by Frank Thomas
Our political system is so immersed in a sea of lies and distortions, not helped by a professionally uncritical, fact misinformed media that too often plays the snappy, surface, hype-searching analysis and interview game, ‘What do you think? And now what do you say to that?’
There are so many areas of factual and biased distortion of the issues, it’s hard to know where to begin. First, as Clinton rightly stated, the central issue facing us today is, “What is The Role of Government?” Republicans as supply-siders favor an inactive government, tax cuts (lavishly for high income groups) overly decreased government spending, no unions, privatization of social nets like Medicare, minimum regulations of financial sectors under a small government … all to spur dynamic economic growth. The Democrats favor an active government, basic social nets to protect vulnerable people in bad times and volatile markets, government spurring of infrastructure development, quality public health care and education, R&D, progressive taxes and closing tax loopholes … all to support middle class progress, a fair playing field, and to contain, if not reverse, our burgeoning, destabilizing income inequality gap.
Let’s review some facts/myths in three federal government areas under different presidencies: federal revenues and spending, federal debt, and job creation. Tables 1-3 confirm numerous recent studies showing persistent US poverty, falling middle class wages, rising inequality, and NO correlation between the top tax rates and economic growth (see “Taxes and the Economy: An Economic Analysis of the Top 10 Tax Rates Since 1945” by the Congressional Research Service (CRS) and the recently released Economic Policy Institute “Review of US Economic Policy”).
I. Federal Revenues and Spending
We are programmed that Democrats are high government spenders, big tax and budget deficit ‘producers’ and Republicans are low government spenders, low tax and budget deficit ‘producers.’ TABLE 1 examines these “Myths” (Source: Office of Management & Budget):
TABLE 1: FEDERAL REVENUES, SPENDING, DEFICITS AS A % OF GDP (Average Year of Presidential Terms Starting With President Carter)
Revenues Spending Deficit(-)
Prior 30 Year Average 18.1% 19.6% -1.5%(1950-1980)
Carter: 1977-80 18.4% 20.8% -2.4%
Reagan: 1981-88 18.2% 22.4% -4.2%
Bush I: 1989-92 17.9% 21.9% -4.0%
Clinton: 1993-2000 19.0% 19.8% -0.8%
Bush II: 2001-08 17.6% 19.8% -2.2%
Obama: 2009-12 (a) 15.4% 24.4% -9.0%
(a) Obama inherited Bush II’s mini-depression with the following carryover Deficits:
Conclusions: One can hardly call Reagan and Bush I low spending and deficit producers during their presidential terms. Neither reduced the size of government as government spending was well above the 40-year average largely from an ‘explosion’ in defense spending (as generally happens under all Republican administrations). Despite aggressive tax cutting under a false “trickle down” theory, Reagan couldn’t stop the accelerating budget deficits hitting a high of 6.3% in 1983, 5% the next 3 years, falling to 3.1% by 1988 … largely due to several tax increases by Reagan to counter lost revenues from slashing the top rate from 78% to 28%. While Reagan reduced middle class income taxes, he sharply increased regressive payroll taxes. On the positive side, he also made it tougher to evade taxes and reduced many tax breaks and shelters. He realized his initial sharp tax decreases with exceptionally high defense spending were producing serious budget deficits and debt levels despite expanded job opportunities.
Clinton’s term showed that sound tax policy and moderate spending can go hand-in-hand to produce budget surpluses. Bush II learned nothing from Reagan’s mistakes and gyrated the top rate down while loosening financial regulations even further causing one of the most dangerous recessions since the Great Depression. Little wonder tax revenues dropped during his term of office, and declined further into Obama’s presidency as consumption plummeted well below 70% of GDP.
Then comes Obama’s massive drop in revenues and increase in spending. Now we are drowning in the political chicanery so corrupting our political system … where Republicans accuse Obama of huge deficits and debt levels arising in 2009, 2010, etc., which are mainly a carryover of the Bush Administration’s mini-depression. The same applies to the substantial national debt increase Obama inherited from Bush II’s mini-depression.
