Republicans revel in President Ronald Reagan’s supply-side theories that critics call “trickle-down” economics. They believe tax cuts for corporations and the wealthy lead to investments in plants and equipment, which theoretically result in economic growth that trickles-down to create jobs for working Americans. But huge tax cuts in 1981, 2001 and 2003 helped create mounting federal budget deficits.
In fact, the fiscal year 2009 deficit that resulted from the Great Recession and tax cuts by President George W. Bush was horrendous. So in 2010 President Barack Obama appointed a fiscal responsibility and reform commission named for its co-chairs, Alan Simpson, a Republican, and Erskine Bowles, a Democrat.
The Simpson-Bowles Commission designed a tax reform plan that repealed the Alternative Minimum Tax, eliminated deductions, lowered rates and taxed capital gains and dividends like ordinary income. Individuals would be subject to three brackets, 28 percent, 22 percent and 12 percent; corporations would be subject to a 28 percent income tax rate.
These lower tax rates might look like a Republican dream. But unlike every GOP tax plan since Reagan, the S-B plan would significantly raise revenues. The commission co-chairs reasoned that deficits could only be reduced by a combination of revenue increases and spending cuts; so they proposed significant spending cuts too, including common sense reforms of so called entitlement programs like Social Security, Medicare and Medicaid.
A simpler, fairer tax code that increases revenues would be a good first step in trickle-up economics. The next step would be implementing the S-B recommendations for eliminating duplicate government programs, providing more resources for reducing fraud in government programs and making government more efficient.
Increased revenues and reduced spending will lower the federal deficits; but that’s only one goal of trickle-up. Americans must be able to earn a wage that lifts them out of poverty and makes them tax payers instead of welfare recipients. The current minimum wage of $7.25 per hour subsidizes the profits of Walmart, McDonalds and other low wage employers while burdening U.S. taxpayers with the cost of providing food stamps and Medicaid to their underpaid employees.
So the minimum wage should be raised appropriately and indexed to inflation. It doesn’t have to be one size fits all; a wage scale could be established that covers teenaged workers and other employees with special circumstances where a lower wage might be appropriate.
Greater federal revenues and controlled government spending would also mean that more robust investments could be made in infrastructure, research and other programs that improve the economy. Infrastructure projects were advocated by candidates from both parties during the 2016 election cycle. These projects just make sense. Spending on bridges, roads, etc. creates good paying construction jobs and spending by these workers generates even more jobs. Contrary to Republican dogma, government spending — which is around 20 percent of Gross National Product (GDP) — does create jobs.
Now let’s talk about trickle-up. Consumer spending is around 70 percent of GDP. The economy expands when consumers are doing well and spending. New car sales improve, construction of new homes surges, Walmart revenues increase and people eat at McDonald’s more often. Strong corporate revenues and profits cause stock prices to increase, which benefits the wealthy. Just consider what happened during President Bill Clinton’s administration.
Clinton engineered a significant tax increase in 1993 and he worked with congressional Republicans to reduce government spending. The result was a booming economy, a soaring stock market and a federal budget that had surpluses from 1998 through 2001. Clinton left office with unemployment at historic lows and the highest job creation record, on record, easily beating tax cutting icon Ronald Reagan. But then the Bush administration took over.
After inheriting a balanced budget in 2001Bush cut taxes twice and started wars in Afghanistan and Iraq. His tax cuts reduced federal revenues by an estimated $1.5 trillion over 10 years. The two wars sacrificed over 6,000 American lives and they cost taxpayers an estimated $3 trillion. Economic growth wasn’t strong under Bush and there was very little trickle-down. So he ended his eight years in office with the devastating Great Recession, huge federal deficits and the worst job creation record, on record.
Unfortunately Republicans never seem to learn. This year they again want a massive tax cut and increased military spending. They have talked about a $1 trillion infrastructure program but recent reports indicate that it is more talk than a plan; and it will take a back seat to tax reform. Well, we’ve tried cutting taxes for the wealthy. These cuts left the middleclass hoping that the economic benefits would trickle-down to them; but they didn’t.
So let’s start on a significant, government-funded infrastructure program; the nation needs it. Then enact a simpler, fairer tax code that increases revenues; we need that too. And raise the minimum wage to put more money in the hands of consumers; they’ll spend it. What if Wall Street bankers have to pay a little more to the IRS? Let them hope that the economic growth from consumer spending trickles-up through the stock market to offset their added tax burden; it just might happen.
To me, trickle-up economics makes just as much sense trickle-down.
Footnote: I thought it would be a welcome change to write a blog without mentioning the name of — well, you know who.