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Posts Tagged ‘trickle down economics’

President Trump’s Tax Plan: Why Rational Republicans Should Bail

Fri ,10/11/2017

President Trump’s new tax plan looks a lot like Governor Brownback’s tax plan for Kansas, which had been disastrous for the state’s economy. Rational Republicans should realize that if an experiment fails, and fails miserably, there is no point in repeating it. That is particularly true when the economy of the entire country is at stake. Both the economic theory and Governor Brownback’s experiment with the Kansas economy show that Trump’s tax plan is doomed to fail our country. The tax bills now winding their way through Congress will lead to economic stagnation and an increased  in the national debt of $1.5 trillion, both things which are repugnant to rational Republicans.

The Theory is based on Laffer’s curve which is displayed at the right. 

The Laffer curve looks like a normal distribution curve. In theory, if the nation is on the high side of the curve with taxes around 80%, then the curve predicts that cutting taxes will cause a move to the left along the curve, increasing tax revenue. That is likely to improve economic growth.  If the nation is on the low side of the curve with taxes around 40%, then cutting taxes will also lead to the left along the curve,  decreasing tax revenue, leading to a stagnating economy, and certainly a greater public debt.

The United States is now on the low side  of the curve with the high marginal tax rate around 40% – so cutting taxes will not lead to increased revenue or spur economic growth. Laffer should know that, but he has abandoned reason and professional ethics and now just supports tax cuts without reference to his own curve. Kansas paid Laffer $75,000 in consultation fees. His advice, when the Kansas economy was tanking, the public debt was mounting, and job growth was decreasing – was to stay the course. Kansas Republicans finally realized that the experiment had failed. They increased the tax rate, and overrode Governor Brownback’s veto of the tax increase. The governor is now leaving the state before his term is up.

The failure in practice is described by Duane Goossen, who was the Kansas budget director for 12 years prior to Brownback’s experiment:

  • “Just like the Brownback tax cuts, the Trump plan makes dramatic changes to tax policy by consolidating income tax rates and reworking deductions. Most notably, the Trump plan offers an enormous tax break to individuals who receive “business pass through income.” In Kansas this feature has become known derogatorily as the “LLC loophole”, allowing business income to be sheltered from income tax while people who earn a paycheck must pay tax.
  • Given that the same economists who advised Brownback now advise Trump, it’s unsurprising that his administration uses similar arguments to sell its plan: the tax cuts will grow the economy and create millions of jobs; the tax cuts will pay for themselves; everyone will benefit. Brownback said all that, too.”

At the right is a graph showing job growth in Kansas during Brownback’s years. It is lower than the United States job growth and much lower than in California, which has a high tax rate.

  •  Mr. Goossen goes on, “But after five years of the Brownback experiment in Kansas, we know the real result. Kansas has an anemic economy and one of the lowest rates of job growth in the nation. A dramatic drop in revenue broke the state budget, wiped out reserves, significantly boosted state debt, and put public education at risk. And that part about everyone benefiting — well, it turns out that the bulk of the benefits went to the wealthiest Kansans while the tax bill to low-income Kansans went up.
  • The idea that tax cuts will ‘pay for themselves’ or that tax cuts for the wealthy will ‘trickle down’ to the middle class should be added to the list of discredited ideas that sound good but don’t work. The sell job was seductive, but Kansans have the raw experience to grasp that the experiment carried out on us was a failure.
  • Do you know how hard Kansas legislators must labor now to fix the financial disaster? Are you catching on that general fund revenue has fallen $1 billion below expenses? Can you see how all political energy goes into crisis management rather than building our future? Is that what you want for the entire country?”

There you have it.

The Eisenhower Memorial is now being built and the Kansas politicians are using it as a chance to praise Eisenhower.  Eisenhower was a great General and President because he realized that it required requisite resources to get the job done. Under Eisenhower, the top tax rate was 90%. Eisenhower used the money to pay our war debts, rebuild Europe, educate returning GIs, and build the national highway system which ensured economic growth for decades to come. We no longer need a 90% tax rate, but our tax rate is now too low, and cutting it further will deprive the country of the resources it needs.

