The False Promise of Another "Morning in America"

So, here we are.

Tom McClintock and fellow Republicans seem to go out of their way to point out how the Reagan tax cuts gave a boost to the economy back in the 80's. McClintock even goes so far as to reference Reagan's “Morning in America” campaign ad from 1984 during his recent speech in Congress. It's true. Reagan did get tax cuts through Congress and the economy did improve. However, he's not telling the whole story. There wasn't a direct cause and effect. McClintock's memory of the 80’s is foggy as he remembers the good times and seems to forget the rest.

Where we were:

In 1979 Jimmy Carter was President and we were in a recession with high unemployment. There were persistent gas shortages as the Organization of Petroleum Exporting Countries (OPEC) flexed its muscle by making drastic cuts to oil supply. If you're old enough to remember, you'll recall the odd/even rationing days for buying gas and the long line waiting for your opportunity to purchase gasoline at $2.50/gallon. (It was around $0.75 prior to the crisis.) Another thing that people tend to forget was the double digit inflation and high interest rates. It was not uncommon to have an interest rate for your home mortgage somewhere between 10.5% and 18%. During his campaign Reagan asked a fair question: “Are you better off then you were four years ago?” Well, in 1979/80 the answer for most Americans was no, and for that (and many other reasons - E.g. Iran captives) Reagan was elected President.

1973-gas-oil-crisis.jpg

All in all, it was certainly a much different set of circumstances than what we're facing today as a nation.

In 1981 Congress passed the Economic Recovery Tax Act, repeatedly telling us that tax cuts would be reinvested in the economy. These reinvestments would make the economy hum again resulting in more people working, and in turn, paying more in taxes overall. We were told the middle class would get a nice tax cut also as they knew they couldn't get the bill passed without throwing us a bone.

Of course, Republicans today fail to point out that just a year later, Reagan and the GOP were forced to raise taxes with Tax Equity and Fiscal Responsibility Act of 1982, taking away about half the cuts that had been put in place. Then, we got hit again in 1983 when Congress increased the tax to Social Security which included a wage cap, so poor and middle-income households paid a higher percentage. Congress also took away some of our tax deductions - We used to be able to deduct the interest we paid on our credit cards. Finally, in 1984 there was Deficit Reduction Act which rolled back most of the original tax cuts. By the end of Reagan's second term as President, he would sign off on 11 different tax increases making him one of the biggest tax-increasing President's in our nation's history. 

There were other big changes:

Companies changed.  Retirement programs began to shift from employer-paid pensions to employee-paid 401K's.  The program was originally setup to be supplemental savings, not a replacement for employer pension programs. Employees changed too. Instead of working for a company for 40 or 50 years and retiring with a pension, employees became more transient as they sought out higher-paying jobs to help fund their retirement. Over time, companies were forced to pay more for labor, and they began to look overseas for lower labor costs.

So, we tried the "tax-cut-as-stimulus" experiment under Reagan with big tax cuts for the rich. Did the economy improve? Yes, but only after reductions in social programs and increased government spending on defense.  But, the effect on the economy was drawn out over time and all the while, our nation was whip-sawed as we rode a rollercoaster of seismic shifts that ultimately ended with taxes being raised again! The middle class and the poor lost so much, but at least they were working... Until the next recession.

So where are we now?

Congress wants to pass massive cut in taxes with the biggest cuts going to top income-earners. We're being told that these cuts for corporations and the wealthiest Americans would be reinvested in the economy, and that these reinvestments would make the economy hum again (as if things weren't going pretty good right now) resulting in everyone working, paying more in taxes overall. The middle class will get a tax cut also... They know they can't get the bill passed without throwing us a bone. 

If you are old enough to remember, then you know we've heard all of this before.  It was "Voodoo Economics" then, and it's just as nefarious now.

giphy.gif

Of course, to offset the cuts in revenue, they also want to reduce spending on social programs and eliminate many of deductions so many of us depend on: Medicare, Medicaid, school funding, SNAP, CHIP, and SALT to name a few. Meanwhile, military spending sees a dramatic increase with a $700 BILLION defense spending bill. We can think of cuts to social programs as a sort of tax on low and middle-income households.

