Once upon a time two Republicans were competing for the party's presidential nomination. One wannabe labeled his competition's economic plan as "voodoo economics". The other would-be said nonsense and won the nomination. And both lived happily ever after. Ronald Reagan went on to be elected President in l980, while George H.W. Bush deleted the phrase from his memory bank and was chosen by Reagan as his running mate.
The big economic problem at the time was stagflation, the nasty combination of high unemployment and high inflation. What Bush called voodoo economics is what is now called supply side economics by its adherents or trickle down theory by its opponents. One central feature of supply side theory is that lowering taxes will increase revenues. The underpinning for supply side theory was provided by the "Laffer curve", named after economist Arthur Laffer who said the idea itself came out of the Middle Ages. Stripped of the Laffer econbabble, supply side economics worked like liberal Democrat Hubert Humphrey (one time senator and later Vice President) described in semi-scatological imagery: to feed the birds, you first have to feed the elephants.
What was called voodoo economics three decades ago has now become the fundamental economic argument of the Republican party. Cut the taxes of the wealthy, individuals and corporations (the elephants), and the added wealth to them will be invested and work its way to all those below (the birds) as benefits in the form of jobs and income. Thus, in the absence of any real job creation program to offer, Republicans use their strong, traditional pro-wealthy/business bias as a make-believe solution for creating much needed new jobs to hasten economic recovery from the Great Recession.
The most discussed aspect of the trickle down theory has been the continuing GOP push to make permanent all of the "temporary" income tax cuts of the former President George W. Bush. President Obama and a large majority of Democrats want to end the tax cuts for the upper income earners while retaining the tax cuts of the middle class. All of the Bush tax cuts are currently scheduled to expire at the end of 2012. The Democratic approach stands in direct contrast to GOP support of trickle down economics. While defying laws of hydraulics, the Democratic approach could be called trickle up, demand side, or stimulus spending (high unlikely) economics. That is, increase the money going to the birds and they will spend much of it thereby increasing the demand for goods and services of the elephants. (I first used "trickle up" in research while at The Brookings Institution; it drew raised eyebrows but was allowed to stand.)
But the trickle down vs. trickle up issue has gone far beyond the question of what to do about the Bush tax cuts for the wealthy, the most extreme case being the tax plan proposed by GOP presidential candidate Tim Pawlenty. His pro-wealthy proposal calls not only for cutting the top corporate tax rate from 35 to 15 percent but also for abolishing all taxes on dividends, capital gains, and estates, a position held by many Republicans. He would also change the tax structure for personal income taxes to have just two rates, 10 and 25 percent, instead of the current six rates, 10-35 percent. In one sense his personal income tax rate changes would be in accord with various proposals that have been made in the past to have a single flat tax or at least fewer rates. However, such proposals usually also include a major overhaul of the tax code to cut out the various deductions and credits, often incorrectly called loopholes, which are used to reduce taxes actually paid by many in both middle and upper income brackets or to give rebates to lower income earners. Pawlenty's plan as it stands now would do nothing about such provisions of the tax code. In short, he would cut the taxes, but retain the deductions and credits which further cut the revenue base. The nonpartisan Tax Policy Center said Pawlenty's plan would cost over $11 trillion in lost revenues over a 10 year period. Pawlenty's plan did not address the issue of reduced spending.
To conclude. What George H.W. Bush called voodoo economics is back, but not as a new or fresh theory, but as a fundamental part of the traditional Republican predisposition toward the wealthy and business.
The 10 or 25 percent tax rate would be a nice change to the tax structure, but there does need to be some cutting out of the "tax loopholes" but some of those loopholes have been around for so long and people are dependentt upon them such as the mortgage intereate rate deduction. Especially with the housing problems still existing, that could hurt the housing market even more.
ReplyDeleteI had actually never heard the term "trickle up" but it makes sense. If you give more buying power to the lower and middle classes than that will help stimlate the economy as it has been shown that the lower and middle classes tend to spend more money. And really, the lower and middle classes need tax cuts and help more than the upper rich.
I do think we need to cut taxes down from 35% for businesses however or we really are going to lose tax revenue from them if they all move their business overseas where it is cheaper to operate.
dpchuck
ReplyDeleteChange of some of the "loopholes" would be in order and I would favor a heavy tilt toward squeezing the wealthier types by such things as eliminating any interest and property tax deductions on second homes, vacation property, etc. Doubt that such changes would discourage wealthier purchasers from buying or encourage current owners to get rid of such properties. Also could CAP such deductions if the primary residence had an assessed value of say $1.5 million. There might be some kind of provisions on capping now but I'm not sure.
