We Need to Get Our Head Straight
Many are buying the right-wing claim that tax cuts will stimulate the economy. History, says Orlando Delogu, tells a different story.
In Maine and the nation, we are caught up in Republican rhetoric that would have us believe that lowering taxes on wealthy individuals/corporations will produce jobs, economic recovery. It’s not true—not in Maine or the nation. Also untrue is the assertion that individual/corporate tax rates on the wealthy are too high—that they are a drag on the economy.
Here is proof: From the Eisenhower presidency to the end of the Clinton era (50 years) we enjoyed long periods of job growth, a buoyant middle class, and generally low unemployment. During this entire period the top federal income tax rate on the wealthy (including capital gains taxes) was far higher than it is today. During the Eisenhower/Kennedy years the top rate was 91%; from Johnson through the Reagan years, it trended down to 70% and then to 50%. During the Bush I/Clinton years the rate dropped to 40%. Capital gains rates for most of this period hovered in the 25% to 35% range. These comparatively high tax rates did not deter job growth, or overall economic prosperity. And they kept federal deficits at acceptable levels.
During the Bush II years, however, tax cutting rhetoric and trickle down economic theories combined to push tax rates for individuals/corporations to their lowest level since the 1930s. The top rate fell to 35%—capital gains rates were reduced to 15%. But these tax windfalls for the wealthy did not ward off the worst recession since the Great Depression. They have not prevented high unemployment. They have not stimulated recovery. What these windfalls have contributed to is a growing federal deficit—period.
On the corporate side of the tax ledger, the rhetoric argues that current tax rates put U.S. corporations at a competitive disadvantage with corporations in other developed nations. Bunk. A recent report by Citizens for Tax Justice points out that among 25 developed nations, U.S. corporate tax burdens ranked 21st. Twenty of the developed nations we compete with impose higher (often much higher) corporate tax burdens than we do.
Another report, Corporate Taxpayers & Corporate Tax Dodgers, 2008–2010, points out that though the formal corporate tax rate in the U.S. is 35%, the wealthiest 280 corporations in the country (all profitable Fortune 500 companies) paid one-half of this rate over the three years surveyed. Their effective tax rate was reduced by subsidies, deductions, credits, carry-back provisions, and other tax loopholes. A third of the corporations surveyed had a federal tax rate of less than 10% and 30 companies paid no federal taxes at all; they each received rebates of taxes paid in previous years. Their federal tax rate averaged minus 6.7%.
In sum, corporate tax windfalls have not warded off recession. They’re not creating jobs. Cutting corporate taxes further, enlarging or extending the current array of tax loopholes in the belief that this will stimulate the economy, seems absurd.
If tax cutting does not create jobs or enable us to climb out of a recession, what does? In a nutshell: an expanded demand for goods and services. In the consumer sector, the pent-up demand spawned by recession and economic uncertainty is beginning to give way. An economy can only mark time for so long. Cars and appliances wear out; home repairs must be made. To facilitate renewed consumer demand, credit (while avoiding the overborrowing of the past) must be made available; responsible lending must be encouraged/facilitated by private lenders and governmental regulatory bodies.
In the governmental sector, beyond freeing up the nation’s lending arteries, this is the time to create demand by making deferred infrastructure improvements. At every governmental level there are roads, bridges, schools, sewer systems, transmission lines that need to be built and/or repaired. These projects both create jobs now, and set the stage for sustained future growth.
In the corporate sector, we must first recognize that corporations in our country are sitting on more than $2 trillion in cash. This hoarded cash can be used to create a demand for capital investment spending to replace outmoded technologies/equipment/plant. This is the ideal time—income return on cash reserves is low, construction costs are low, labor is available. More importantly, this will immediately create jobs, and also sets the stage for future growth.
Current data suggests that these three sectors of our economy—the consumer, governmental, and corporate—are already moving slowly in desired directions, but too slowly. We need to get our head straight. Accelerating all of these demand curves is what is needed. This will create the jobs, the more robust economy we want. Tax cutting—pandering to the wealthy—has not worked. It has only added to state and national deficits.
Orlando E. Delogu, an emeritus professor of law at the University of Maine School of Law, also has undergraduate and graduate degrees in economics.