why supply side economics doesn t work
In a, President Obama issued a damning critique of trickle down economics and a stark defense of social insurance and public investments funded by progressive taxation. The presidentÁs speech in Osawatomie, Kan. , addressed the challenges of rebuilding the middle class and tempering income inequality, making the case that doubling down on the supply-side experiment of the last decade will fail the needs of the vast majority. The president aptly characterized conservative economic policy as a two-pronged approach of cutting regulations and cutting taxes for the wealthy. (Note conservatives glaring lack of enthusiasm for refundable tax cuts or even an across-the-board payroll tax cut Á tax cuts that would be pretty broad-based. ) This is, of course, exactly the economic nostrum being preached by the GOP presidential field and Republican leadership on Capitol Hill. See, for instance, how the tax plans of presidential candidate
or House Budget Committee Chairman (R-Wisc. ) belie any concern about income inequality, or how regulatory uncertainty is used as a. This is peddled on the premise that when the wealthy do well, income gains trickle down to the middle class and everyone benefits from a growing economy. But that hasnÁt happenedÁ in recent decades (particularly since 2000) and income gains have been. The president made the following salient point on the supply-side experiment: ÁNow, itÁs a simple theory And that theory fits well on a bumper sticker. But hereÁs the problem: It doesnÁt work. It has never worked. It didnÁt work when it was tried in the decade before the Great Depression. ItÁs not what led to the incredible post-war booms of the Á50s and Á60s. And it didnÁt work when we tried it during the last decade. I mean, understand, itÁs not as if we havenÁt tried this theory. Á (Emphasis added. ) The, also invoked by the president, indeed speaks volumes: ÁRemember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did it get us? The slowest job growth in half a century. Á That and the. Imagine if we had instead used the $2. 6 trillion these tax cuts added to the public debt over 2001-2010 to undertake investments in areas like education, infrastructure, and scientific researchÁinvestments that would have produced much better job-growth and that have actually demonstrated high economic returns.
Since the 2001 and 2003 tax cuts didnÁt generate much in the way of jobs or incomes, they failed (by miles Á or should we say trillions of dollars) to fulfill the mendacious claim often made by conservatives that. (Note that this assertion continues to surface despite being. ) Based on this abject policy failure and the clear dysfunction of a tax code that allows a, President Obama made the case for tax reform Á including allowing the top individual income tax rate to revert from 35 percent to the 39. 6 percent rate implemented by President Clinton (which would still be well below tax rates for most of the post-World War II era). Since most Republicans will clearly scream about the onerousness of this proposal, itÁs worth noting that the optimal taxation literature calls for a steeper schedule of marginal tax rates and a considerably higher top rate than 39. 6 percent. In their, economists Peter Diamond and Emmanuel Saez peg the optimal top income tax rate at 73 percent, up from 42. 5 percent today (taking into account Medicare payroll taxes and average state income and sales taxes). This would imply a top federal marginal income tax rate of 65. 5 percentÁmore than 25 percentage points higher than that proposed by the president. The current top tax rate is Áis optimal only if the marginal consumption of very high income earners is highly valued,Á note Diamond and Saez. Of course, the value that policymakers put on the happiness of the very rich is exactly what stands behind the and the of long-term deficit reduction negotiations because of conservative intransigence over raising more revenue from upper-income households. I applaud the president for. AmericaÁs low- and moderate income families should, too. As a nation, we cannot afford to double down on the failed, plutocratic pipe dream that is trickle down economics. Another round of tax cuts for the highest-income households will not restore full employment but will exacerbate widening income inequality, blow a bigger hole in the budget deficit, and defund needed public investments and economic security programs.
Any policymaker genuinely concerned with the fate of the middle class, inequality and immobility, or the budget deficit, should be focused on rolling back the last round of inequitable and ineffective tax cuts rather than digging us deeper and deeper into a new Gilded Age. There has been a lot of talk about fake news, but we also need to start discussing fake economics. House Republicans Á mostly for corporations, wealthy people and their heirs Á that to the national debt over the next decade. Senate Republicans and President Donald Trump generally like this approach, although the devil will be in the details. GOP leaders wish they could cut taxes even more, but congressional rules on debt accumulation would allow Democrats to stop them. Wait a minute: ArenÁt Republicans the ones who always complain about government debt when Democrats want to spend money on things such as health care, education, social services and infrastructure? Yes, but this debt is different. ThatÁs because it is created by cutting taxes. How can they justify that? With a myth that goes like this: Whenever you cut taxes for rich people and corporations, they will return the favor by creating jobs and economic growth Á so much growth that it will offset those huge deficits. This magical thinking is called Ásupply-sideÁ economics. It also is known as Átrickle-downÁ economics, or, as George H. W. Bush famously called it when Ronald Reagan started touting it in 1980, ÁvoodooÁ economics. The trouble with this theory is that it has never worked, and it is unlikely to work now. Interest rates are low. The economy has no shortage of investment capital; it is just not being invested. Yes, the economy grew when Reagan cut taxes after years of high interest rates and high inflation. But the national debt also grew, from $997 billion to $2. 85 trillion. Bill Clinton raised taxes on rich people and corporations and achieved stronger economic growth than Reagan did. Clinton also had four balanced budgets and turned the national debt into a surplus. That surplus was later erased by George W. BushÁs wars and tax cuts and Barack ObamaÁs stimulus spending, which may have kept the Great Recession of 2008 from turning into a second Great Depression.
When Republican governors and legislators in states such as Kansas and Louisiana have slashed taxes based on supply-side economic theory, Supply-side economics is the opposite of conventional theory, which holds that businesses invest, expand and hire workers when there is a demand for the products they are selling. ThatÁs why it makes more sense to put money in the pockets of poor and middle-class people through lower taxes or higher wages. They will spend that money and stimulate the economy. When rich people get tax breaks, they save most of the money. When corporations get windfalls, they reward shareholders rather than hire workers they donÁt need because demand hasnÁt grown. So why do Republicans keep touting supply-side economics? Because corporations and rich people want lower taxes, and they make generous campaign contributions to get them. Supply-side economics also is pushed by conservative think tanks funded by rich people such as industrialists Charles and David Koch. The Koch brothers have invested hundreds of millions of dollars in politics, funding lobbying groups such as Americans for Prosperity and academic programs such as the University of KentuckyÁs. In September, the UK institute hosted Arthur Laffer, the father of supply-side economics,. While weÁre talking about economic myths, here are two more:. When you compare tax burdens as a percentage of gross domestic product in the worldÁs 35 most prosperous countries Á member states of the Organization of Economic Cooperation and Development Á the United States ranks 31st, just ahead of South Korea, Ireland, Chile and Mexico. Taxes at all levels of American government total 26. 4 percent of GDP, compared to the 34. 3 percent average of the 35 OEDC countries. The most-taxed countries are at 45 percent or above. Another myth is that economic growth Álifts all boats. Á That was once true. But since the late 1970s,. AmericaÁs top 1 percent now have more income than the bottom 40 percent. Tax reform based on fake economics will only make the problem worse.
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