II. Federal Debt
The political right puts all the blame on Obama for our continuing high deficits and debt levels. My view is they could have been far worse without the $800 billion Obama stimulus and far less if the stimulus had been in the order of $1.2 - 1.5 trillion. Obama can be rightly blamed for not fighting all-out for more stimulus funds, for stoppage of foreclosures, and for not increasing the top income rate back to 39.5% - a very weak compromise he allowed himself to be blackmailed into to keep unemployment benefits going for the innocent victims of Bush II’s mini-depression. As all studies have proven, the tax revenue carryover loss of the Bush tax cuts and drug industry subsidies is in the order of magnitude of $2 trillion during Obama’s term.
Let’s put the historical debt trends into perspective as we have done very briefly for federal revenues, spending, and deficits under different presidents.
TABLE 2: GROSS PUBLIC DEBT ON A FISCAL BASIS IN $BILLIONS (At End of Budget Term In September)
End of Budget Term Increase
Term - Sept Amount %
Carter: 9/30/81 $998 -- --
Reagan: 9/30/89 $2,857 $1,859 186%
Bush I: 9/30/93 $4,411 $1,554 54%
Clinton: 9/30/2001 $5,804 $1,396 32%
Bush II: 9/30/09 $11,910 $6,106 105%
Obama: 9/30/12 $16,000 $4,090 34%
Obama: 9/30/13 est. $17,000 $5,090 43%Source: Treasury Direct, Office of Management & Budget
NOTE: Monthly statistics are quoted from January, as US presidents take office at the end of January and from September, as this is the last month of the federal fiscal year. In other words, the election in November will cause a president to take office at the end of January and begin the process of passing a federal budget which takes effect in the October following the election year. Calculating financial data and job growth in this way for each president is in fact more accurate.
Conclusions: When one properly allocates the carryover deficits and debt caused by Bush II’s policies over 8 years, then one comes to a more accurate picture of Obama’s so-called “bad management” of our nation’s finances. Don’t get me wrong. The numbers are AWFUL! But they are, relatively speaking, from a president faced with the worst structural financial crisis in 70 years, much LESS AWFUL than the debt/deficit results under Bush II’s administration. The spiraling of deficits and debt beginning in 2003 and splurging in big measure over into Obama’s term were a result of Bush tax cuts, drug firm subsidies, wars in Iraq/Afghanistan and the Great Recession.
Again, this is not to say that Obama has sufficiently and forcefully stood up to mitigate the mess he inherited from Bush II. He has given in far too easily to Republican blackmail that started the very first month of his presidency – when both Boehner and McConnell announced they would vote against all of his Administration’s key policy measures (including job stimulus) to ensure his defeat in 2012.
But, as Table 2 shows, the percentage debt increase over Obama’s one-term was even less than Bush I’s term where there was but one small, short war with Iraq’s Saddam Hussein. But, if elected to a 2nd term , Obama and the Democrats must come up with many more aggressive actions to keep the national debt from exploding further to the $20 trillion range by the end of his second term. This will definitely mean raising taxes on incomes – perhaps rate-stair-stepped progressively, for example, on income above $350,000, above $750,000, above $1,500,000, etc. Despite all of Romney’s blarney that a Defense budget of 5.5% is hardly adequate although it’s almost bankrupting us, Obama needs to get defense expenditures down to less than 4.0% of GDP (as Clinton did) over a 5 year span. This is still DOUBLE the approximate 2% of GDP expenditure rate of all other advanced countries.
Let’s now review the historical job creation trends also on a fiscal basis under various presidents as shown in Table 3.
TABLE 3: JOB CREATION ON A FISCAL BASIS – END OF BUDGET TERM SEPTEMBER
Jobs Created 1977 - 2012
Democratic Presidents 31,459,000 = 63% over 16 Years
Republican Presidents 18,097,000 = 37% over 20 years
Carter: 09/30/81 7,939,000
Reagan: 1st Term 09/30/85 6,552,000
2nd Term 09/30/89 10,303,000
Bush I: 09/30/93 3,032,000
Clinton: 1st Term 09/30/97 12,060,000
2nd Term 09/30/2001 8,106,000
Bush II: 1st Term 09/30/05 2,716,000
2nd Term 09/30/09 -4,506,000
Obama: 09/30/12 3,354,000
Source: BLS Data, Wikipedia
Conclusions: It’s seems that politicians, media, and some esteemed economists have missed the true dimensions of Obama’s turnaround of the enormous job destruction carried out under Bush II and inherited by Obama as more accurately shown on a fiscal basis in Table 3. Viewed this way: job creation went from a Positive 8.1 million under Clinton’s 2nd term to a NEGATIVE 4.5 million under Bush II’s 2nd term back to a Positive 3.3 million in Obama’s 1st term of 3 years to date on a fiscal basis. Going from a positive 20 million job gain in 8 years under Clinton to negative -1.8 million job loss in 8 years under Bush II – a net disastrous negative job loss reversal of over 22 million to a positive 3.3 million jobs creation in 3 years under Obama is a significant turnaround to say the least. NOT ENOUGH BY FAR, BUT HEADED IN THE RIGHT DIRECTION!
