Tax Policy and Economics

When a politician tells you that they will bring good paying jobs back to their district you should know that they are lying.  And while it should surprise no one that politicians lie; this lie is particularly insidious because it is something that could easily be accomplished. Politicians lie about job creation because many have themselves swallowed a lie called “trickle down economics” hook, line and sinker.

The idea of paying taxes to fund government operations goes back to the early Chinese emperors. Taxes can be broad based, like the tax on tea that precipitated the American Revolution. Historically governments appreciated that if they wanted to raise a lot of money, they needed to impose taxes on the wealthier people in the system.

The US federal income tax, beginning in 1919, was always progressive. It taxed people who earned higher income at higher rates.  For most of the time between 1919 and 1970, the highest tax rate on people who earned the most was 70%.  That amount seems confiscatory and it was, but for most of that time it applied to a very small portion of the total population.

The highest period of job growth in the US was during the post-WWII era, roughly 1945-1975.  During that time, the US federal government paid for two wars, Korea and Vietnam (which was very expensive), the US interstate highway system, the cold war military buildup (intercontinental ballistic missiles, battleships and aircraft carriers) and the space program.

All of these were very expensive outlays of funds that originated with taxpayers. At the same time, virtually all of these funds were spent within the US, the great bulk of it on salaries of workers who were building the highways and the hardware that the government was purchasing.

In the mid-1970s the US economy was battered with high inflation caused in large part because oil production was taken over by a cartel (OPEC). That raised the cost of everything in the US that moved by truck which was just about everything.

The OPEC oil embargo caused shortages which resulted in people waiting in long lines to get gasoline.  It also caused home heating oil prices to soar causing difficulties and dissatisfaction during the winter months.  Those of you who remember President Gerald Ford on television with a WIN (whip inflation now) button can relate. That dissatisfaction led to the election of President Reagan in 1980.

It is actually a 1978 article that is credited with the birth of “trickle down” economics and the “Laffer curve”. The article related the events that had occurred at a dinner attended by Dick Cheney and Donald Rumsfeld, both of whom worked for Pres. Ford. At this working dinner Prof. Arthur Laffer, then at the University of Chicago, sketched a curve on a napkin as an illustration of the tradeoff between tax rates and tax revenues.

Laffer suggested that tax revenues would increase as rates decreased because the untaxed funds would be used efficiently to create businesses and jobs and hence additional revenue which could be taxed.

For his part, Laffer claims that the restaurant had cloth napkins and he would never have used one for the illustration.  He also is quick to point out that the idea that cutting tax rates increases tax revenues goes back to the 14th Century.

Economics is a science that is very much based in mathematics. At its core is the idea that people will spend money in ways that satisfy their own best interest. The primary interest is getting the same or similar goods or utility at the cheapest price, so that you can get more goods and services with the money that you have.

There are mega gigabytes of data covering income, spending, taxes and a great many formulas and equations to explain and extrapolate that data.  If you took algebra in high school you know that when you change the variables in an equation, you get different results which you can then plot on a graph.

The Laffer curve is a graph that has no equation or data supporting it.  Most economists never accepted the Laffer curve but “cutting tax rates will make the country better off, create more jobs and result in higher tax collections” is an argument that has needs little factual or statistical support. It is a bastardization of a slogan we used to have in the 1960s: “if it feels good, do it.”

The Laffer curve is the basis of the Reagan era tax cuts on the wealthiest Americans and subsequent tax cuts at the state levels that continue to this day. The sales presentation for these tax cuts was that these wealthy individuals would invest the money that they saved creating new businesses and new jobs as the money “trickled down” into the economy.

It never happened.  Several states, (Louisiana and Kansas) continue to cut state taxes and have increasing difficulty funding schools and essential services. But the slogan: “I’m going to cut your taxes so you will have more money in your pocket” wins elections.

There seems to be an abiding desire to return to the “good old days” when there were many good paying jobs in the US.  As we learned with the New Deal and in the post-war prosperity, government can create those jobs. But it also needs to pay for them.

In round numbers, if your adjusted gross income is more than $375,000 per year you are in the top 1% of US taxpayers. The average overall federal tax rate for this group is just about 25%.  This includes some business owners, some doctors, some lawyers, all NBA rookies, many entertainers and hedge fund managers. Not all create that many jobs for others.

If the tax rate for this group were raised by 5% there would be more than enough money to create 1 million good paying jobs in the US; fixing highways, highway bridges, airports, ports and other infrastructure projects that just about everyone agrees need to be fixed. Fixing the highways would also reduce commute times, gasoline consumption, air pollution and the cost of everything that moves by truck.

These workers would pay taxes on their earnings which would fund other government programs and expenditures. They would also buy homes, cars, hamburgers, movie tickets and just about everything else people buy. It is money that would truly trickle down to other businesses. These types of construction jobs usually come with medical benefits as well.

Understand that even these workers will buy products like clothing and iPhones that are manufactured overseas. Overseas workers charge substantially less per hour for their time and Apple does not repatriate the profits it earns overseas or pay US taxes on them.

That is part of the problem with the current tax system and with the current “trickle down” theory. Left to their own devices business owners will use the money that they save from tax cuts to create jobs overseas.

I appreciate that there is a certain amount of “down with the top 1%” in this but I am not advocating a mass redistribution of wealth.  If anything, it is the tax cuts in the last 30 years that have caused the current disparity between rich and poor. Swinging the pendulum back the other way for a decade or two would seem to be a good way to promote growth and overall economic stability.