terrorist-to-tea exemption, Jeffrey Merrifield, now works for Shaw. And the Secretary of Energy who promoted the plan, Spencer Abraham, is now Chairman of Areva USA, partner in Shaw Areva MOX Services.
Heinrich Himmler's solution to the problem of having to look into the eyes of your kill was to industrialize the process, using gas from I.G.Farben Corporation and ovens from Siemens AG. They just took the orders.
But there's a regulator of regulators we must rely on. The Fourth Estate.... That's our job as journalists, to rip away masks...."
The same Fourth Estate that is being vilified as “fake news” for daring to report nearly any real news at all.
Anyone who tells you that there is too much regulation perhaps does not care if there is e coli in the broccoli they eat, lead paint and other toxics in the toys their children, nieces and nephews play with, or mold that causes meningitis in the antibiotics that might be prescribed.
Regulations protect the rest of us from this sort of thing. I'm sure that when the reader goes the supermarket, you appreciate the "sell by" dates on dairy and meats. That's regulation. It protects us from the profit motive. That's an economic argument. I'm also sure that when you go to a restaurant, you appreciate that the employees must wash their hands before leaving the bathroom. That's just common sense, but it is also a regulation. Before we start talking about regulations as "bad," and full of red tape, we have to recognize that at least some of them are necessary and worthwhile. And they have to be enforced and paid for. With taxes.
We have a choice. We always do, on what kind of people we want to be? What kind of society do we want to create? How much are we willing, or unwilling, to contribute to our own well-being, and to take care of our neighbors who need help the most?
It depends on who you ask. The Republicans just answered the question their own way. Speaker Ryan, as I noted in my post yesterday, wants to use the anticipated deficit to cut Social Security and Medicare, destroy unions, and create a non-wage-earner, sub-contracting world where corporations no longer will be required to pay for benefits, including sick pay, family leave, unemployment insurance, workers compensation, vacation pay, Social Security, Medicare, or, of course, health insurance. Yet that entire economic argument, that we need lower tax rates to grow the economy has been systematically debunked. We need taxes, and fair taxes, to make sure that we can take care of our own. And unless you no longer care whether restaurant employees wash their hands after using the toilet, you have to agree that at least some regulation is important. After that, you just have to figure out which other ones are, too.