Let’s not forget that those officially unemployed peaked at an astronomical 15 million PLUS another 8 million underemployed as a result of the Great Recession under Bush II. During the long mini-depression created under Bush II’s watch, corporations have been taking advantage of the crisis to reduce permanently a large number of people through automation – adding more pain upon pain to the middle class while the Republican Congress has been thwarting Obama’s efforts at greater stimulus, leaving quantitative easing by the Federal Reserve as a last resort.
Given these huge comeback structural obstacles, Obama has got to step on the gas pedal for ever stronger job creation in the 200,000 a month range. Companies are not going to do it. Only government can provide the scale of job and demand push needed through infrastructure investments. Considering the enormity of the financial chaos and job loss situation Obama inherited – the worst in 70 years - Obama has not done badly but must continue to do better.
Facts don’t lie, people do. A fact many politicians and media pundits have amorally become comfortable with in a winner-take-all political system where “hype is life” and brain dead “one-liners” sway the faithful and undecided.
There’s another indoctrinated MYTH out there we struggle to deal with objectively in our broken social-economic system … namely:
- High taxes discourage growth and productivity: As noted, the non-partisan Congressional Research Service research has found little relationship between the top tax rate and economic growth. In fact, 65 years of tax cuts for the wealthy have produced US “record inequality, not prosperity,” with one of the world’s highest Gini coefficients, says the CRS report.
In a recent Foreign Affairs publication, “America the Undertaxed” by Andrea Campbell, similar research also found little correlation across OECD countries between taxes as a percentage of the economy and the size of the economy itself, as measured by per capita GDP. Nor, according to this research, is there a high correlation between taxes as a percentage of GDP and the annual rate of economic growth. As Andrea Campbell says in her Foreign Affairs article:
“With the earnings of the top one percent mostly back to their pre-recession levels ( vs. persistent stagnation for the middle class), past experience suggests that a tax hike today would NOT severely damage the economy, and productivity might even rise with the security and investments that government spending can provide.
“In proposing a mix of options to regenerate the economy, from reducing spending to raising revenue, policymakers are confronting the reality of US fiscal policy: compared with its counterparts among the advanced nations, the US tax system collects little revenue, poorly redistributes that money across the population, and is mind-bogglingly complex.”
This is something the Romney types unabashedly and greedily exploit to the HILT! Reagan is no doubt shouting from his grave at the elite tax avoiders and tax loophole chasers costing our nation at least $200 billion in lost tax revenues yearly!
May I add a few other important facts relating to how the our nation manages corporate tax revenues?
It’s important to point out that US corporate tax revenues as a source of total federal taxes has plunged from 30% in the 1950s to 10% today as described by Andrea Campbell in Foreign Affairs and my writing some time ago, “Our Fiscal-Economic Quagmire: Some Solutions.”
Despite a seven percentage point higher gap between US top statutory corporate tax rate and the OECD average rate, the US EFFECTIVE corporate tax rate has trended around 13% vs. an OECD rate of 16%. Thus, US business effective tax rates are LOWER, NOT HIGHER than OECD average rates, contrary to what right wing conservatives often claim.
Why is this so?
Over the years, our US superbly complex tax code has evolved through persistent insider lobbying efforts with the result that statutory rates are applied to a much narrower base of taxpayers or taxpayer adjusted income base – both for individual and corporation incomes. This has been achieved by an intricate, multi-layered barrage of business tax credits, subsidies, and breaks – all of which are practically non-existent in the tax codes of the mature OECD countries.
