Bomb One
During the Trump presidency, he and the Republicans took America straight down the ineffective road of trickle down, supply-side economics by encouraging domestic investment through tax cuts and less regulation — even though history pretty much tells us trickle down, supply-side economics doesn’t work if your main goal is to encourage economic growth.
Now listen, we're not saying there is never a time and place for tax cuts. There certainly can be. But tax cuts made absolutely ZERO sense for an economy that had been on a healthy trajectory in terms of stable growth and falling unemployment for over eight years. Essentially, the Republican Tax Cuts and Jobs Act of 2017 (TCJA) acted as a fiscal stimulus when we didn’t need one.
This was a double-whammy because, not only was it clear from the beginning that the Republican tax cuts were going to cost this nation a fortune, but the Federal Reserve Bank of San Francisco made clear at the time that “many recent studies have found that fiscal stimulus has a smaller impact when the economy is strong, implying that the near-term boost to GDP growth could be two-thirds or less of that from previous tax cuts.”
The Feds warning proved 100% correct. Even with the Republican tax cuts acting as a stimulus, the annual gross domestic product (GDP) growth rate was only 3 percent in 2018, then fell to 2.2 percent in 2019. Hardly a bonanza.
Let’s take a closer look at the historical record of trickle down, supply-side economics. < Please don’t misunderstand, all this negative talk about trickle down, supply-side economics in no way means that the better way is massive tax-and-spending, which may even be worse! >
Here is the Republican fantasy about supply-side economics in a nutshell: Cutting corporate taxes and rich people’s taxes, plus minimizing regulation, will give corporations and rich people the chance to create so many fabulous opportunities that the benefits will “trickle down” to everyone else and the economy will flourish beyond anyone’s wildest dreams!!!
Obviously, a tax cut means that less money is being collected by the federal government, but supply-side Republicans believe that this tangible loss is more than compensated for by the level of economic growth that the tax cuts will surely bring. They believe this fairytale because forty years ago, President Reagan unleashed “Reaganomics” when he signed the Economic Recovery Tax Act of 1981.
What these Republicans seem to forget is, although the U.S. economy did indeed experience a boost during this time period — including a net gain of 2 million jobs per year during Reagan’s two terms (which, incidentally, is less than the 2.6 million jobs per year under President Jimmy Carter) — it was more a function of the Paul Volcker-led Federal Reserve’s significant interest rate cuts and increased spending for defense and construction projects.
They also forget that, when President Reagan took office, the economy was in recession, interest rates were 19 percent, unemployment was in the double digits, and inflation was almost 10 percent (which are all reasons why the Federal Reserve’s interest rate cuts made such a huge impact). Also, the top marginal income tax rate was 70 percent.
All of us can probably agree that a top marginal income tax rate of 70 percent was waaaaay too high and, at the time, substantial reform of the tax code was long overdue.
To that end, the Economic Recovery Tax Act of 1981 reduced the marginal tax rate from 70 percent to 50 percent. From the beginning, President Reagan and his team recognized that the tax cuts would not pay for themselves, but their expectation was that spending cuts would help balance everything out. Typically, the spending cuts never came.
But even back then — with an economy that had negative markers across the board — supply-side economics didn’t work. Soon after the 1981 tax cut, federal revenues dropped like a rock and the deficit blew out, making it clear that the tax reduction was too aggressive.
As a result, President Reagan and Congress had to raise taxes in 1982 (a rollback of some of the 1981 tax cuts), 1983 (a payroll tax on Social Security and Medicare), 1984 (a closure of tax loopholes) and 1987 (a closure of more loopholes and an extension of a telephone excise tax). President George H.W. Bush was forced to raise taxes again in 1990 — violating his “read my lips, no new taxes” campaign pledge, which cost him a second term — as was President Bill Clinton in 1993.
Tax historian Joseph Thorndike put it this way, “Reagan was certainly a tax cutter legislatively, emotionally and ideologically. But for a variety of political reasons, it was hard for him to ignore the cost of his tax cuts.” Together, the tax legislation that passed in 1982 and 1984 “constituted the biggest tax increase ever enacted during peacetime.”
After two years of intense analysis by the U.S. Treasury Department, President Reagan signed the Tax Reform Act of 1986, a bipartisan bill with the stated goal of “fairness, simplicity and economic growth.” This legislation reduced the marginal income tax rate from 50 percent to 28 percent and reduced the corporate tax rate from 46 percent to 34 percent.
But this didn’t really have an impact either. As Bruce Bartlett — a domestic policy adviser to President Reagan and one of the architects of the Economic Recovery Tax Act of 1981 — explains:
Today, Republicans extol the virtues of lowering marginal tax rates, citing as their model the Tax Reform Act of 1986, which lowered the top individual income tax rate to just 28 percent from 50 percent, and the corporate tax rate to 34 percent from 46 percent. What follows, they say, would be an economic boon.
Indeed, textbook tax theory says that lowering marginal tax rates while holding revenue constant unambiguously raises growth. But there is no evidence showing a boost in growth from the 1986 act. The economy remained on the same track, with huge stock market crashes — 1987’s ‘Black Monday,’ 1989’s Friday the 13th ‘mini-crash’ and a recession beginning in 1990. Real wages fell.
Strenuous efforts by economists to find any growth effect from the 1986 act have failed to find much. The most thorough analysis, by economists Alan Auerbach and Joel Slemrod, found only a shifting of income due to tax reform, no growth effects: ‘The aggregate values of labor supply and saving apparently responded very little,’ they concluded.
This is more of what Auerbach and Slemrod had to say:
Of course, saying that a decade of analysis has not taught us much about whether the Tax Reform Act of 1986 was a good idea is not at all the same as saying it was not in fact a good idea. We think it was.
The theoretical case remains valid for a tax system with a broad and clean base which minimizes the reward to tax-driven economic activity. Advocates of this kind of tax system will, however, be frustrated that a retrospective analysis of the most comprehensive attempt in history to achieve this goal offers little hard evidence of the fruits of this effort.
“Reaganomics” didn’t work as advertised, in part, because of those damn unintended consequences, and no one knew that better than Ronald Reagan himself. In his farewell address to the nation, he said, “I’ve been asked if I have any regrets. Well, I do. The deficit is one.” #The Butterfly Effect
That all said, it probably made sense to give supply-side economics a shot back in 1981, given the dire state of the economy and before we had actual evidence of its ineffectiveness. But why in the world did Republicans try it after they should have known better?
Two years after the tax cuts passed, the Congressional Research Service — Congress’ public policy research group — reported that, “on the whole, the growth effects [of the Republican 2017 tax cuts] tend to show a relatively small (if any) first-year effect on the economy. Although growth rates cannot indicate the tax cut’s effects on GDP, they tend to rule out very large effects particularly in the short run.”
They concluded that “the growth patterns for different types of assets do not appear to be consistent with the direction and size of the supply-side incentive effects one would expect from the tax changes.”