Ever since the beginnings of the Reagan Revolution in the 1980s, the right-wingers of America have been in overwhelming support of tax breaks in all social classes, primarily that of the very rich. The evidence often cited is that it has resulted in the expansion of wealth, economic prosperity, and increased revenue to the government. But if examined closer than charts that only show the surface, the picture shown is very different from the one often times painted.
FEDERAL REVENUE: TAX CUTS RESULT IN MORE MONEY COMING IN?
It is no secret that as our GDP continues to increase so will the tax revenue that we receive each year. As the White House Office Of Management and Budget displays in it's historical data, GDP has risen almost uninterrupted since 1940 [Chart 10.1], and so have federal revenues in an almost uninterrupted pace as our companies and businesses continue to expand and thrive. It is fallacious to imply that revenues increasing nearly every year is proof that tax cuts increase revenue, for they would have very likely done so regardless, as historical trend dictates. (note: this is an example of a post hoc fallacy). Corporate profits especially typically increase between 10-15% a year with few breaks, as recent trends from the BEA show. In fact, the only years that federal government receipts did not increase post-1964 was:
1971: -5.7 billion
1983: -16.8 billion
2001-2003: -242.9 billion
2007-2009: -463 billion (much of this is due to the 2008 recession)
This comes straight from the federal archives [second column for federal receipts, first for the total]. As the second chart to the right states, revenue growth as a whole during the 1980s was stunted in comparison to the growth in the 1990s, during several tax increases in both George H.W Bush's and Bill Clinton's administrations (not to mention Reagan had some tax increases too!). Once that trend was reversed in George W. Bush's administration, that took a large backwards slide. Revenue received is directly proportional to economic growth, and lowering those tax rates has drastically altered that ratio - revenue must drop as a proportion to a whole, not just revenue alone. That is the primary reason where Reaganomics and the logic to support it fails.
The United States Treasury keeps an entire list of every tax bill passed since 1940 and revenue figures alongside it, with more accurate figures for passed after 1968. These figures provided are intended to measure the effect the various tax cuts and tax hikes have had on our GDP and federal revenue. These are the tax breaks and hikes displayed on page 17 that shows the effect that each post-1968 tax bill has had on our GDP and federal revenue - bills with tax cuts/repeals/credits are on the bottom, bills with tax hikes are on the top:
Revenue Act of 1971
Crude Oil Windfall Profit Tax Act of 1980
Tax Equity and Fiscal Responsibility Act of 1982
Highway Revenue Act of 1982
Social Security Amendments of 1983
Deficit Reduction Act of 1984
Consolidated Omnibus Budget Reconciliation Act of 1985
Omnibus Budget Reconciliation Act of 1987
Omnibus Budget Reconciliation Act of 1989
Omnibus Budget Reconciliation Act of 1990
Omnibus Budget Reconciliation Act of 1993
Small Business Job Protection Act of 1996 (Note that this wasn't an actual tax hike, but it reduced the possessions tax credit so I place it under here)
Tax Reform Act of 1969
Tax Reform Act of 1976
Tax Reduction and Simplification Act of 1977
Revenue Act of 1978
Tax Reduction Act of 1975
Economic Recovery Tax Act of 1981
Tax Reform Act of 1986
Tax Relief Act of 1997
Economic Growth and Tax Relief Reconciliation Act of 2001
Jobs and Growth Tax Relief and Reconciliation Act of 2003
Working Families Tax Relief Act of 2004
American Jobs Creation Act of 2004
Tax Increase Prevention and Reconciliation Act of 2005
Notice how almost every bill passed with a tax hike brought us revenue each year (the 1990 and 1993 Onmibus bills combined bringing us an average of 78.7 billions dollars a year!), and bills with tax cuts bring us massive reductions in revenue (the wave of tax cuts in 1981 and 2001 combined is thought to have brought us a staggering 193.3 billion dollars in deficits a year). These statistics are completely incongruous with the notion that reducing taxes will increase corporate and personal income enough to offset the deficit - the huge losses that followed for years to come left us with far less money to allot to spending in the federal government. Note: These figures are in 2006 dollars.