So, the self-serving right wing political cry the Romneys and Ryans join in that US businesses are disadvantaged with much higher effective tax rates vs. their European business competitors is simply NOT TRUE. What is TRUE, however, is that total European taxes – federal, state, and local – are higher than those of the US as a % of GDP. For example, in 2006 before the financial-crisis startup and long recession, US total tax revenues were 28% of GDP vs. 35% for the OECD. This difference was and continues to be mainly due to Europe’s very stable flowing VAT consumption tax … a tax America doesn’t have. But, over the decades for the majority of the better performing and mature European countries, this total tax difference as a % of GDP has Not resulted in notably lower GDP growth rates vs. the US. Quite the opposite, higher total taxes and clever redistribution of same have resulted in a broad-based sharing in societal progress with relatively low income/wealth gaps between the top 10% and everyone else.
The mature OECD countries visibly and concretely see a larger share of their tax bill fairly redistributed across all regions and income classes in the form of:
- up-to-date, well-maintained infrastructures; family allowances for children and vacations; quality low-cost, standard basic health care for All with a range of standard-defined upgrades; excellent affordable coverage for serious disabilities; humanly decent unemployment compensation.
This post Obama-Romney 1st debate Postscript addresses the falsehoods and non-sequiturs of the Romney/Ryan cut taxes and spending plan that they say will be Deficit Neutral – a Supply Side Economics cure-all to speed up GDP growth … a policy which caused federal debt under Reagan to increase 186% over 8 years.
Romney and Ryan’s 20% across the board tax cuts without increasing deficits raises an obvious question no one in the media or informed commentator world has raised or put in proper historical perspective.
Romney assumes that simplifying the tax code (good idea) and then implementing broad-based aggressive tax rate cuts involving trillions in annual federal tax losses will be offset by reducing tax deductions and loopholes he doesn’t identify. BUT, this is mathematically impossible without dramatic reductions in spending (except Defense) including social nets. This approach, says Romney and Ryan, insures a DEFICIT-NEUTRAL effect … in other words, the same amount of taxes will be paid on a FISCAL year basis.
The trillion dollar question is: HOW WILL THIS DEFICIT-NEUTRAL PLAN IMPROVE CONSUMER SPENDING, PRIVATE INVESTMENT and JOBS IF ABSOLUTE EFFECTIVE TAXES PAID REMAIN THE SAME ??
Romney is selling the same economic miracle Reagan/Bush II sold the public: across the board tax and spending cuts to increase jobs without gyrating deficits and debt, nor income/wealth gaps. Romney says under his plan the top 5% will still pay 60% of all income taxes as they do now … but he forgot to say 60% on a much higher total income under 20% lower marginal rates and ever lower rates on capital gains. Remember, the top 5% earn most of their income from capital gains and exploiting offshore tax havens and loopholes.
We are hearing the same Reagan supply-sider economic assumptions that large reductions across the board in marginal income tax and capital gains tax rates will stimulate more jobs by investments while lowering deficits and debt. Table 4 captures the TRUE Big Picture of what actually happened to tax revenues, spending, deficits, debt, job creation during Reagan’s presidency.
TABLE 4: 1981-89 FISCAL YEAR RESULTS DURING REAGAN’S TERM
DATA EXPRESSED AS A % OF GDP
1981-1989 Ave. 40 Year Ave.
Federal Revenues 18.2% 18.1%
Federal Spending 22.4% 20.6%
Deficit -4.2% -2.6%
Federal Debt (a) 53.1% 32.5% (Carter’s Term)
Federal Debt Increase (a) 186% = +$1.9 Trillion
(a) As of 9/30/1989
Average Annual Jobs Increases On A Fiscal Year Basis
Carter 2.0 Mil.
Reagan 2.1 Mil.
Bush I 0.4 Mil.
Clinton 2.5 Mil.
Bush II -0.2 Mil.
Obama 1.1 Mil. (10/30/2009—09/30/2012)
Sources: Office of Management & Budget, BLS
Reagan’s Supply Side Economic plan increased average annual job growth 2.5% or 2.1 million per year vs. 4% or 2.0 million per year under Carter. Reagan´s job growth was no better than Carter´s. GDP growth did improve to an average of 1.8% vs. 0.8% under Carter with high inflation. BUT, Reagan´s supply-side Trickle/Down tax-spending-cut panacea caused annual deficit and debt levels to MUSHROOM … despite his commendable efforts eliminating tax loopholes and tax avoidance and changing his mind to increase taxes 11 times to offset resulting big deficits! In fact, average yearly growth in federal tax revenues hardly grew as a % of GDP from levels that would have been realized WITHOUT the substantial net tax rate decreases.
