During the past several weeks I have been experiencing deja vu.
Back in 1979, I worked as an economist at Merrill Lynch in Manhattan. One day CEO Donald Regan descended from his 55th-floor executive suite to our research center on the 32nd. He had a special request.
Rep. Jack Kemp had asked Regan to help push through a tax cut lowering the top federal income tax rate from 70 percent to 50 percent. Regan, in turn, asked us to simulate the effects of the tax cut on the economy.
Our model indicated that the proposal would raise deficits and increase income inequality. To my naive surprise, Regan flew off the handle, employing time-tested expletives to punctuate the point.
“I can’t take this to Congress! Get me something that helps pass this bill!”
To the rescue came Arthur Laffer. Art produced the “ Laffer Curve,” arguing the cut would be so stimulative that tax revenues paradoxically would rise. Of course, no credible economist believes this. Regardless, the tax rate cut passed.
Some historical revisionists point to that 1981 tax cut as the singular event that unleashed a decade of growth and prosperity. Economists know better. Yes, the tax cut happened and coincidentally the economy grew.
Similarly, weeks ago I switched on a light in our bedroom. At that exact moment, lightning flashed outside my window. You get the point. My switch does not cause lightning.
In 1980, Fed chairman Paul Volcker raised interest rates to 20 percent thereby causing a deep recession. This extreme move was necessitated by the runaway inflation of the 1970s.
The recession therapy worked. Inflation retreated into remission. This is what ushered in the miraculous growth. But to be sure, the Kemp-Roth tax cut did in fact unleash a powerful force into our economy. It was the start of a decades-long reverse-Robinhood redistribution of income from middle- and upper-middle class families to the very wealthy.
Today, this same scenario is on instant replay in Congress. Their latest tax cut is touted as a miracle growth hormone. In reality, it is the next step in widening the gap between those who work two jobs for next to nothing and those who come home with most of the loot.
In describing the 1981 tax cut, economist John Kenneth Galbraith explained, “If you feed the horse enough oats, some will pass through to the road for the sparrows.” The new proposed tax cut has even less going for it. I suspect that much of the tax cut will find its way to less pricy overseas stock markets.
When you boil this plan down to its essence, it is simply a tax cut on corporate profits, paid for by leaving millions of Americans without health insurance and running higher deficits. Everything else is window dressing.
In reality, it completely bypasses economic growth. Consider an analogy.
Last night, I messaged a Maine-raised West Point grad with the following question. Suppose you have 100 soldiers, five highly skilled, 50 fairly experienced, and 45 with great potential but in need of training. What would you do to raise the effectiveness of your militia?
“I would make the five top soldiers leaders. … I would have them train the others and bring them up to speed. Maximize your entire force, leverage your experience.”
Just as the best way to strengthen a militia requires lifting the skills of the least experienced, the surest way to grow an economy is to focus on those individuals who have room to grow, the lower 45. Focusing on them lifts everyone.
The proposed tax cut will do the opposite. The first effect will be to increase deficits. Deep cuts to programs that strengthen the lower 45 percent will soon follow. Recent data around the nation confirms that growth occurs when tax revenues are sufficient to support public investment in education, health care, infrastructure and so forth.
Sen. Angus King keenly grasps this. Sen. Susan Collins is considering, pondering. Her party is pushing hard, but she is savvy enough to see reality.
If you have not already done so, please join the thousands of Mainers around the state who have called her office. Please encourage her to stand firm as she has courageously done throughout the year. Her number in Augusta is 622-8414. Her Bangor office is 945-0417.
This is an urgent and desperate request. Maine as well as the rest of the nation deserve much better.
Marcus Hutchins is a former economist for Merrill Lynch. He lives in Southport.
Follow BDN Editorial & Opinion on Facebook for the latest opinions on the issues of the day in Maine.