Income inequality SHOULD be a result of “personal” ambition and aspiration!
But turn-of-the century GOP trickle-down economics actually creates the very “bottom-feeders” they themselves blame for their provenance by the GOP’s own greedy hand.
By T.L. Dayen
A society’s values and priorities are reflected in how and where it spends and invests its money. Political debates over federal tax policy are not just over the merit of each political Party’s values and priorities, but how federal tax policy can and should affect national economic prosperity. According to Kerbo (2012), taxation as a means for government investment is a form of wealth distribution that is a normal function of government and can be either progressive or regressive. Historically and today, the role and function of federal taxation is perhaps the most contentious of disparaging issues between our two political Parties. When considering the role federal taxation plays in social stratification,
two time periods of American history provide empirical evidence of the economic outcomes created by these two opposing tax strategies.
The contemporary Republican or conservative approach to regressive taxation was initially put forth in a report by the Republican Study Committee’s critique of the Humphrey-Hawkins Act of 1978; influenced heavily by Friedrich Hayek and Milton Friedman’s philosophy of individualism and spontaneous free markets (Jones 2012). The measures presented in this report forged the tax policies known as Reaganomics or trickle-down ‘micro’economics that were intended to spur economic growth and national prosperity (Jones 2012). The contemporary Democratic or progressive approach to taxation is based on an ideology and tax policy put forth by FDR’s 1930’s progressive era New Deal, also known as Keynesian Demand-Side ‘macro’economics. Keynesian macroeconomics remains the bedrock of progressive taxation as a means for economic stability through social mobility and equal opportunity (Himmelberg 2001).
The Progressive Era
Robert Himmelberg (2001) refers to the decade’s pre and post WWII as the “Progressive Era” in where a paradigm shift had occurred in the relationship between the federal government and social and economic issues. The Great Depression (GD) of the 1930’s uniquely encapsulates both the Keynesian macroeconomics that it spawned and the microeconomic policies that caused it. Literature refers to the decade that preceded the GD as the “roaring ‘20’s;” a rather prosperous time for America under three consecutive Republican Presidencies of Harding, Coolidge and Hoover. But it also refers to
the ultimate result of that economic model of minimal taxation, minimal federal investment and minimal business-finance regulations that was the greatest financial collapse in American history.
According to Himmelberg (2001), FDR’s sweeping public intervention into the private sector; that is, unprecedented public/private infrastructure investment in housing, public works, transportation, public lands and various government public infrastructure projects designed to modernize the American civil landscape, inspired the British economist, John Maynard Keynes’ demand-side macroeconomics. Keynes envisioned a mixed economy of a predominantly private sector with an intervening role of government during periods of economic recession. This public/private investment partnership included a progressive tax. FDR’s Revenue Act of 1935 raised corporate and personal income taxes on up to 75% of earnings. But Himmelberg (2001) indicates that the effectiveness of the New Deal relied on more than taxation and investment. It also required three additional new roles of government that would fully define the Progressive Era of the New Deal:
- Stricter and new regulations of the U.S. banking, finance and investment sectors and the private business sector regarding wages, hours and worker rights were both needed to counter initial causes of the GD.
- Government must have a role, when needed, to provide economic relief and/or assistance for those individuals and markets most in need which included the initiation of farm subsidies for American farmers hit hard by the GD and the implementation of Social Security, unemployment and disability insurance.
- Perhaps the most defining aspect of the progressive era, according to Himmelberg (2001), was the idea that government should expect and accept deficits as a normal outcome during periods of investment.
The literature indicates that FDR’s New Deal; specifically the symbiosis of government and business as an effective means of securing national economic stability and socio-economic equity in times of recession and in this case severe depression, was the basis for an unprecedented thriving middle class during the decades that followed into Post WWII. From the liberal perspective, recovery from the GD through centralized distribution of revenue proved that taxation as a means for investment in economic growth and national prosperity can and does produce equitable outcomes (Himmelberg 2001; Madrick 2010).