If all that weren't enough, we now have a report from the nonpartisan Tax Policy Center that shows by 2027 under the House GOP tax plan backed by Congressman Tom McClintock, Households making $5+ million would receive an average tax cut of $300k. Households making below $55,000 would see a tax hike.

But what about jobs? Companies are overseas because labor costs are cheaper. Of the few companies that have remained, most have moved to automation thereby reducing the number of employees and increasing their profit margins.

Trump tells us (repeatedly) that he will put pressure on companies to bring manufacturing back to the U.S. He has said, "If you manufacture offshore, and try to bring [imports] back, it will cost you.”  Well, who do you think it will cost? He is talking about tariffs. Any economist worth her salt will tell us that consumers end up paying those costs. We can think of tariffs as a new tax burden that we must bear.

Furthermore, Trump tells us that the cash companies hold “off shore” will be brought back and invested domestically if we reduce the corporate tax rate.  I am sure that there are some companies that might do this to a limited extent. However, most companies are doing very well right now with strong domestic cash holdings. In reading many company financial statements, most state they have no intention of bringing that money back to the U.S. Instead, they plan to reinvest in their overseas operations. GE, for example, stated in last year's annual report that "At December 31, 2016 and 2015, approximately $82 billion and $104 billion of [overseas] earnings, respectively, have been indefinitely reinvested outside the United States. Most of these earnings have been reinvested in active non-U.S. business operations, and we do not intend to repatriate these earnings to fund U.S. operations." (It should also be noted that the company's effective tax rate in 2016 (ETR) was a mere 8.7%.)

The last time we tried to repatriate overseas cash was in 2004 with the Homeland Investment Act. The result? "Repatriations did not lead to an increase in domestic investment, employment or R&D -- even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained." Instead, they used their cash for stock buybacks, effectively giving that money to their investors. 

So, if companies aren't likely to reinvest capital domestically, then the only way to bring these overseas jobs back are to A) limit (or eliminate) the minimum wage, and B) incentivize companies with subsidies using our tax dollars.

Why did I mention the inflation and interest rates of the late 70’s and early 80’s?  Because, this had a major impact on Trump and his “businesses.” Construction was difficult to fund because it's financed by the banks. So, of course he remembers Reagan and the later 80’s fondly. The tax cuts coupled with lower interest rates are what made him able to buy his gold plated throne. However, the change in interest rates had nothing to do with the tax cuts and everything to do with the changes made at the Federal Reserve with monetary policy.

You can’t have it both ways. Trump repeatedly touts the fact that the economy is better. The stock market is at an all time high (great for investors & big banks) and unemployment is the lowest it's been in more than a decade. This recovery started in 2011 under Obama. So if all of that is true, then why do we need tax cuts that only help the rich? 

Meanwhile

McClintock railed against the budget.  He said:

“The budget resolution sets the spending architecture for the fiscal year.  The House version provided for $200 billion of enforceable mandatory spending reductions over ten years and balanced within the decade. The Senate amendments gut these provisions, squandering the one opportunity Congress has each year to bring mandatory spending under control -- taking us another year closer to a sovereign debt crisis. This is tragic and I condemn it in the strongest terms.”

He was against the budget, until he voted for it.

Are there still people out there hurting in this economy? Yes. There has always been a segment of the population who struggle even in the best of times. We need to help them. Taking a hard hit after the last recession are the baby boomers who lost pensions and were forced into early retirement. They face age discrimination, and if they find jobs it's usually at a far lower salary.

Many of these baby boomers are very concerned. Not only are they in no position to retire in comfort, but many also depend on the very social programs that Congress is trying to cut. They also remember the Reagan years, and remember that the reductions in tax revenue and increased military spending increased the National Debt. They worry about their grandchildren having to pay that debt, and they don’t want to end up holding the bag while the rich get tax cuts.

Tom. If you're listening, we want you to know we see what's going on. We know this tax bill is a scam, and we're not falling for it.