Taxes – something is not right

Shannon Bohrer

(4/2019) April is a good time to discuss the promises of reducing our taxes and how this affects us. We often hear from political candidates about cutting taxes and how it will solve our problems. Additionally, the way the tax cuts are presented one would think that any problems we have can be cured with a tax cut, which is not true. April 15 is also the deadline for us to reap the rewards of the tax cuts from the previous year.

We have been told that tax cuts will spur the economy with higher employment and better wages. That does make sense. If people have more money, they could spend more. Businesses could sell more products and therefore we have a better economy and business could pay better wages. We have also been told that with lower tax rates, the government will collect the same and/or more revenue because of the growth. Hence, we keep more of our earnings without reducing the government’s revenue. This has been a standard message for about 40 years.

However, the expected growth of the revenue from economic gains with tax breaks - has not always occurred. Deficits for the last two years, after our "big" tax reductions, have exploded. Last year’s budget deficit was 779 billion, the largest since 2012. This year’s projected deficit is 897 billion, a 15.1 percent increase from last year. Our national debt is more than 22 trillion, which is more that the economic output for the whole country last year.

After the 2017 tax cuts, the speaker of the house and the speaker of the senate, both suggested that the government should be looking to reduce entitlement programs. The reason for this was the increases in annual deficits. The entitlements mentioned by both leaders were Social Security and Medicare. We have heard this message for many years, that we cannot afford entitlements. Of course we have also heard that tax cuts will grow the economy and reduce our deficits. Something is not right.

The question we should be asking is; if tax cuts really spur the economy and create more government revenue, why is the treasury collecting fewer dollars? The spending for the first two years of this administration, along with reductions in tax revenues, has added significant long term debt, over a trillion dollars for each year. That is not sustainable.

The notion of tax cuts spurring the economy started with President Regan. His administration is often credited with the idea of "supply side economics", which would create a "trickle- down" effect. The "trickle-down effect" says that if the taxes on the wealthy are reduced, the wealthy will invest more in business and industry and the middle class will benefit. So, when the wealthy benefits, some of those benefits trickle-down to the middle class.

When President Reagan was elected the federal debt was about half of what it is today, when examined as a share of the economy. His first tax cut was huge, reducing the top rate from 70 percent to 50 percent. It was predicted that the tax cut would pay for itself, but it did not. The Treasury later reported that federal revenues fell about 9 percent during the first two years, and at this time inflation was close to 10 percent.

With President Regan’s tax cuts, his administration also increased spending, which put additional pressure on the deficits. As a direct result of increased deficit projections, Congress raised taxes in 1982, 1983, 1984 and 1987. However, during his second term, Reagan pushed another major tax rate cut, reducing the top rate to 28 percent. For the next five years, which included President George H.W. Bushes term, we experienced a small economic recession. Because of this small economic recession and the growing deficits, President George H.W. Bush raised taxes in 1990. He was vilified for doing so and some attribute the tax increase to his loss in the next election.

From early on in the tax cutting frenzy atmosphere, there were economists that disagreed with the idea that reducing taxes would spur the economy, especially reducing taxes on the wealthy. The idea that "trickle-down" theory would create economic growth and reduce our deficits - has never materialized.

President George H. W. Bush later referred to President Ronald Reagan's economic policies as "Voodoo economics." The term was widely used along with "Reaganomics."

Under President Clinton, the marginal tax rate was raised from 28 percent to 39.6 percent. The economy posted slightly above average growth for the ensuing five years. Not only did the economy grow, for his last two years in office the annual budget was balanced and we paid off some debt. The last time we had a balance budge (not adding to our national debt) was when Eisenhower was president.

When President Bush Jr. was elected, we returned to the "supply -side-focused" tax cuts again. Remember, when he took over the economy was good and we were paying down the debt. Not long after the tax rates were reduced, the economy stalled. The economy then contracted before crashing in 2008. While many attribute the recession (a near depression) at the end of his term to his tax cuts, the repeal of banking regulations also contributed.

"Reagan proved deficits don’t matter" - Vice-President Dick Chaney"

In 2012, the Congressional Research Service concluded that there was "No correlation between top tax rates and economic growth." The findings were posted in a paper and the Congressional Republicans protested. They argued that the Congressional Research Service paper contained errors and "didn't account for the long-term benefits of tax rate cuts." The problem with their logic is that no one has found benefits of long-term of tax rate cuts – at least for the top rates.

POLITICO studied the changes in top income tax rates for five years, comparing it to the GDP per capita growth rate. The results mirrored the Congressional Research Service findings: "changing the top income tax rate does not have a predictable effect on economic growth." Of course it does affect our deficits.

When President Barack Obama was elected the economy was tanking with banking problems. He extended the Bush tax cuts in 2010, which is when they were to expire. In 2012, the president and congress allowed the top marginal rate to return to 39.6 percent, the same as it was in the Clinton era. For seven years the economy grew slowly and we avoided a long-term recession.

Lowering and reducing the top marginal tax rates –does not lead to economic growth. What does happen is that we experience more deficits and our leaders then tell us they need to cut social security and Medicare. Something is not right.