Americans seeking wisdom about their economy will gain little insight from mainstream economics writers. They are like detectives called to investigate an assault. They note boot prints in the garden, the broken living room window latch and the smell of gunpowder. But they fail to observe the three dead bodies.
These are the cadavers:
One. America’s budget deficit last year was a staggering US$2,723.8 billion. This amounts to 16.7 per cent of gross domestic product (GDP). That was the worst outcome in recorded history and by far the worst deficit of all OECD members.
This is the first time the USA has been at the bottom of this global table.
Two. The USA has had the greatest expansion of federal debt of all OECD countries from 2016 to 2022, deepening from 105.2 to 137.2 per cent of GDP.
Three. The US economy is in technical recession with two quarters of negative GDP growth. No other developed economy has suffered that this year. Again, this is a first since records have been kept.
The cause of the demise
All the clues point to one culprit. Tax revenues plummeted in 2018 and thereafter following the bizarre decision in December 2017 to slash the corporate tax rate from 35 per cent to 21 per cent, and cut income tax rates.
Trumpist Republicans asserted this would increase revenue and improve the economy. They were disastrously wrong.
Corporate tax revenue fell by a thumping 31 per cent from $297.0 billion in 2017 to just $204.7 billion in 2018. This recovered slightly in 2019, but tumbled again during the pandemic to $211.8 billion in 2020. (This is according to tables published by the Office of Management and Budget at the White House.)
Those tax cuts have caused lasting damage to the economy, as seen when we survey recent history. The dollar value of corporate taxes in 2007, before the great recession, was 370.2 billion.
Fourteen years later, in 2021, corporate tax receipts were only $371.8 billion. This year’s are forecast at just $382.6 billion. Both are below 2007 in real terms.
With profits now more than double 2007 levels, the big profitable companies are now making about half the contribution made historically.
Pressure from right wing lobbyists
Conservative American business lobbyist Cato Institute tried to assert in March that Trump’s 2017 tax cuts had succeeded with the white chart, below, right.
The red line shows corporate tax receipts as recorded by the Office of Management and Budget (OMB). The blue line shows last year’s OMB forecasts and the black line shows last year’s Congressional Budget Office (CBO) forecasts.
The article claimed that ‘the strength of corporate tax revenues is impressive as reflected in the upward shift in the baseline.’ It argued that because the real red line was higher than the imaginary blue and black lines that the tax cuts must have been effective.
That was pure nonsense. Yes, the red line eventually climbed above 2017 levels, pre tax cuts. But Cato’s chart does not show what the revenue would have been without the tax cuts.
So we can. See green line on the chart at the top of this page. That is the best estimate of the revenue which would have accrued had the rates not changed in 2017. The yellow shaded area is the total quantum lost to the US budget – and the American people – since the tax cuts. That is at least $430 billion over the last five years.
Cost to ordinary Americans
Much of this loss of revenue from company profits was made up by tax hikes on individuals and increases in excise taxes and social insurance receipts. But total revenue in 2018 rose by only 0.41 per cent. Nowhere near enough to cover government spending, which increased in line with GDP by 3.2 per cent.
Naturally, shareholders of the profitable corporations are delighted with this. Maybe that’s why media corporations are reluctant to expose it. But the cost to individual taxpayers is substantial.
The interest bill on the federal debt this year is budgeted at $681.0 billion. With 151.2 million taxpayers, that is an average tax take of $4,504 each – just to pay the interest.
Lessons for the watching world
This diary has long argued that adequate contributions from company profits are essential for a healthy economy. The findings of this coronial inquiry confirm that.
Meanwhile, those three corpses are still lying on the living room floor.
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This is an edited version of an article published today in Independent Australia. The original article is available here in full for free:
https://independentaustralia.net/politics/politics-display/detecting-the-cause-of-americas-collapsing-economy,16801
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