When congressional Republicans were selling their tax cut package to a skeptical public, they assured them that lower tax rates for corporations and the wealthy would stimulate the economy and the benefits would flow to working-class Americans. Yet, reams of research show that the Republican notion of “trickle down economics,” popularized by President Ronald Reagan, doesn’t work.
Now, a new and respected voice has joined the chorus. “The tsunami of wealth didn’t trickle down. It surged upward,” financier Warren Buffett wrote about the concentration of wealth over the last three decades in a recent essay for Time.
He noted that since 1982 the wealth of those on Forbes 400 list increased 29-fold — from $93 billion to $2.7 trillion — “while many millions of hardworking citizens remained stuck on an economic treadmill.”
This matters because Mainers will likely be told, as lawmakers debate how much of the federal tax cuts Maine should adopt, that lowering taxes on the top earners helps those at the bottom.
It is time to retire this false ideology that tax cuts pay for themselves through economic growth. Even Bruce Bartlett, an architect of Reagan’s 1981 tax cut, says tax cuts don’t spur growth. “That’s wishful thinking,” he wrote last year in The Washington Post. “So is most Republican rhetoric around tax cutting. In reality, there’s no evidence that a tax cut now would spur growth.”
So, why did the economy grow in the 1980s? A big drop in interest rates and big spending increases for defense and infrastructure, which increased government spending on goods and services, thereby stimulating the economy, Bartlett wrote.
Along the same lines, Republicans claim that reductions in the corporate tax rate will lead to higher wages for workers. Evidence suggests this isn’t true, either. After Reagan signed a tax overhaul in 1986 that reduced the country’s corporate tax rate from 46 percent to 34 percent, wages fell for four years.
Despite this data, Republicans in Congress last year pushed through a tax cut bill that includes big giveaways to the rich, like a doubling of the estate tax exemption, while ultimately hurting average Americans. Nearly a third of the tax cuts for Americans would go to the richest 1 percent in 2018. By 2027, that fraction would rise to nearly half, according to the Institute on Taxation and Economic Policy. A third of the tax cuts would go to the bottom 80 percent of U.S. taxpayers in 2018 and that number would drop to 28 percent in 2027.
Already, the consequences of these tax cuts are being seen. Some businesses announced bonuses and pay increases for their workers after the legislation was passed, which is good news for workers. But corporations were much more likely to use their windfall to buy back stock, a maneuver to increase stock prices, which further enriches executives and investors. The value of these buybacks — more than $170 billion by mid-February — is 28 times greater than employee bonuses.
Because of the tax cuts and increases in federal spending under the Trump administration, the federal deficit is expected to top $1 trillion next year, according to the Committee for a Responsible Federal Budget. Congressional Republican leaders are already using this deficit to justify cuts in government programs.
Maine should not go down a similar path as it figures out how to handle the federal tax cuts. Full conformity is not an option because the GOP plan eliminated personal exemptions. Taking this path would result in a $250 million tax increase for Maine households, according to Maine Revenue Services.
But adopting a proposal from Gov. Paul LePage, that includes lowering corporate taxes, allows rich couples to exempt $22 million from taxation when they die and carries a $88 million price tag, is not the solution, either.
There is a lot of room for a compromise in Augusta. But any tax deal must be based on economic reality, not wishful thinking.
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