Here we go again: Tax cuts as tax reform

Published 1:10 pm Thursday, October 12, 2017


Contributing columnist 

As Yogi Berra would say, “It’s déjà vu all over again.” The House of Representatives has just passed another tax cut involving the wealthiest 1 percent that will involve taking trillions from Medicaid, Medicare, child care, early childhood education and other needed services.  (The Tax Policy Center estimates that the wealthiest 1 percent will get half of the gains from the proposed cuts in 2018 and garner 80 percent of the proposed cuts over the next 10 years.) In Washington and in Frankfort the claim of economist Arthur Laffer, first aired in 1974, that more tax cuts for the top 1 percent will produce economic growth because of what the top most tier will supposedly do with its windfall is getting another burst of oxygen — this despite the economic disasters in Kansas, Louisiana, and North Carolina that followed wholehearted allegiance to the Laffer credo. However, there are dissenters, and not just from usual progressive taxation advocates. We are being warned by some credible experts that more slashes at the top not only do not produce growth but even sabotage growth. Furthermore, the cuts not only fail to address inequality in the short run but exacerbate inequality over the long term as well, and drastic inequality hurts the total economy.

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One reason that Laffer skeptics are speaking up is that times have changed since the 1970s, as flagged by Eduardo Porter in “Economic Scene” (New York Times, October 4, 2017).  When Laffer made his claim, the marginal tax rate was 70 percent and the top 1 percent had accounted for only 10 percent of the nation’s income over the last three decades. The proposed cuts would admittedly widen inequality in the economy in the early stages of growth produced by the richest, who no longer would lack incentive to grow the economy because of an oppressive tax burden. Nevertheless, it was assumed that increased productivity would ultimately make a bigger pie and lessen the inequality of the slices.  Following the Laffer lead, the top tax rate went from 50 percent to 28 percent and the corporate tax rate from 46 percent to 34 percent, but the promised aggregate benefits were not forthcoming, and inequality worsened.    

Today the top 1 percent is taking in more than 20 percent of the nation’s income, and the marginal tax rate is 39.6 percent. And once more the main beneficiaries of the lower corporate and individual tax rates are growing their incomes exponentially but not growing the new enterprises and jobs. Tax avoidance, tax evasion, earnings manipulation, and other tricks escalate high end incomes while reducing the pie for everyone else. As Porter states, “In more unequal societies, the rich have the power to distort policy-making to channel more of the fruits of growth in their direction by, say, cutting taxes and government spending that might improve production and growth.” What is needed for aggregate growth, such as improved education, improved health and health care, wider access to the internet, better child care, etc. goes begging. Worsening inequality hurts not only the poor but the middle class, which suffers loss in its ability to consume.  

In this light, notice the anticipated cuts to Medicare, Medicaid, Social Security, education, medical research, meals on wheels and road repair advocated by Governor Bevin. Notice too his promotion of “consumption taxes,” which can include groceries and medicine. This is blatantly regressive taxation; it hurts the least affluent the most. It is not fair unless one is under the illusion that health problems and hunger are totally the fault of the victims. We can be glad that our state representative Daniel Elliott has expressed his opposition to the consumption taxes on groceries and medicine.  

French economist Thomas Pickitty and some colleagues from University of California—Berkeley and Harvard have studied a set of industrialized economies between the 1970s and the 2008 severe recession. They found no meaningful correlation between tax cuts for the top 1 percent and economic growth.  Countries like Denmark that have kept a high tax rate have seen faster economic growth that big tax cutters like the U.S.A.  In the U.S.A., income share of the top 1 percent grows faster than in France and Germany, but the entire economy is not benefitted. This realization leads such economists to say that the optimal tax rate could even exceed 80 percent without stalling growth.

Could this contradiction to Laffer be sinking in? The White House is reportedly open to a new top tax bracket for the very rich. None other than Steve Bannon is proposing a top tax rate with a 4 in front of it. A 44 percent figure for the top 1 percent (those over $466,000 per year) would bring in over $600 billion over a period of three years. Douglas Holtz-Eakin, president of American Action Forum, a conservative pro-growth group, is open both to a new tax bracket for the very rich and to raising capital gains tax rates at death (in the absence of estate taxes).    Could it be that such implicit recognitions of links between greater equity and growth could make for some alliances between progressive advocates targeting inequality and pro-growth advocates?

Perhaps the most formidable barrier to repudiating the Laffer argument for yet more tax cuts at the top is resistance to the idea that those who prosper most owe most to the society that has fostered and enabled that prosperity. What of the air and water quality, the schooling of the corporate leadership and the labor force, the infrastructure, the level of public health, the cultural advantages that draw people and companies to a locality, and the governmental services,?  Are there really any totally self–made people? If one assumes that no one is entitled to have a share (through a social safety net) of what I have earned legally and that everyone truly has an equal shot at accumulating wealth, then the idea that a progressive tax system is a matter of indebtedness will continue to fall on deaf ears. Those who find ways to avoid paying any taxes on huge personal and/or corporate incomes are then admired for having outsmarted the system, and civic virtue remains a lost cause. Is it too much to hope that realistic and idealistic objections to the Laffer tax cut mantra could be finding each other?