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Trickle Down Tax Reform – Engine Of Economic Growth Or Simply A Trick?

by Richard Cameron

This week, Senate Republicans are in a furious scamper to get so called “tax reform” on Donald Trump’s desk, who will assuredly sign it. Trump is desperate to sign anything at this point, so he can boast that his presidency is “winning” – at any price.  Actually, the price is right, from the viewpoint of Trump and his investment class cronies, because no matter what happens with the economy going forward –  he and they will be able to evade even more of their share of the tax burden. Adding to the illegitimacy of the entire process is that we still have yet to look at Trump’s taxes.

Part of the perceived need of haste on this bill is that if it is not slammed through now and gets taken up after the mid-terms next year, Trump and the GOP might actually have to negotiate with the Democrat party to pass a bill. Needless to say, the fained objection of a handful of Republican Senators is slipping away as we speak because there is intense horse trading going on in the sausage factory. 

Americans are in the majority, opposed to the GOP tax bill.  Even so, Republicans aren’t paying attention to voters. Their attention is focused on the phone calls from their donors, who are telling them that the money spigot is going to be shut off if they don’t come through with this lucrative windfall.

In fact, in our previous report, we disclosed that one consortium of large contributors, pledged $400 million in spending to influence the passage of the corporate tax relief plan. Their mouthpieces in the Republican party, are trotting out the shop worn justification that tax cuts for the wealthy and corporations will create collateral benefits for workers and the middle class.  This is the premise of “trickle down economics”. So, let’s examine that premise and discover whether there is any validity to it or whether it is merely a pretense to reinforce the existing regressive tax environment in the United States.

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Trickle down economics as it relates to the tax argument, is broadly speaking, the contention that giving the uber wealthy more and more tax breaks stimulates jobs, revenues, investments and wage growth.  Bruce Bartlett, one of Ronald Reagan’s domestic policy advisors, writing in the Washington Post, says of the theory of trickle down: 

“there is no evidence showing a boost in growth from the 1986 act. The economy remained on the same track, with huge stock market crashes — 1987’s “Black Monday,” 1989’s Friday the 13th “mini-crash” and a recession beginning in 1990. Real wages fell.  Strenuous efforts by economists to find any growth effect from the 1986 act have failed to find much. The most thorough analysis, by economists Alan Auerbach and Joel Slemrod, found only a shifting of income due to tax reform, no growth effects: “The aggregate values of labor supply and saving apparently responded very little,” they concluded.

According to advocates of trickle-down economics, cutting top tax rates should encourage more work and more productive investment from top earners. But a Congressional Research Service report found “no conclusive evidence to substantiate a clear relationship between the 65-year reduction in the top statutory tax rates and economic growth.” Cutting taxes does, however, appear to increase pre-tax income for top earners.

According to Kimberly Amadeo, President of World Money Watch – writing in The Balance:

Trickle-down economics says that Reagan’s lower tax rates should have helped people in all income levels. In fact, the opposite occurred. Income inequality worsened. Between 1979 and 2005, after-tax household income rose 6 percent for the bottom fifth. That sounds great until you see what happened for the top fifth. Their income increased by 80 percent. The top 1 percent saw their income triple. Instead of trickling down, it appears that prosperity trickled up.

Walter Haines, economist at New York University, notes that “a growing economy depends on purchasers, and it’s primarily the working population that makes the bulk of the purchases. For these reasons, the “trickle down theory” has been generally discredited for a long time now.”

But the advocates of the tax reform bill are telling Americans that if the GOP tax bill is approved, they will benefit from more jobs, higher paying jobs and higher wages. A most damaging assessment of the likelihood of that prospect, comes from William A. Niskanen, a member of Reagan’s Council of Economic Advisers until March 1985, now chairman of the Cato Institute in Washington, D.C. “The most disappointing result of the tax cut was that economic growth was not robust. This was quite contrary to what the Reagan people, myself included, had hoped.”

photo of Wall StreetIf the rules that Washington makes shape the structure of the economy and the rules are written by the economically powerful, it stands to reason the economically powerful are going to be the beneficiaries of the rules and that someone else is a designated loser according to the rules.

Corporations and the upper regions of the 1% have already mastered the game of tax avoidance and there is scant evidence that when the statutory rate is reduced, that they will do anything other than what they are doing in the present environment, which is to continue the existing conventions of financializationnot investing in Main Street America

Additionally, the Chicago Tribune reports, a Bank of America / Merrill Lynch survey this summer asked over 300 executives at major U.S. corporations what they would do after a “tax holiday” that would allow them to bring back money held overseas at a low tax rate. The No. 1 response? Pay down debt.

The second most popular response was stock buybacks, where companies purchase some of their own shares to drive up the price. The third was mergers. Actual investments in new factories and more research were low down the list of plans for how to spend extra money. Stock buybacks are actually the mechanism by which the markets have rebounded since the economic crash – not that there was some magic by virtue of Barack Obama or Donald Trump sitting in the White House. 

But if you still harbor any illusions about whether there is any reality to the idea that tax cuts for corporations (which on the average are already only paying 20.7 percent) will translate into increased wages, consider the reaction of corporate CEO’s to Chief White House Economic Advisor, Gary Cohn.  Cohn, in a recent meeting hosted by the Wall Street Journal asked corporate heads to raise their hands if they planned to increase wages as a response to tax cuts. Only two in the room raised their hands. 

For that matter, if you work for a corporation – ask your boss if he’s going to raise wages when the tax cut bill goes into effect. When the convulsive laughter subsides, you’ll have your answer.      

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