The the current Republican tax plan is taking shape. The big winners will be corporations and those already wealthy. Though billed as a tax cut for the middle class, the biggest losers will be the middle-class taxpayers and United States economy. Under the proposed plan we will see:

  • “Up to half-a-trillion dollars cut from Medicare and Medicaid
  • Substantial increase in the national debt with no way to pay it off
  • Elimination of state and local tax deductions – designed to hit people who live in “blue” states the hardest
  • Repeal of an itemized deduction for medical expenses – hitting people who rack up large medical bills because of the inadequacies of our health insurance system
  • Repeal of the deduction for interest on student loans
  • Repeal of the deduction for teachers purchasing classroom supplies
  • Slashed incentives for wind energy and electric vehicles, while maintaining most of the permanent oil incentives and extending nuclear energy tax breaks”

Our current Republican tax plan will add over a trillion dollars to the national debt and will not provide the resources needed to take care of the needs of our country and build for the future.. The tax rate we now have is already too low as the national debt is increasing. Cutting taxes further will surely lead to economic stagnation and an increased national debt, both things which are repugnant to Republicans.

(c) 2017 J.C. Moore

 

President Trump’s Tax Plan: a Disaster for the Economy

Sun ,21/05/2017

Article Photo

Trumps new tax plan looks a lot like Gov. Brownback’s tax plan for Kansas, which had been disastrous for the state’s economy.  It is based on Laffer’s curve which is displayed at the right.

The Laffer curve looks like a normal distribution curve. If the nation is on the high side of the curve with taxes around 80%, then the curve predicts that cutting taxes will cause a move to the left along the curve to increased tax revenue. That is likely to improve economic growth.  If the nation is on the low side of the curve with taxes around 40%, then cutting them will lead to the left along the curve, toward decreasing tax revenue. That  likely leads to a stagnating economy, and certainly greater public debt.

We are now on the low side – so cutting taxes will not lead to increased revenue or spur economic growth. Laffer should know that, but he has abandoned reason and professional ethics and now just supports tax cuts without reference to his own curve. Kansas paid Laffer $75,000 in consultation fees. Here is how it has worked out in Kansas as described by Duane Goossen, who was the Kansas budget director for 12 years prior to Brownback’s experiment:

  • “Just like the Brownback tax cuts, the Trump plan makes dramatic changes to tax policy by consolidating income tax rates and reworking deductions. Most notably, the Trump plan offers an enormous tax break to individuals who receive “business pass through income.” In Kansas this feature has become known derogatorily as the “LLC loophole”, allowing business income to be sheltered from income tax while people who earn a paycheck must pay tax.
  • Given that the same economists who advised Brownback now advise Trump, it’s unsurprising that his administration uses similar arguments to sell its plan: the tax cuts will grow the economy and create millions of jobs; the tax cuts will pay for themselves; everyone will benefit. Brownback said all that, too.
  •  But after five years of the Brownback experiment in Kansas, we know the real result. Kansas has an anemic economy and one of the lowest rates of job growth in the nation. A dramatic drop in revenue broke the state budget, wiped out reserves, significantly boosted state debt, and put public education at risk. And that part about everyone benefiting — well, it turns out that the bulk of the benefits went to the wealthiest Kansans while the tax bill to low-income Kansans went up.
  • The idea that tax cuts will “pay for themselves” or that tax cuts for the wealthy will “trickle down” to the middle class should be added to the list of discredited ideas that sound good but don’t work. The sell job was seductive, but Kansans have the raw experience to grasp that the experiment carried out on us was a failure.
  • Do you know how hard Kansas legislators must labor now to fix the financial disaster? Are you catching on that general fund revenue has fallen $1 billion below expenses? Can you see how all political energy goes into crisis management rather than building our future? Is that what you want for the entire country?”

