Recently, I posted about the difference between tax cuts and tax reform, and why we need the latter but not the former. That argument was made–far more persuasively than I made it–by billionaire Nick Hanauer, in a recent post to Politico.
The Republican tax plan is a scam—a massive and destructive financial giveaway masquerading as pro-growth tax reform. Which is why our first response must be to demand not one penny of tax cuts for big corporations and rich guys like me. In fact, if I were Benevolent Dictator, I would substantially raise taxes on myself and my wealthy friends. Why? It is the only way to sustainably grow the economy, boost productivity, increase business opportunities, and create more and better jobs.
Hanauer takes aim at the central premise of GOP tax policy, what I have referred to as an “article of faith,” because when you take something on faith, it’s because you have no empirical evidence for its validity. In this case, as Hanauer points out, we have substantial evidence that the premise is fatally flawed.
There is is simply no empirical evidence nor plausible economic mechanism to support the claim that cutting top tax rates spurs economic growth. When President Bill Clinton hiked taxes, the economy boomed. When President George W. Bush slashed taxes, the economy ultimately collapsed. It wasn’t until after most of the Bush tax cuts expired during the Obama administration that the post-Great Recession recovery started to pick up steam—an ongoing recovery that, as uneven as it has been, has grown into one of the longest economic expansions in U.S. history.
And then, of course, there’s Kansas.
As we all know, and as Hanauer reminds us, Kansas dramatically “underperformed ” the rest of the country in economic growth and job creation after Sam Brownback, its “true believer” Governor, slashed taxes on individuals and corporations. And as he also reminds us, California, which horrified those true believers when it imposed the nation’s top income tax rate, has thrived. By 2015, California had the fastest-growing economy in the nation. Kansas? Dead last.
For several years, Hanauer has been arguing that Republicans have the economic argument exactly backwards–that inequality, not high tax rates, retards economic growth and job creation.
But the Republicans’ problem is that they have economic cause and effect reversed: Low wages and rising inequality are not symptoms of slow growth, low wages and rising inequality are the disease that causes slow growth—and inequality cannot be cured by creating even more inequality. In reality, our modern technological economy is best understood as an evolutionary feedback loop between innovation and demand. Innovation is the process through which we evolve new solutions to human problems, while consumer demand is the mechanism through which the market selects and propagates successful innovations. And it is economic inclusion—the full participation of as many people as possible in as many ways as possible, as innovators, entrepreneurs, workers and robust consumers—that drives both innovation and demand. The more we invest in the American people—in our wages, our education, our health care and our infrastructure—the more dynamic that feedback loop, and thus the faster and more prosperous our economy grows.
As I tell my students, if you own a widget factory, and no one is buying your widgets, you are unlikely to hire more workers to increase widget production. When consumers lack disposable income with which to buy your widgets, you cut back–or stop making widgets entirely.
As Hanauer explains:
The real problem with our economy is that we are concentrating wealth in the hands of people who aren’t spending or investing it, while starving working- and middle-class Americans of the ability to invest in themselves—not to mention sapping the consumer spending power that accounts for 70 percent of GDP. We rich Americans may not all be idle, but these days, much of our money is—and you will not get it flowing back through the economy again by cutting our taxes even further. I already earn about 1,000 times more per hour than the average American, but I couldn’t possibly buy 1,000 times more stuff. I only own so many pairs of pants. My family and I can only eat three meals a day. We enjoy a luxurious lifestyle, but we already own several houses, a private jet and one too many yachts (turns out, the optimal number is two). Cutting our taxes will make us richer, but it won’t incentivize me or my venture capital partners to spend or invest more than we already do. What’s holding us back isn’t a shortage of cash, but rather a shortage of demand—from you.
Exactly.
Thank you to everyone who wished me a happy birthday yesterday. It was much appreciated!
This one would be GREAT in the “Star”. Thank You Prof
Thanks! I should read that often. It reminds me how greedy the Kochs are that they want more more more.
Somehow I missed your birthday. Just keep on celebrating !
