Martire: Lessons of history don't speak well for supply-side tax reform

By Ralph Martire
Guest columnist
Posted11/10/2017 1:00 AM
  • Ralph Martire

    Ralph Martire

To stimulate the U.S. economy to "levels you haven't seen in many years," President Trump pushed Congress to cut federal income taxes, for most folks in general, but predominately for really affluent families and mega-corporations. Republicans in Congress have accommodated the president's request. In fact, according to the Joint Committee on Taxation, just one part of the Republican proposal -- reducing the corporate income tax rate from 35 to 20 percent -- provides $1 trillion in net tax cuts over the next decade to predominantly really big businesses, while the proposed reduction in the estate tax only benefits the wealthiest families. House Speaker Paul Ryan of Wisconsin assured the public that these "supply-side" tax cuts were all about stimulating economic growth.

By now, however, every American who is objective or can do math should know that the proposed supply-side tax cuts won't really stimulate the economy. Why? First and foremost is something called "history." Supply-side tax cuts have never worked as promised. Never. Second, focusing tax cuts on affluent individuals and corporations is not an effective way to stimulate private sector job growth -- which pretty much explains why our nation's actual experience has proven supply-side economic theory is bogus.

Now for the history lesson. Top federal income tax rates for individuals were very high from the end of World War II through 1980 -- ranging from 90 to 72 percent. During that sequence, the U.S. economy grew at an average rate of 3.8 percent per year, in real, inflation-adjusted terms. Meanwhile income distribution slightly favored the top, with the wealthiest 10 percent realizing roughly 34 percent of all growth in income over that period, leaving 66 percent of income growth for the bottom 90 percent in earnings to share. Still, these were pretty good times, that included a strong middle class and real income growth for all earners.

Then came supply-side under President Reagan, who cut the top marginal income tax rate from north of 70 percent to 38.5 percent in 1981. President George W. Bush then cut the top rate down to 35 percent in 2001, while also cutting capital gains and dividend tax rates, which all primarily benefited the most affluent. That's nearly four decades of supply-side. And the results ain't pretty. In fact, average U.S. economic growth from the Reagan Administration through the end of George W. Bush's second term was 2.8 percent annually after inflation. That's one full percentage point lower than during the previous, high-tax era, and translates to about $150 billion less in annual economic activity. So, despite 30-plus years of tax cuts for the wealthy, there's never been any trickle-down effect. Meanwhile, income inequality became much worse post supply-side, with more than all real growth in income going to the wealthiest 10 percent. Everyone else earned less after inflation in 2007 than in 1980.

Which should surprise no one, because tax cuts mostly benefiting businesses and affluent families can't be expected to stimulate job growth. Here's why: The economy is primarily, as in around 68 percent, consumer spending. Tax cuts for affluent folks won't generate much new consumer spending -- because individuals at the top of the ladder already have rapidly growing real incomes. In economic terms, they have a low "marginal propensity to consume," that is, they are unlikely to spend any tax relief they get. No bump in consumer spending, no job growth.

Business tax cuts also don't incentivize job creation, because businesses only hire more workers when they actually need additional capacity to satisfy growing demand for whatever they sell. It makes no sense for a business to utilize tax relief to hire folks if there's no work for them to do. Excess capacity is wasteful, and cuts profits.

Which means there's literally no reason to believe the congressional Republicans' proposed tax cuts will stimulate the economy, but every reason to believe they'll grow the national deficit.

Ralph Martire is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank.

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