There has been a lot of talk about fake news, but we also need to start discussing fake economics.
House Republicans unveiled legislation Thursday calling for massive tax cuts — mostly for corporations, wealthy people and their heirs — that would add $1.5 trillion to the national debt over the next decade.
Senate Republicans and President Donald Trump generally like this approach, although the devil will be in the details. GOP leaders wish they could cut taxes even more, but congressional rules on debt accumulation would allow Democrats to stop them.
Wait a minute: Aren’t Republicans the ones who always complain about government debt when Democrats want to spend money on things such as health care, education, social services and infrastructure?
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Yes, but this debt is different. That’s because it is created by cutting taxes.
How can they justify that? With a myth that goes like this: Whenever you cut taxes for rich people and corporations, they will return the favor by creating jobs and economic growth — so much growth that it will offset those huge deficits.
This magical thinking is called “supply-side” economics. It also is known as “trickle-down” economics, or, as George H.W. Bush famously called it when Ronald Reagan started touting it in 1980, “voodoo” economics.
The trouble with this theory is that it has never worked, and it is unlikely to work now. Interest rates are low. The economy has no shortage of investment capital; it is just not being invested.
Yes, the economy grew when Reagan cut taxes after years of high interest rates and high inflation. But the national debt also grew, from $997 billion to $2.85 trillion.
Bill Clinton raised taxes on rich people and corporations and achieved stronger economic growth than Reagan did (3.9 percent vs. 3.5 percent). Clinton also had four balanced budgets and turned the national debt into a surplus. That surplus was later erased by George W. Bush’s wars and tax cuts and Barack Obama’s stimulus spending, which may have kept the Great Recession of 2008 from turning into a second Great Depression.
When Republican governors and legislators in states such as Kansas and Louisiana have slashed taxes based on supply-side economic theory, the results have been disastrous.
Supply-side economics is the opposite of conventional theory, which holds that businesses invest, expand and hire workers when there is a demand for the products they are selling. That’s why it makes more sense to put money in the pockets of poor and middle-class people through lower taxes or higher wages. They will spend that money and stimulate the economy.
When rich people get tax breaks, they save most of the money. When corporations get windfalls, they reward shareholders rather than hire workers they don’t need because demand hasn’t grown.
So why do Republicans keep touting supply-side economics? Because corporations and rich people want lower taxes, and they make generous campaign contributions to get them. Supply-side economics also is pushed by conservative think tanks funded by rich people such as industrialists Charles and David Koch.
The Koch brothers have invested hundreds of millions of dollars in politics, funding lobbying groups such as Americans for Prosperity and academic programs such as the University of Kentucky’s John H. Schnatter Institute for the Study of Free Enterprise. In September, the UK institute hosted Arthur Laffer, the father of supply-side economics, as the star of a panel discussion about tax reform.
While we’re talking about economic myths, here are two more:
One is that Americans are over-taxed. When you compare tax burdens as a percentage of gross domestic product in the world’s 35 most prosperous countries — member states of the Organization of Economic Cooperation and Development — the United States ranks 31st, just ahead of South Korea, Ireland, Chile and Mexico. Taxes at all levels of American government total 26.4 percent of GDP, compared to the 34.3 percent average of the 35 OEDC countries. The most-taxed countries are at 45 percent or above.
Another myth is that economic growth “lifts all boats.” That was once true. But since the late 1970s, almost all income growth has gone to the wealthy. America’s top 1 percent now have more income than the bottom 40 percent. Tax reform based on fake economics will only make the problem worse.