Donald Trump’s tax plan, unveiled Wednesday, calls for massive tax cuts for corporations and the wealthy (i.e. “small business”). He also threw a bone to the “middle class” in the form of increasing the standard deduction from $12,700 to $24,000 for a married couple.
All justified in the name of jobs and economic growth. Economist and New York Times columnist Paul Krugman has famously labelled the economic growth argument for tax cuts as “Voodoo Economics.” We think Krugman is being too kind. Our name for supply side economics can’t be printed, but the initials “B.S.” more accurately reflect our view.
As Krugman has pointed out on numerous occasions, there is no evidence that tax cuts stimulate significant economic growth. In fact, history has proven the opposite to be true: in periods when tax rates were high relative to today’s rates, economic growth was more robust than during periods of lower rates.
In the two decades after W.W. II, for example, personal income tax rates averaged more than 80% for the highest earners, and yet economic growth was robust, averaging more than 4%. In contrast, during the administrations of Ronald Reagan and George W. Bush, personal income tax rates were slashed, but economic growth fell to 3.5% and 2.1% respectively.
Today, the top rate for personal income is 39.6% for married filers earning more than $466,950 a year, while growth is averaging an anemic 1.5%. Trump, for his part, wants to cut the top rate to 35%. The last thing we need is yet more of the failed policies of the past.
What’s wrong with the supply side theory? It sounds good, and it has popular political appeal (which is why Republicans have used the argument so successfully to justify tax cuts) but it doesn’t stand even a common sense smell test. It smells like, well, B.S.
Cutting taxes on corporations and the wealthy may stimulate marginal investment, or, just as likely, more profits will be redistributed to shareholders in the form of dividends and increased capital gains. And, oh by the way, those dividends and cap gains are taxed at a top rate of 20% – a much lower rate than ordinary income, a double bonanza for the rich.
To make matters worse, Trump has proposed eliminating the “estate tax” on accumulated wealth (currently levied on estates valued at over $5.45 million for an individual and $10.9 million for a married couple). Triple bonanza!
“Supply side” economics is simply code language for redistributing income to the wealthy, including Donald Trump and most of his appointees.
If you really want to stimulate the economy, you should invest for growth – in job training and education; in infrastructure including clean power, roads, bridges, mass transit and high speed rail, the things that actually make our economy run. That is what we did in the period after W.W. II, when we educated veterans on the GI bill and built the interstate highway system, among other initiatives, and it worked.
To fund this investment without blowing up the deficit, yes, we would have to raise taxes. But maybe it is past time raise the rates on “unearned” income, such as dividends and cap gains, so the wealthy actually pay their fair share.