You're right about the trickle up effect. Fiscal conservatives really disliked the additional weeks added to unemployment checks but you can be sure that much of this money got plowed back into the economy, although some of it may have gone to reduce credit card debt or help with paying the mortgage.
From what I have read we are really an undertaxed nation both for individuals and corporations. One tax change that may slow down the flow of investment overseas would be to make money earned abroad taxable along with money earned at home. Right now earnings from abroad which are kept abroad are not taxable unless these earnings are brought back to this country. A number of years ago we gave corporations a tax break on such earnings if they brought the money back within a year. Don't know how this turned out but suspect much of the repatriated money went for higher dividends to shareholders and investments that did not create new jobs, investments such as the purchase of other companies.
I absolutely agree with getting rid of interest and property tax deductions on second homes. Primary homes is one thing but vacation homes is just another coo for the rich. I understand that wealthier people are already paying a high percentage of the taxes in this country but we need to get rid of a lot the tax deductions that favor the wealthier like the deductions for second homes.
ReplyDeleteI thought our country had really high corporate tax rates compared to other countries(?) Something has to be done so that we don't keep losing jobs in this country.
dpchuck
ReplyDeleteMy thought is that would only be on primary homes above a certain value, that value being set high enough to be sure you are only reducing the deduction for those who are really "wealthy". Also, it would not be total elimination of the deduction, but only for that portion above the "wealthy" level. Below that the deduction would remain as now.
To me the biggest thing we can do to "slow down" exporting of jobs is levying the corporate tax on earnings abroad. The emphasis is on "slow down" since the big driver for investing abroad is the lower wages in places such as India. With so many jobs being created in information technology, it is particularly painful to see so many of these jobs going overseas. By IT I am including such things as the huge number of call centers being established in places like India.
Are any politicians calling for raising corporate taxes on earnings abroad? It seems that could be sold as a patriotic action aimed at increasing American jobs and thus make it harder to fight against.
ReplyDeleteCosmo
ReplyDeleteThere have been some Democrats who have called for such corporate taxes and I expect it to come up again as part of any grand bargain struck over the 2012 budget. However, there isn't a prayer that it would ever pass the House where tax legislation originates.[
Cosmo
ReplyDeleteP.S. By saying such a tax may come up as part of a "grand bargain", I didn't mean it would get into such a bargain, only that some Democrats may try.
If the corporate tax rates get too high though we may be at a disadvantage to compete globally. If tax rates are going to be raised though it would make sense to have taxes on overaseas profits so all the jobs don't go overseas.
ReplyDeleteJeffrey
ReplyDeleteJust looking at a "nominal" tax rate isn't necessarily a good way of comparing. At 35% the U.S. is among the higher countries but don't believe that we are that much different from a lot of countries. The real test of tax burden is "effective" tax rates which compares revenues collected against the gross domestic product (GDP). I don't know where we stand on that but I suspect it is well below the 0-35% nominal tax rates. Also keep in mind that the 35% doesn't kick in until profits exceed $335,000. That keeps truly small businesses out of the highest rate.
If the powers that be in Congress get around to dealing with the sheltered foreign profits, I suspect it will be in terms of a tax holiday rather than a long term taxation. A few years ago we had such a holiday for one year during which time a corporation would be taxed only 5 percent if it brought its profits home. The argument was that such a holiday would bring the money home so it could be used for job creation investments. Not sure how all of that turned out but my next posting will say something about what corporations are prone to do with an increase in profits from a tax cut. Suspect that the same alternative uses would also apply to repatriated money from a tax holiday.
There are companies like ExxonMobil that reinvest the profits back into research but I wonder how much of the profit went to line the pockets of the big managers with some big bonuses.
ReplyDeleteJeffrey
ReplyDeleteIf the money is plowed back into research and development, then that money never makes it to the profit line so it is not really a piece of the profits that they are putting into R&D. Don't want to get into this deeper than I know, but it may be that R$D can be used as a tax deduction the same way a homeowner uses the property tax and interest on mortgage. And it is also possible that some R&D spending can be taken as a tax credit which is even better.
You can be sure that a piece of the profits went into bonuses.