thought,,, Jerry Brown became Gov of calif, (again)after arnie, and grey, with Calif in the hole 8 billion dollars, he raised the taxes on the incomes of the upper tier people. somewhere in the area of 36 percent, after 6 months, Calif was in the black….. he then bought the legislature back, for some real time tax reform. sure, its Calif, but, the fact, republicans song and dance with the states finacial interests, are a true lie. two cents a gallon in fuel would not, damage the working class,instead they seek privatzation of infrastructure, whereas, you allowed to spend 6-8 bucks a day,on a toll, to go to work. this maybe a high end, but i look at denver,co belt way around town where,i as a trucker is harrased from the core highway, to spending for the belt around town, same as chicago, NYC, and others,i dont need to mention the ind,tollway,right? or,(pa turnpike)a truck from youngstown to philadelphia, was about 38 bucks 1997, today.140$ Pa set a 50 cent a gallon tax on fuel when Gov Wolf came in, thats haw bad it got, and he had few other ways to get the work done, now the oil and GAS industry in Pa. made record windfall on thier projects finding trillions in cubic feet of gas, for the needs. they DONT want to be taxed! and its own legislature is backing it. get real. Im in north dakota, we complain about low state funds are now that the work is down to a few wells around the state,but we still have 700 wells to frack, were shipping 1.1 million barrles daily of the BEST crude ever drilled, seems the state depends on what we the worker spends,not revenue direct from OUR resources,instead, the oil companies run off with the profits and give then away to shareholders,while our needs fail. we have the people who still believe today,the min wage still works?the rents here are still oil field high,even after the end of the greed period in drilling,. in the central to east side of nodak, there was no oil development and they still,have the high cost of living still attacking the economy. restautrants still are plagued buy suppliers like sysco,and u.s. foods on a binge screwing for supplies. the wages are not, anywhere like the rest of the country overall. taxes here are low, but, the cost of living is really, a taxation in sheeps clothing..Tom Seyor the demo billionaire also said the rich dont need a tax break as the working class needs it,and or a wage increase to stimulate the economy. its a game. i have a past saying,for the upper crust,,,, qoute,if you dont want to pay taxes,i know of a bunch of third world nations where you can piss in a bucket, and walk a dirt path to whatever work you can find.,,, or ,how many living wage jobs did you create today!…..seriously, America doesnt live on air, we need a tax base to support Americas needs,beyond what most feel isnt their resposablility, but you recieve the benifits of..with better wages comes a tax base to support the civil,and social needs, we once had! this take from the working class in their hard work to support a employer,should be back into the workers pockets,not wall streets greed..
If only we could get the Kochs, Mercers and their fellow billionaires to listen to Nick. I read his article about Plutocrats a couple years ago where he basically said the same thing that was published in Politico.
The absolute greed of the most wealthy people is simply astounding. They don’t care that no one will be able to buy what their corporations make. They will have so much money that their only concern will be to indenture us as their slaves in exchange for poor quality food and filthy bug infested housing.
“The real problem with our economy is that we are concentrating wealth in the hands of people who aren’t spending or investing it, while starving working- and middle-class Americans of the ability to invest in themselves—not to mention sapping the consumer spending power that accounts for 70 percent of GDP.”
These words take us to the crux of the matter; the current administration has long ignored the fact that Bush’s tax cuts to the wealthy did NOT produce jobs, did NOT increase the buying power of consumers and forgotten that President Obama did not end that originally temporary tax cut on the date set by Bush. Thereby, continuing the economical crisis – and we ARE still in crisis situation – regarding our spending power which is lessening and further impeding any increase in the GDP. No increase in minimum wage, no increase for those underpaid employees who are the primary source of the GDP increase as costs of everything soars and income levels remains stagnant.
What should be easily understood regarding the difference between “tax cuts”, which would benefit the few, and “tax reform”, which would benefit the masses appears to be misunderstood by Congress. Legal language is incomprehensible to the general public and open to interpretation to those educated in the law, creating those pesky “loopholes” through which the wealthy slithers as they add to the massive amounts of income they do not return to the economy.
I have now received my I.U. Health and Medicare 2018 handbooks; co-pays have increased. Has our monthly Medicare premium increased as it did for this year? If it is listed, I couldn’t find it. Will our Social Security and Disability payments increase or decrease as it did for this year? November 1st is 10 days away and we have no information or indication that this information is part of the Congressional agenda; the daily crap from Trump and his minions appears to be more important than notifying the public exactly what is going on in either branch of Congress. If consumer spending amounts to 70 percent of the GDP; these issues and clear explanations of what is being done – and left undone – in Congress should be filling the airwaves. The endless health care battle is a major portion of consumer spending but with no decision on the status of ACA being forthcoming, how can the current budget plan, which includes “tax cuts” or “tax reform” be accepted or denied?
This may or may not be an aside but; you might find it interesting to read in full: Presidential Executive Order Promoting Free Speech and Religious Liberty, concentrating on Section 3 and ask why it includes a reference to the Preventive-Care Mandate, referencing United States Code section 300gg-(a)(4) of title 42 which separates women’s preventive health care and screenings. Free Speech and Religious Liberty?
While the focus here is on the billionaires, I am more concerned with the 15% of US households that are millionaires. Those tax breaks will not just go to the top 1%; they will go to thousands upon thousands of families who live a life of luxury too. They may not own three yachts, but they do own one large sleeps six boat, a plane or a summer home. They travel and buy and dine in high style sheltered in exclusive suburban neighborhoods, or on the farm with their own airfield, or at the top of some high rise condo. They shelter their money too just like the billionaires and support the political party that they know is helping them at the expense of those with less. No, it isn’t just the 1%…. it is more like 16% of the US population that consistently wins and is poised to win again with their bought and paid for Republican Party.
The problem is that the Republicans control the narrative on this. For years we have witnessed Paul Ryan being interviewed on dozens of “news” shows. As he spouted his makers vs taker rhetoric, I waited for the interviewers to challenge his assumptions with the facts. They never did. Every time the Republicans talk about the tax cuts, they refer to businesses as the job creators. Again, I wait for the interviewer or someone on the panel to say, “But they don’t create the jobs, demand creates the jobs. A business without customers contracts, rather than expands” It never happens.