David Beito (1989) chronicles the severity of the conservative opposition to FDR’s New Deal policies through economic periodicals and industry journals of the 1930’s such as the American Taxpayers’ League’s Handbook on Taxation and the Wisconsin Taxpayer. The literature paints a general consensus among those fortunate during the GD to have not lost everything, but who in fact experienced significant economic leverage comparatively, as literally incensed by a national attitude of government preying on the wealthy, and Americans exploiting the government as “tax eaters.” According to Beito (1989) those who felt unfairly burdened to pay for FDR’s New Deal government programs were pitted against those who benefited from them.
This socioeconomic class consciousness supported conservative Individualism that persisted into the 1970’s and forged trickle-down microeconomics.
Daniel Jones (2012) explains the rise of trickle-down Reaganomics as the conservative remedy implemented by the Reagan administration in response to the economic woes of the 1970’s. Three economic maladies were at issue:
- Soaring inflation
- Soaring fuel costs (Mid-East oil embargo)
- A national economic decline in productivity
In collaboration with the conservative policy think tank, Heritage Foundation; the Republican Study Committee’s 1978 report described four measures that promised to increase capital, productivity, long term employment and raise income levels and standard of living for all:
- Broad and permanent individual and business tax cuts
- Elimination of taxes on capital gains
- Smaller government and minimal regulations at every level of business and commerce
- Reduced deficit through austerity measures to stabilize the dollar.
Upon taking office in January 1981, Reagan removed any remaining economic controls that had been in place by Nixon on oil and petrol and cut taxes on oil profits. That summer Reagan busted the air traffic controllers union and fired all workers who were striking that year. Next, Reagan made sweeping and unprecedented tax cuts to the top tax rate of 70 percent to 50 percent and again in 1986, to 28 percent. This redistribution of wealth to the middle and upper class earners through tax policy, according to Jones (2012), was the process that came to be known as trickle-down economics, and Reagan’s supply-side revolution; the antithesis to Keynesian demand-side tax policy. Trickle-down tax policy was intended to create increased investment by the wealthy that would in turn create more opportunity for everyone.
By 2008, thirty years after the 1978 Republican Committee Study and Heritage Foundation supply side economic recommendations followed by three Republican Presidencies:
- The deficit had been tripled.
- A massive migration of manufacturing to cheap overseas labor markets led to record high corporate profits but also ballooning unemployment rates and local tax bases strapped for revenue.
- Minimal or nonexistent federal regulations and oversight culminated in the financial crash of 2008 wiping out pensions, forcing further layoffs and depleting local tax bases.
- The income gap between the rich and poor was at a historic level (Jones 2012; Madrick 2010).
The literature cites the actual long-term effects of the microeconomic tax policies of Reagan and two subsequent Republican President’s, George H.W. and George W. Bush as the impetus behind not only frequent recessions and high deficits, but that increased costs of health care, housing and education attributed to free market privatization exacerbated government spending on public services and the welfare state; something trickle-down was billed to reduce. Referred to as the “social question,” according to Jones (2012), neither the Reagan nor both Bush Presidencies showed interest in addressing these failures, and in fact, purported that supply-side trickle-down economics simply required a general acceptance that social inequality was an inevitable, yet essential part of economic growth and social progress overall. So, instead of working toward correcting this “glitch” within trickle-down Reaganomics, Reagan conservatives began floating the notion that one’s socioeconomic success or failure depends on an inherent level of “fitness.” Their premise; that
regardless of the socioeconomic “class” in which you find yourself at birth, your financial means are equal to your inherent quality of character and intelligence – Social Darwinism (SD).
Charles Murray firmly alluded to SD when he wrote that public welfare aid supported the “immorality and deviant behavior of the poor” (Kerbo: Murray 1984). In the mid ‘90’s, he and fellow conservative Richard Herrnstein attempted to empirically support the SD theory with research that showed lower IQ scores among the impoverished (Kerbo: Herrnstein and 1994), but their conclusions were staunchly debunked as wildly spurious and their findings grossly misinterpreted. However, this published material is still used today in support of conservative principals of Individualism!