The figures shown only describe the average of the first four years in regards to the additional deficits or surpluses in revenue they created. The long-term effect of these bills is much more profound, especially considering spending has not decreased in proportion. One of many right-wing policies involve a heavy emphasis on defense spending, which nearly doubled during Reagan's term, and again under Bush Jr's. Reasons such as this are a factor in the exploding deficits characterized by these presidencies despite the opposing claims of "tax cuts paying for themselves" and claims of fiscal conservatism on the right. Some people place the estimated cost of the Bush 43 era as high as 11.5 trillion dollars alone in terms of lost tax revenue and the deficits they helped to create, and with Reagan it may be much higher on account of the fact that his tax cuts have never been fully repealed or removed, and steadily rising interest rates must be paid to keep the deficit from increasing even further.
Now, it's a valid counterpoint to argue that government spending was much of the problem, and to an extent that is true. Spending in proportion to revenue was sharply increased in the 1980s and 2000s relative to the reduced income levels, particularly in military and defense despite the fact that actual spending itself increased at a much more restrained pace, actually aligning with previous historical trends. Obviously, spending should have decreased to compensate for the decreased revenue. But what about the effect of these tax cuts on the middle class? Since 1981, their share of America's wealth has declined and their purchasing power reduced, but the wealth of the top quintile has increased markedly, especially among the top 5% bracket. Tax cuts along with deregulation has had an indirect effect on much of the wealth redistribution to the top, and that is the second failure of Reaganomics - the failure to spread it's supposed benefits to all segments of the population and not just the super-rich.
WEALTH REDISTRIBUTION: WHERE DOES ALL THE MONEY GO?
Understanding why wealth has all gone to the top requires more than just blaming Wall Street. One has to understand how the market naturally distributes wealth and the means to control it. A good place to start is the average worker versus a high-level corporate executive, such as a CEO. The average worker, who as of 2007 makes $18.52, will be fortunate to save a million dollars in his lifetime. His lack of substantial, constantly streaming sources of revenue will hinder his ability to amass a fortune, unless he is able to parlay it into something greater (examples include investments in a new technology and purchasing stocks). But most people don't do this - those that do are likely well-off as it is (see chart 4). But the average CEO in any major company makes an average of anywhere between 250-300+ times the amount of a normal worker's salary, and a lot of that is stock.
There is no singular, solid answer as to what caused our wealth to trickle to the top and why it happened. That's why I'm going to attack this from a number of different angles and explain how it may have come to happen at an ever increasing pace after 1980. A primary reason for this involves deregulation, primarily among the banks and related areas. I'm not going to go too in-depth into it's effects, for that alone would spawn several articles explaining the subject and how economic crashes, such as the Savings and Loan Crisis and the 2008 recession, resulted in a greater ability for the top 1% to accumulate wealth while the rest of America bore the brunt.
In the 1980s, especially in the Tax Reform Act of 1986, the deregulations involving specific S&L banks allowed them to start making high-risk speculative bets with low interest rates, make loans worth more than they were worth, and using supposedly federally-backed deposits to fund various mortgages and other deals, even if they weren't profitable (which they were later found to be hemorrhaging money, but the banks continued to make loans anyways). When the loans finally crashed, the total assets that were affected totaled as much as over half a trillion dollars, and taxpayers had to brunt over 80% of the bailout costs while simultaneously having over 20,000 people losing their entire life savings. When the deal was done, the bailout helped to save the rear ends of the most important banks who helped perpetuate the crash, later bouncing back to even greater heights while the taxpayers suffered.
The loss in the S&L Crisis does not even begin to compare with that of the 2008 so-called "Great Recession", in which Wall Street banks got saved in the forms of the Emergency Economic Stabilization Act of 2008 and the Troubled Asset Relief Program. As a result of being able to offset the massive losses caused primarily by the subprime mortgage loan crisis, inflated oil prices (and the subsequent crash), the real-estate speculative bubble, and the lack of control regarding derivatives, Wall Street began reporting a profit by 2009 despite the rest of America continuing to suffer low house prices, high unemployment, grim job prospects, and the fact that their wealth has been largely wiped out:
So far there are only tentative projections -- based on the price of housing and stock in July 2009 -- on the effects of the Great Recession on the wealth distribution. They suggest that average Americans have been hit much harder than wealthy Americans. Edward Wolff, the economist we draw upon the most in this document, concludes that there has been an "astounding" 36.1% drop in the wealth (marketable assets) of the median household since the peak of the housing bubble in 2007. By contrast, the wealth of the top 1% of households dropped by far less: just 11.1%. So as of April 2010, it looks like the wealth distribution is even more unequal than it was in 2007. (See Wolff, 2010 for more details.)