Perhaps Mr. Hanauer can write a piece for the “Wall Street Journal” or “USA Today” where more people would see it.
Nancy – I fear your comment is closer to the truth than the Kochs and Mercers would ever admit.
To: mike seczney —
Gonna keep reading your post. Did I get it right? At first blush, I would sum it up like this:
Apply tax in small increments on high volume item (such as fuel) so it’s barely noticeable to the many rubes. Result: high total revenue realized.
Then, slash tax “bigly” on the few one-percenters so they notice it and will support re-election with the bucks saved.
But FIRST: Call it Tax “REFORM”! (The Art of the Trump GOP Deal)
As an amateur economist, I must have written 100 posts saying the same thing Nick has written so much better than I ever could, especially with his standing as one of the one percenters (a standing I do not enjoy). It’s all about aggregate demand and, despite Republican propaganda to the effect that this is complicated, it isn’t complicated at all. It is simple to a fault. When the vast army of consumers do not have the necessary withal to participate in demand for goods and services in the marketplace, the marketplace withers, workers are laid off, social costs multiply, the economy goes into recession (or worse). Cutting taxes on the rich does absolutely nothing to stop this obvious progression toward the 1929 cliff of no return, quite the contrary and, among a plethora of other negatives, important federal initiatives designed to move America and its people forward go wanting for lack of revenue. (Think education, infrastructure, R & D etc.)
Nobel-winning economist Stiglitz compares our economy to a pie, and unless there is economic growth, the pie does not get bigger, and there is zero empirical evidence that tax cutting or tax increases have anything to do with it. There are other economic forces at work which create prosperity or depression other than political jockeying of the tax rate for favored sectors up or down. When one sector (the rich) gets a bigger slice of the economic pie and there is no real economic growth, then our slices of the pie are reduced which, in turn, reduces aggregate demand and is deflationary (which is far worse than inflation) so that Bingo! Comes now the recession!
One can and should argue (as I do) for the adoption of Keynesian economics that powered our post WW II economy and gave us economic growth rates and a middle class that we can now only dream about rather than the austerity economics Wall Street and the Republican Party have foisted on the rest of us as we have adopted policies apparently designed to keep us on the edge of recession, a part of the Republican fear campaign waged against a despairing and deunionized workforce already subject to outsourcing and automation. Such phony pretenses that tax cuts will lead to prosperity for all of us is nothing but propaganda and totally unsupported by history. Meanwhile,Nick for president!
The Glass-Steagall Act was enacted after the stock market crash to stop banks from literally “stealing” homes and businesses from those they could have helped. Little by little, through the following years, different administrations repealed parts of it. Bill Clinton repealed the bill in totality before leaving the White House and George W. turned the banks loose on us with no regulations left to protect consumers and to continue enriching the already rich. There is much blame to be spread but the Republican takeover of Congress during the Obama administration followed by the election of Trump, using Citizens United as passed by SCOTUS, to protect only the wealthy and further victimize the 98% of Americans.
Tax reform and health care should be the primary interest of the entire government rather than concerns about sports figures kneeling to express their freedom of speech regarding the lack of civil and human rights being eaten away and encouraging Trump to insult all victims of his choosing.
Priorities, people, priorities!
Gerald,
“the vast army of consumers do not have the necessary withal to participate in demand for goods and services in the marketplace…”
Because of the widening gulf between the rich and the growing number of poor that same vast army of consumers are also shut out of participation in society as a whole. When half of your country does not feel that they belong…. you have the makings of widespread crime, extremism, and eventually revolution.
Theresa – Right you are, and those you cite are included within my “plethora of other negatives” in my piece. The second Gilded Age in which we find ourselves could bring about all sorts of unthinkable human consequences, ranging from pestilence to water shortages and through immolation, which R & D and diplomacy might have averted if not for our penchant to enrich corporate and banking executives and their shareholders and play world cop. I think I have a pretty good fix on what our domestic problems are, but I have begun to wonder if our international problems have their nexus in Washington rather than in Beijing, Damascus and Pyongyang, thus lending credence to the view of “profit at any cost.”
]
I follow Nick on facebook and he is a great educator to us “liddle people.” Thank you for your continuing effort to educate the masses with your posts Professor. I hope you had a great birthday celebrating with your family.
A great article which I just posted on my Facebook site no doubt to the chagrin of my friends that are totally infested with the malarkey stemming from the horrid man currently living in the White House when he’s not playing golf. I hope that this article gets all the traction it definitely deserves and thank you very much Sheila for posting.
Maybe these oligarchs with their massive stacks of cash that they hoard instead of creating jobs with it need stacking technicians to keep it all well stacked. Might be a potential employment opportunity down the road as we become poorer and poorer thanks to them and their greed. I’m pretty good at stacking things starting with laundry.