The Republicans are working hard to continue embedding the economic myth that lowering taxes on the already affluent results in economic growth. It is indeed a myth. And while we need to be cautious about correlation, and there are many other factors intervening in macro-economic growth, it is still relevant to review the evidence from the recent past decades of tax decreases and tax increases. Here it is:
- Americans born before 1965 can remember the Reagan tax cuts in 1981 – a 25% tax cut targeted to the affluent and super-wealthy. What came next was the deep 1982 recession, resulting in an unemployment rate of 10.8% in December 1982. Over the Reagan Presidency, the federal debt increased from less than $1 trillion to almost $3 trillion. That’s trickledown economics.
- A decade closer to the present, Bill Clinton and the Congress increased taxes by about 8%, from 31% to 39.6%, on the top 5% of households in 1993. Following that, our country enjoyed 7 years of economic growth, and the reversal of the federal budget from a deficit of $290 billion the year before President Clinton took office to a surplus of $236 in his last year in office. Unemployment was cut in half, from 7.4% at the end of 1992 to 3.9% at the end of 2000.
- George W. Bush came into office in 2001 and proceeded to put forth tax cuts largely benefiting the affluent, especially those who didn’t work for wages, but enjoyed dividends and capital gains. The resulting drops in revenue helped to drive the federal budget into a deficit within a year of Bush taking office. In 2008, his last full year as President, the federal deficit was almost $500 million. All through his presidency, the economy was sluggish. The main factor pushing the economy along was the increasing housing bubble, by which families were accumulating their own unsustainable debt, and which ended in the 2008 dive into the Great Recession.
But we don’t have to look to ancient history for further proof of the correlation of raising taxes on the wealthy and economic growth. That’s because in 2012 President Obama and the Republican(!) Congress and Senate raised taxes on the most affluent, increasing the top marginal tax rate from 35% to 39.6% for households with income above a $450,000 threshold. This kicked in for income in 2013.
The taxes to finance the Affordable Care Act also began in 2013: 0.9% FICA tax on households with income in excess of $250,000, and 3.8% tax on net investment income for these same households.
Combined these three taxes could add up to an increase of 9% on income in excess of $500,000 for affluent households. What happened?
- Unemployment fell by 3 percentage points to 4.7% at the end of 2016.
- GDP increased by $1.043 trillion between 2012 and 2015, or 6.8%.
- GDP per capita increased by over $2,000, or 4.25%.
- Median compensation - that is, compensation for the worker in the very middle of compensation for all workers - increased by over $2,400, or 9% between 2012 and 2015.
Don’t be fooled by the myths promoted by the billionaires and millionaires now hovering around the White House, the Congress, the Senate, and the legion of corporate lobbyists. The wealthy have too much money, the vast majority of Americans have too much insecurity. It will only get worse as the President-elect cuts taxes, not for us, but for the uber-wealthy!