Our capitalist system isn't just unequal - it's unfair. In 1970, when the tax rate for the highest bracket was 73.5% and our corporate tax rate was 48% as opposed to the current 35%, and the tax rate for the middle class was at roughly 20%, the wealth of the middle class was at an all-time high - wages were at their near peaks, and the middle class was at it's largest. Wealth inequality had been at an all-time low: the Gini Coefficient, frequently used to measure income distribution and inequality around the world, was at it's lowest point and had been declining for several years (see chart 5) - the middle class was even able to pay taxes more than they do now! This would begin to change with the passage of the Tax Reform Act of 1969, passed only a year prior, would both lower the highest taxes on earned income from 70 to 50 percent and not adjust the Alternative Minimum Tax for inflation, putting poorer families at risk to be affected by it. Further more, by the 1980s and again in the 2000s, lowered corporate tax levels would result in the smallest proportion of collected tax income since the 1930s, despite the numerically increasing levels collected by the federal government. On the other hand, the wealth and income levels of the middle class remained stagnant amidst the ever-increasing wealth of the top income quintile.
To bring this all together, my point is that the tax rates, which have almost been almost exclusively lowered on the rich and wealthy, are structured to favor those who have the greater capacity to save and invest their money, as well as being able to multiply it. A person making $20,000 a year who receives a tax hike of 10%, for example, loses $2,000 a year in income - that could mean the difference between paying next month's rent, and his meager income barely allows him to scrape by as it is even with him forgoing basic amenities. A person making $1,000,000 a year whose tax rates go up from 35 to 45% still keeps 550,000 dollars a year - the slight reduction of income has absolutely no effect on his ability to live a very comfortable life despite numerically paying fifty times as much as the poor man who is barely making ends meet as it is. The rich's capacity to make money far exceeds that of the poor - a person who wants to start a business needs capital. A person who wants to invest in the market needs funds. A person who wants to invest in a hedge fund needs collateral. The poor almost always lack all three, and more.
Reaganomics has given those who are pulling in a far greater sum of money to expand their personal wealth because those who benefited most from it ended up more than doubling their personal incomes, because tax rates were nearly halved during his two terms in office. A person making ten million dollars now received nearly twenty, while a person making 20,000 a year received almost nothing more. The person now pulling in 20,000,000 dollars a year can more than double the size and scope of his investments and perhaps expand his company even more, whereas the person making 20,000 a year sees virtually no change, aside from a couple hundred extra dollars a year. Tax hikes on the rich have never resulted in a cataclysmic implosion of our economy and the hemorrhaging of jobs. Tax hikes on the rich (again, the top 10% who own over 70% of our wealth) have been historically proven to add to our federal income and reduce deficits. Because the rich are almost exclusively in positions to improve their wealth and exponentially increase their savings in short time periods, they will have the ability to benefit from the hundreds of thousands to millions of additional dollars they receive from tax breaks.
The simple fact is: we have among the most rigid class systems in the developed world, and the opportunity to advance is a lot less than we think. Despite the claims from people who agree with Reaganomics, the wealth of the middle class hasn't grown at all - it's declined. The wealth of the richest of us has grown exponentially under Reaganomics, and it's been demolished under those in the lower and middle classes. The evidence shown to support their assertions are faulty at best, and they never bring up how America experienced it's greatest boom at a time when tax rates were far higher than they are now - according to their logic, the economy should have been that of a third-world country. I am not advocating that we take away the wealth of the rich - I am happy to see when somebody becomes successful and wealthy. What we've allowed, however, is to let people become successful and wealthy at the expense of many others.
Logan T. Arias