Bad Tax Policy Has Tragic Consequences

For the last three decades, we have heard that transferring wealth to the top of the income pyramid—to what used to be called “the supply side” of the macroeconomic equation, and is now referred to by the supply-side party, collectively, as “the job creators”—would make everybody else more affluent. We have been told that the natural result of pushing wealth in the direction of the wealthy would be massive hiring, and the “trickle down” effect, as wealth from the top eventually flows to everyone else.

The result has been a steady decline of the American middle class. Median household wealth, when excluding the wealthiest 1%, has declined. The income gap between CEOs and the average worker at their own firms has now leapt from a ratio of about 24:1, in the 1960s to well over 200:1 today. The entrepreneurial class—or rather, those best positioned to motivate major investment in entrepreneurial activity—were given huge amounts of money, and so saw less urgency in investing it.

Over three decades, supply-side tax policy in the United States has been the largest centrally planned transfer of wealth in the history of the world. One simple example of this is the federal budget deficit: the commonly held view is at all Americans will have to pay for the deficits, though virtually the entire amount of the value of the spending on unfunded tax cuts and unfunded wars went to the already wealthy.

Trillions of dollars in ordinary Americans’ household wealth and earning potential have been transferred to the wealthiest Americans, channeled through unfunded tax cuts, Defense spending, corporate tax privileges and banks no longer limited by even some of the most sensible basic financial regulations. Those interests, naturally, became dependent, and remain so, on this flow of unearned capital.

Supply-side economics sets up a false choice, between delivering wealth to the less affluent and delivering wealth to the affluent. It does not even propose to level the playing field or to create truly open markets. In fact, the resulting concentration of wealth has the opposite tendency: constricting access to market-moving activity, and fixing markets in favor of established market leaders.

That reduces the opportunity for new competition, and consequently reduces the opportunity for robust new hiring, and for the return of middle-class wealth to a restored middle class. It’s simple arithmetic: the macroeconomic health and welfare of a consumer-driven middle class economy falters when wealth is drained from consumers. Or: when the demand side is drained of capital to fund the supply side, the virtuous feedback cycle between supply and demand is undermined.

Over the last decade, after two major tax cuts, which were never paid for, and which drained over $3 trillion from the consumer economy, the demand side of the equation became almost entirely reliant on borrowing, as real household wages declined. Eventually, there would not be enough real income, savings or assets, to fund the 70% of US GDP that is consumer spending, and to pay the interest on all the borrowing.

Supply-siders routinely blame those who are out of work or unable to pay mortgages for the situation they find themselves in. But the fact is that there are real consequences to supply-side tax policy: consumers, families, small businesses and the majority of actual “job creators”—people who give money to other people in exchange for actual work—are drained of capital. So job creation stagnates, along with investment in small businesses and local communities, and more families struggle to keep up with payments on their mortgages and credit cards.

The same wealthy, market-driving interests that secure an overly generous flow of free capital to their accounts, by way of the supply-side policy agenda, tend to respond to the idea that most people are being unfairly disadvantaged by these policies with indignation. The supply-side theorists suggest people need to be “more competitive” and communities “more elastic”, that the labor market must be “more dynamic” and that only in a centrally planned “socialist” economy would anyone object to the fallout from the policies that favor them so directly.

Clearly, there is a logical incoherence in such rhetoric: one cannot demand, plead for, invest in and defend with exorbitant lobbying efforts, policies designed to give undue advantage to one’s own interests, then complain that those disadvantaged by those very policy outcomes not speak up for their own interests.

The US economy is suffering from a foolish disregard for basic arithmetic and for the value of a vibrant and economically empowered middle class. The supply-siders continue to allege (falsely) that Pres. Obama’s policies have been “socialist” and have involved a deliberate deepening of deficits, emerging from an unimaginative adherence to the idea that ordinary people have a right to income.

There are countless examples of this argument, and they are often propped up by radical Utopian visions of a society in which aggressive disregard for the welfare of one’s fellow citizens carries with it the magical quality of motivating an entirely virtuous civic infrastructure, in which policy and tendency converge to make happiness inevitable. Disregard is treated as regard; parasitic behavior is treated as generosity.