From : http://www.kansas.com/opinion/opn-columns-blogs/article151800857.html

Note added on 11/05/2017: The Eisenhower Memorial is now being built and the Kansas state politicians are using it as a chance to praise Eisenhower for his great leadership. However, they should have learned the lessons from Eisenhower’s leadership. Eisenhower was a great General and President because he realized that it required requisite resources to get the job done. Under Eisenhower, the top tax rate was 90%. Eisenhower used the money to pay our war debts, rebuild Europe, educate returning GIs, and build the national highway system which ensured economic growth for decades to come.

Our current Republican tax plan will add trillions to the national debt and will not provide the resources needed to take care of the needs of our country and build for the future. It is being sold as a tax cut for the middle class, when most of the benefits go to those already wealthy We certainly do not need a 90% tax rate, but the tax rate we now have is already too low, and cutting taxes further will lead to economic stagnation and an increased national debt, both things which are repugnant to Republicans.

Note added on 11/09/2017:The Republican tax plan is taking shape. The big winners will be corporations and those already wealthy. Though billed as a tax cut for the middle class, the five biggest losers will be:
1. Middle class taxpayers. They receive a small rate cut but will lose many of the deductions they rely on.
2. Teachers. They will no longer be allowed to deduct school supplies paid for from their own pocket.
3. College students. The amount of deductible student debt interest has been cut from $2500 to $202 and graduate students will now be taxed on research and teaching assistantships.
4. Mortgage holders. The home mortgage interest deduction will be cut about in half and there is now a limit on how much taxpayers can deduct for state and local property taxes.
5. Charities. A higher standard deduction reduces the number of people who will itemize and claim charitable deductions.
Source:http://www.care2.com/causes/5-big-losers-in-the-gop-tax-plan.html

 

(c) 2017 J.C. Moore

Aristotle, the Pope, and Income Inequality

Thu ,02/01/2014

 

Aristotle, when comparing forms of government, pointed out some of the problems in a democracy. When the poor gain too much power, they will enrich themselves out of the public treasury and the nation will become poor. If the wealthy gain too much power, then the nation will become an oligarchy and the poor will suffer. Oligarchs insist that citizens be treated differently based on wealth, and they argue that wealth is a sign of virtue and merit, and that the poor are poor because they lack those qualities.  Aristotle concluded that: “A large middle class is absolutely essential for a stable and well-run government because the middle class do not covet rule, are not envious, foster friendship because of their similarity, and can act as neutral arbitrators between the rich and the poor.” –  Aristotle’s Politics

There is ample evidence that the middle class in United States has declined sharply, while the country has moved toward oligarchy, allowing the wealthy to enrich themselves at the expense of the middle class, the poor, and also the nation. The chart below shows how the income is now divided in the United States, with the top 1% owning 38% of the wealth and the top 20% owning 82% of the wealth. Not only is the distribution of wealth much worse than what people consider ideal, it is even much worse than what they think it is.

Wealth in Amer 2

According to Senator Bernie Sanders:

“While the very rich get richer, the middle class continues to disappear and we now have more people living in poverty than ever before.  Despite huge increases in technology and productivity, tens of millions of workers are finding it harder to feed their families, pay for health care, send their kids to college or put aside savings for retirement.” In recent years,  95% of all new income has gone  to the top 1%, we have seen a huge increase in the number of millionaires and billionaires. While the average American is increasingly unrepresented in  the political process, the very wealthy are spending hundreds of millions of dollars to justify their wealth and to convince voters to elect candidates who will further their interests.”

The  wealthy consider the money an investment which has paid off handsomely. It has bought tax breaks, loopholes, and subsidies. Many wealthy Americans are even reaping the lions share of many federal programs that were intended to help the poor and disadvantaged. 