American federal taxation and social stratification today
Contemporary literature available on macroeconomic tax policy draws striking comparisons between the causes and effects of the GD and the financial crash of 2008; specifically an inflated housing market, de-regulation of the financial industry, and prolonged austerity measures neglecting needed infrastructure investment. The literature cites current microeconomic tax policy and austerity measures as preventing a full recovery from the 2008 financial collapse; protracting a broadly depressed economic landscape and historic income inequality. Today, there is call for a renewed investment partnership in the spirit of the New Deal between government and the private sector (Elson 2013; Madrick 2010). An investment partnership requires revenue, but current tax policies are choking government revenue resources. According to Madrick (2010) just 20 percent of American households hold 89 percent of America’s net worth (32 trillion), and that an additional tax rate of just 0.5 percent on this top 20 percent would provide an additional 160 billion per year in federal investment revenue. Madrick (2010) also cites that certain analysis has indicated every two tax dollars invested could over time again return another three to four dollars in future tax revenue.
American businesses, while they benefit from conservative non-regulation policies, are themselves recognizing that conservative austerity measures and regressive tax policy are reducing American house-hold incomes; inhibiting spending and market demand-side expansion (Elson 2013).
America’s crumbling transportation and outdated energy infrastructure is in sore need of public investment (Madrick 2010; Elson 2013). With high paying American jobs in short supply today, Madrick (2010) quotes a Transportation Committee report from the Federal Highway Administration with a model showing that 75 billion in government investment would yield more than 3.5 million jobs and 464 billion in market revenue. In other words, according to Madrick (2010), for every 1 billion invested, 47,500 jobs and 6 billion in market revenue would be created. According to Elson (2013), Business representatives such as the US Chamber of Commerce are actually calling for new government stimulus investment in 21st century transportation and energy infrastructure.
The literature available on federal taxation and American social stratification concurs that there is a correlation between the two. The literature concurs that supply-side trickle-down microeconomics creates greater social stratification and concurs that demand-side Keynesian macroeconomics reduces social stratification. The socioeconomic relationship between federal tax revenue investment and social mobility is not in dispute. Where the literature diverges is what that means to Americans.
The literature advocating for microeconomic Individualism has shown that trickle-down has historically and currently created considerable profit and wealth for those in the top 20 percent income bracket, but also that socioeconomic inequality is an inevitable and therefore necessary outcome of this economic model. Also; that those who benefit from this economic model are of higher quality of character and intelligence, while those who do not are immoral, deviant, and unintelligent. The literature advocating for macro-economic Keynesian Collectivism does not consider 20 percent of Americans enjoying economic growth to be “social progress;” and that progressive policies have historically provided for National prosperity, at all relative levels of the income scale.
If we are looking for federal tax policy that addresses social stratification; that is, promotes socioeconomic stability, social mobility and equal opportunity, the literature clearly indicates that the current microeconomic trickle-down federal tax policy is in direct opposition to these socioeconomic goals. The literature supports the premise that federal taxation as a means of federal investment revenue has a historic and current role as a viable alleviate to contemporary American social stratification and as a stimulus of social mobility.
Beito, David T. 1989. Taxpayers in Revolt: Tax Resistance during the Great Depression. Chapel Hill, NC: U of North Carolina.
Elson, Diane. 2013. “Austerity Policies Increase Unemployment and Inequality-But Don’t Reduce Budget Deficits and Government Borrowing.” Journal of Australian Political Economy. 71:130.
Himmelberg, Robert F. 2001. The Great Depression and the New Deal. Westport, CT: Greenwood.
Jones, Daniel Stedman. 2012. Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics. Princeton: Princeton UP.
Kerbo, Harold R. 2013. Social Stratification and Inequality: Class conflict in historical, comparative, and global perspective. New York: McGraw-Hill.
Madrick, Jeff. 2010. The Case for Big Government. Princeton: Princeton UP.