Some go as far as to attempt to commodify human life and suffering and to argue that anything that is not bought and sold, for the benefit of some narrow interest running the market for buying and selling, is inherently destructive of human freedom. And all of this stands in for evidence, since evidence, beginning with simple arithmetic, suggests that taking wealth from most people will leave most people with less wealth.

From 2000 to 2008, median household income declined by more than $2,000 per year. Since then, another $500 or so has come off the median American household’s income—a sign that things have stabilized somewhat, but also a reflection of a generational trend, whereby the entire economy relies on the health of powerful financial interests—not middle class families and communities—to keep from unraveling.

Since the financial system collapsed in 2008, requiring the most costly bailout on record to remain solvent, some 88% of income growth has gone to corporate profits. There are two reasons: 1) In the post-1970s American economy, small and local means costly and vulnerable, so the failure of global financial institutions led to the saving of those and the loss of the small and local; 2) given that, were major conglomerates to vanish into nothing, far more economy-wide wealth would vanish with them than already has.

The quest to stabilize the American economy has had to focus on big projects, entangled in many—too many—smaller interests, an attempt to staunch the bleeding and speed the cure. The crisis has been deep enough that those in real, pressing, immediate human need, are not able to sense that there is a kind of cure ongoing: and the distortions built into our economy over the last three decades almost make that necessary.

It is, to some extent, necessary that the fix be slow and also to some extent remote from most people’s direct observation, because so much of the supposed wealth, built up in the nation’s major financial institutions, has come to rely on not perfectly indisputable claims of value. In other words, there may not be so much “there” there, and extricating ourselves collectively from such a mess requires that the process be quiet and not traumatic. Nevertheless, the operation is a kind of trauma.

Wall Street is still nervous—perhaps more than most people would find reasonable, given the stock market boom and huge growth in corporate profits over the last few years—because what 2008 and the long recession have shown us is that the model of free capital flowing to the already capital-rich, in the absence of any close regulation, does not yield the best results. That game might be ending, in favor of a more transparent, more responsibility-focused model for capital investment and bank-to-bank lending.

The nation faces a stark, and not very simple moment of choosing: should complex financial institutions with broad leeway to derive somewhat less than traceable financial instruments for enhancing relatively stagnant private capital determine how wealth moves through our economy, or should the vast majority of people, whose financial interests are simpler, less far-reaching and also more real, hold the reins?

Having opted for three decades for the complex multinational financial institutions, we have become addicted to a credit-focused model of economic growth, where instead of a centrally planned government-run economy or a middle-class focused citizen-consumer economy, we have built a profit-focused planned marketplace, where neither the government nor the citizen-consumer can do much to redirect the dominant forces of the moment.

The tragic consequences of this misguided fealty to unproven theory has been not only the radicalization of our fiscal and economic policy, but also the rejection of the primacy of an economically empowered middle class for expanding practical democracy in an open marketplace—for ideas, for capital and for new entrants—favorable to human freedom.

The middle class has been eroded and we now find post-industrial ghost towns, a nationwide rash of foreclosures which seem not to have any use for improving value conditions in the market for home-buying or commercial renting, and even tent cities, whether on the outskirts of Sacramento or in the woods of Lakewood, New Jersey.

Policies not focused directly and explicitly on building the middle class, almost as if from scratch, will not get us to a place of generalized economic solvency in which the middle class is again the most vibrant positive influence on the health of the American economy and the great treasure of its democracy. We should fix what is broken and stop pretending we can prop up a failed ideology by disregarding the real focus of need in our economy.

One response to Bad Tax Policy Has Tragic Consequences

  1. Joseph Robertson – Author

    From John Harwood’s Sunday article in the New York Times:

    In 1979, when Mr. Obama began his freshman year at Occidental College, the highest-earning 20 percent of American households received 45.5 percent of all income before taxes. The middle “quintile,” according to Congressional Budget Office figures, received 15.8 percent. The poorest 20 percent took in just 5.8 percent.

    By 2007, as Mr. Obama sought the presidency, the share of pretax income received by the top 20 percent had risen to 55.9 percent — while Congress had chopped their maximum income tax rate in half, to 35 percent. The share of income for every other group went down.

    The shift in inequality was even more drastic when it came to the richest Americans. The top 1 percent (average 2007 income: $1.8 million) reaped 19.4 percent of the nation’s total — double their 1979 share and more than the bottom 40 percent combined. [Full article…]

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