Trickle Down economics  is behind the redistribution of wealth that began during the 1980’s, as shown in the chart at the right. Super rich incomeWhen President Reagan came into office in 1980 the top tax rate was 60%, a rate which the wealthy thought was much too high. Arthur Laffer developed the supply side arguments that led to taxes being cut using the Laffer Curve . Mr. Laffer convinced the Reagan Administration that lowering the tax rate would give the job creators more money to invest, which would stimulate the economy and lead to greater tax revenue. Reagan cut the top tax rate to 28%, which put more money in the hands of the wealthy, but little of it trickled down. The economy grew at 3.5%, a lower growth rate than when tax rates were higher, the wealthy got wealthier,  and the national debt almost tripled. The graph at the right shows a narrowing of the income gap when the Clinton administration raised taxes and a widening gap after the 2003 tax cuts.  

Following Laffer’s trickle down theory put the U.S. on a slow spiral into debt,  austerity, and income inequality. Tax rates are now clearly too low  and, according to the Laffer curve, raising taxes should stimulate the economy. Certainly, raising taxes sufficiently would end our national debt problems and the shameless practice of using the national debt for political purposes. However, Congress thinks the problem is that we have not cut taxes enough, and Paul Ryan has proposed a Congressional budget that would further decrease tax rates. Paul Ryan has proposed  reducing the top tax rate to 25%. The nonpartisan Tax Policy Center estimated Ryan’s budget would add $5.7 trillion to the deficit over the next decade and would increase the after-tax income of the top 1% of citizens by 18%.  His budget is a case of ideology trumping practical economics.

 Jobs: Congressman Ryan is still working under the assumption that trickle down economics works, and he argues that further tax cuts would create jobs. That argument is discredited by Nick Hanauer, a billionaire who has helped start many companies. He explained on Ted.com that the rich aren’t the job creators, as job creation now comes from demand, and the demand would come from a large  numbers of middle class consumers, a person making 1000 times as much as the average citizen does not buy 1000 times as much stuff. When someone calls themselves “job creators”‘, they are making a claim as Aristotle pointed out, on their virtue – the status and privileges they think they deserve.  Mr. Hanauer says the 15% taxes that capitalists pay on interest, dividends, and capitol gains and the 35% the ordinary citizen pays on their job earnings is hard to justify. He points out that of the inequality has been justified by the fallacy that ” as taxes on the rich go up, job creation will go down”. His data shows the opposite to be true. Tax vsjobsHe concludes that demand grows the economy, and taxing the rich to pay for investments that benefit all is the best thing we can do for the middle class, the poor, and for the rich as well.

The Pope recently spoke about the problem of economic inequality as it is worldwide. Many countries are in debt because of policies that favor the rich, and the remedy is too often austerity programs that hurt the poor. In his recently published Exhortation, Pope Francis warns the world against the idolatry of money and the false promise of trickle-down economics.
“Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about great­er justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”

 “While the earnings of a minority are grow­ing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ide­ologies which defend the absolute autonomy of the marketplace and financial speculation.”” Con­sequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control.  To all this we can add widespread corruption and self-serving tax evasion, which have taken on worldwide di­mensions. ” In this system, which tends to devour everything which stands in the way of in­creased profits, whatever is fragile, like the envi­ronment, is defenseless before the interests of a deified market, which become the only rule.” – Pope Francis

The IMF: Clearly, there are both sound economic and moral reasons that countries need to act for the common good by correcting income inequality. While the Pope acts to change hearts, the countries’ leaders need to act to make fairer economic policies, raise taxes, and cut out loopholes. The Guardian of financial orthodoxy, the International Monetary Fund, typically calls for nations in difficulty to slash public spending to reduce their deficits. But in this year’s Fiscal Monitor report, subtitled “Taxing Times”, the Fund advanced the idea of “taxing the highest-income people and their assets to reinforce the legitimacy of spending cuts and the fight against growing income inequalities.” There is both a moral and an economic imperative to do so.

(c) 2014 J.C. Moore