Furthermore, unlike Reagan promised, spending INCREASED as a % of GDP, not helped by an explosion in Defense spending. Not surprisingly, INCOME and WEALTH GAPS began widening considerably between the top 10% and all other Americans.
So, just the OPPOSITE revenues, spending, deficits, debt results and income-wealth gaps happened from what Reagan promised – and what Romney and Ryan are now similarly promising with their extreme supply side economics of across the board tax rate cuts under the premise of being Deficit Neutral … an equitable income improvement for the middle class. These were exactly Reagan words when he said a just economic model is one where, “A rising tide lifts all boats.”
WHY DID ABOVE NOT HAPPEN?
Reagan’s income tax rate cuts grossly favored the rich who did not trickle down their expanded income/wealth to the middle class. His lowering of income tax rates for the bottom 50% was largely offset by higher regressive payroll taxes for lower income people. Tax revenue growth remained stagnant and the rate of spending did NOT decline.
His administration forgot, as Romney and Ryan are now conveniently forgetting, that the so-called Laffer Curve – or better said, Laugher Curve which is the foundation of conservative Supply Side Economics theory – even warns that tax rates too high or too small will NOT MAXIMIZE tax revenues and hence GDP growth. Reagan´s extreme tax-cut policies fell into this trap despite curtailment of tax avoidance schemes and later raising taxes 11 times. Spending grew at a much faster rate and revenues at a very slow rate … with resultant deficit/debt acceleration.
What happened under Reagan´s policies was rightly called VOODOO ECONOMICS by President Bush I. In fact, Reagan´s goal of lowering taxes to increase revenues was seen by many experts as really a “smokescreen” for starving the government of revenues, thus making it smaller.” Does this right wing goal sound familiar today? Government under Reagan as well as Bush I, Clinton, Bush II did NOT get smaller.
Reagan´s `Trickle Down´ idea that we can produce our way out of economic slowdowns by seriously cutting taxes and spending without exploding deficits and debt proved FALSE. California is on the constant edge of bankruptcy from extreme Supply Side Economic policies inherited from Reagan. Such a policy idea is only TRUE or possibly has merit in a HIGH TAX environment which the US does not have and in a WEAK TAX REDISTRIBUTION environment which the US does have. Lowering US taxes under these two conditions to the right level could indeed raise net tax revenues and cause improved economic growth. BUT today, the US already has very LOW EFFECTIVE corporate and individual marginal tax rates compared to most developed countries.
Compounding the false basis of the Romney/Ryan plan is a gross underestimation of the depth of the Bush mini-Depression hangover where companies are still engaged in balance sheet deleveraging, canceling/delaying investments, laying off/outsourcing workers all to increase cash; and consumers are still struggling to pay off debts and increase savings; banks building up profit reserves, management bonuses, and restraining lending.
This all means the Romney/Ryan (Reagan-like) plan of significantly reducing tax rates for personal income, capital gains, and corporate income will have a negligible effect on job growth, deficit and debt reduction even more so when incorporating idea of OFFSETTING resulting tax revenues losses in the trillions with comparable reductions tax deductions and loopholes.
What Romney/Ryan are in effect saying is that total absolute federal taxes will remain the SAME.
How does this benefit anyone? Will still unknown Giant cuts in discretionary spending and social nets do the job – e.g., privatize Medicare, repeal Affordable Health Care Act while getting rid of Dodd-Frank financial regulation legislation? How to do this without worsening a slow but steadily improving economic situation and without exacerbating deficits and debt as Reagan and particularly Bush II did on a perilously grand scale? How to do this without investing in infrastructure and education? Without forcing states to increase taxes and fees to compensate for vastly reduced federal support?
Romney and Ryan remain vague and obtuse about these questions while comforting those understandably skeptical with the words, “Trust us, we intend to work together with our Democratic colleagues across the table to arrive at a suitable compromise.”
This brings me back to my original trillion dollar QUESTION:
HOW WILL THIS `DEFICIT-NEUTRAL´ PLAN IMPROVE CONSUMER SPENDING, PRIVATE INVESTMENT and JOBS … IF ABSOLUTE EFFECTIVE TAXES PAID REMAIN THE SAME??