I merely point out that lower taxes for 30 years have failed to produce what you and yours have said they would all along.

How easy the economic disaster of the 70’s is forgotten.

1980: Kady buys her first house, gets her first professional job. Inflation rate, 14%. Mortgage rate, 15.75% on an ARM, and I felt lucky to get it.

Unemployment rate, 6.5% and rising. GDP Growth? Negative. Dow? On an inflation adjusted basis, it peaked in 1965. By 1980, it had fallen off by more than half from that peak. Nobody made a fucking dime in the capital markets from 1965 to 1982. The Phillips Curve, loved by liberal economists, said that the above couldn't happen. Oops.

Problem? Multiple. Too much currency in circulation, for one thing. Too much reliance on foreign oil. But the largest problem was the stranglehold the tax system had on investment dollars. To avoid high marginal tax rates, the government forced people of means to stuff money into financial engineering instruments that provided no growth to the economy, but sucked up dollars, all to avoid those punitive marginal rates. So, a new term was coined to describe the economy at the time:

Stagflation

Has a nice ring to it, doesn’t it? I hope you like it, because that’s right back to where people like you want to take us. There’s a saying: Those who are ignorant of history are doomed to repeat it.

At any rate: The tax code was FLATTENED. Upper marginal rates dropped from 70% to 28%, ultimately. Those financial engineering tools that had rich people investing 10 grand in the hind half of a pig so they could get a 40 grand decrease in their AGIs went away. Money came flying into the economy in search of something to do; what it decided to do was go into real estate, the stock market, and the first “round” of tech venture capital (Sun Microsystems, Pyramid Technologies, Silicon Graphics, Lucid Software, Symbolics).

Net worth of the citizens skyrocketed. Inflation dropped. Mortgages rates subsided. GDP took off, hitting 7.3% in 1984. The Dow moved from 2000 to 16000 over the next 15 years (inflation adjusted).

Yea, all that really sucked. :-)

What happened next? Well, the Dems convinced GHWB to raise taxes. The country went into a slight recession, GDP hitting -.1% in 1991. It recovered well in 1992, hitting 3.6% growth, but it was too late to save the Bush presidency. Clinton was elected into a strong economy, and his first action was to break his campaign promise and raise taxes.

The recovery froze in its tracks. GDP growth backtracked to 2.7% the following year. Growth was OK for the rest of the Clinton 1st term, but nothing outstanding.

Capital Gains Taxes. Funny thing about cap gains taxes. Although income tax cuts usually only bring back about 2/3 of the money cut to Treasury, cap gains cuts bring back 100% of the loss; even candidate Obama admitted that on stage in debate back in 2008 (he still supported them being raised out of “fairness”, but let’s not digress).

At any rate, cap gains taxes are either the fuel or the brake for venture capital investment. When a venture capitalist feeds data into whatever model they like to use to decide if a venture is worth seed or a second round, it’s the cap gains tax rate which matters to them most. If that rate is low, then their models look a lot better than if that rate is high.

What feeds Silicon Valley? Venture capital, of course. So, when Clinton lowered cap gains taxes from 28 to 20% in 1997…….BOOM!!!!!! Dot com EXPLOSION! GDP growth rates of 4–5%, good growth in the Dow (NASDAQ went nuts).

2001: Mr. Bush takes over in a period of budgetary surplus, but with the economy falling into recession. A lot went on in 2001, as you well know, and it’s extremely difficult to parse the dot-com bust from the tax cut from 9/11 from the Iraq disaster.

So I won’t try; I don’t think anyone can do it, to be honest. What I can tell you is that Bush did cut taxes, and GDP growth rose from anemic to 3.8% in 2004. Because, although you don’t believe me, I try to be HONEST, I will tell you that hours of crunching numbers on this tax cut have left me unconvinced that this particular tax cut was causal to the recovery from the extended slow-growth period that plagued the US from 2001–2003.

All I can tell you is that it didn’t hurt the recovery.

Mr. Obama: We have had the longest period of slow/negative growth under Mr. Obama since the early 1930’s. Actually, under Mr. Obama, it’s the longest period of slow/negative growth ever. For some reason, this doesn’t bother people, and people are not running around in search of the reasons why. I suppose it’s going to be like the Great Depression, where we really didn’t understand it until 30 years ex post facto. At any rate, Mr. Obama certainly didn’t lead a tax cut environment, and the economy behaved expectedly.

CONCLUSION

Now, let me remind you of my prior contention. TAX POLICY IS NOT CORRELATED WITH INCOME or WEALTH INEQUALITY. That’s simply a mathematical fact. I’ve written about this a couple of times, articles which you have apparently not seen. In this one, I do the math on inequality and correlation to various factors:

And in this one, there’s a nice chart that shows that although we have a problem in inequality for sure, we’re not the only one. Inequality in Sweden, for one, has grown even more than in the US.

What you see from the short but somewhat interesting history above is that, sorry, tax policy HAS IN FACT delivered, over short term periods, precisely what the people like me (let’s put the politician’s claims on the side for a moment) say it will do. To wit:

  1. Tax cuts generally stimulate economic activity; tax increases generally act as a headwind to economic activity. That’s so intuitive it’s hard for me to imagine why I have to say it, but I guess I do.
  2. Economies are complicated things. There are always lots of headwinds and lots of tailwinds competing to move an economy forward or hold it back. This results, at times, in unexpected results. For example, in 1932, Hoover raised taxes, and the economy tanked, dropping off nearly 13% in one year. Then, in 1936, FDR raised taxes, and the economy took off, GROWING at nearly 13% in that year. Obviously, in the 1930’s. there was a lot of shit going on, which is why the same action from different presidents had two opposing and rather shocking results.

So, I contend that you are HISTORICALLY INCORRECT; that tax cuts always stimulate economic activity TO SOME EXTENT, that extent dependent on other factors (such as war, to name one, or misallocations of capital driven by international trade where other nations have lower tax rates). Further, the TYPE of economic activity that is stimulated is further dependent on those other factors, such as the existence of sufficient investment capital, and/or the aformentioned misallocation of capital in international trade.)

Now, what’s going to happen with THIS tax action? Well, the proper response whenever there’s a major change in the tax scheme is “who the fuck knows”. But, we can make some educated guesses:

  1. On the individual side…….not much. There will be some demand side stimulation due to low and middle income people having some extra money in their paychecks. Dropping marginal rates on the upper income bracket is offset by the mortgage and SALT caps to a large extent, and I wouldn’t expect any major stimulation of the economy to come from that.
  2. The corporate tax changes, OTOH, is probably the best thing the government has done economically in two decades. Changing to a territorial system (like the rest of the world uses) and dropping rates to close to the world average eliminates the incentive to stash profits and invest abroad rather than in the US.

So, sorry……to go back to your original contention….

I merely point out that lower taxes for 30 years have failed to produce what you and yours have said they would all along.

You’re just flat out wrong.

Written by

Data Driven Econophile. Muslim, USA born. Been “woke” 2x: 1st, when I realized the world isn’t fair; 2nd, when I realized the “woke” people are full of shit.

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