WHERE TAXATION IS CONCERNED, CITIZENS WANT FAIRNESS AND ECONOMISTS WANT EFFICIENCY
Part 1:
The Current State of the Union and How We Got Here
By Edward J. Dodson, M.L.A.
Beginning with Ronald Reagan’s 1980 Presidential campaign, the issue of tax policy became central to the ideological and policy debates of every candidate campaigning for office, from city mayor on up. Americans were then facing a new and unwanted reality. Producers in the United States no longer dominated global markets. Already at this time many firms domiciled in the U.S. had moved their operations to other countries in order to establish a market presence and to lower the all-in costs of doing business. Simultaneously, everyone everywhere was trying to respond to the dramatic increase in the cost of fossil fuels, even as stagflation brought the global economy to its knees.
Mainstream economists had no answers. The statistical correlation that for several decades validated the Phillips Curve[1] disappeared almost overnight. Keynesian demand management no longer worked to soften recessionary downturns or shorten their duration. This opened the door for the introduction of economic and tax policies aligned with Ronald Reagan’s commitment to reduce the Federal government’s role as social engineer and director of market forces.
THE DOWNSIDE OF SUPPLY-SIDE ECONOMICS
The “supply-side” analysis of U.C.L.A. professor Arthur Laffer was brought to Ronald Reagan by the then Congressman Jack Kemp. Early in 1983, I wrote to Representative Kemp to express my view that what was being referred to as “supply-side” economics ignored the important distinction between assets we produce (i.e., capital goods) and assets provided to us by nature, the supply of which is inelastic and therefore insensitive to changes in price. I sent a copy of this letter to Professor Laffer, who replied without really responding to the points I raised with Representative Kemp. The policy to be embraced by the Reagan Administration was the reduction in marginal tax rates on incomes regardless of their source(s).
Although not all Republicans bought into the “supply-side” idea that lower marginal tax rates on higher incomes would result in greater investment in economic growth and bring in more revenue at the same time, the approach was consistent with Reagan’s call for a “new Federalism.” That is, for a relationship between the states and the Federal government characterized by a return to States’ responsibility for social and economic programs.
The Reagan Administration’s first step was The Economic Recovery Tax Act of 1981, which cut the highest personal income tax rate from 70% to 50% (but also increased the maximum rate of taxation on so-called capital gains from 20% to 28%, a modest recognition that the gains on the sale of financial assets were derived rather than earned). In 1986. a second cut in the personal income tax reduced the highest rate down to 38.5% with a schedule annual decrease down to 28%. From that point on, the nation’s economic future fell into the hands of Administrations and Congresses committed to reducing taxes regardless of the real world consequences. One consequence of this was increasing budget deficits and a constantly-rising National Debt. Creative accounting and revenue shifting strategies served to present presiding governments in the most positive light. In truth, political ideology now justified economic outcomes that resulted in the accelerated concentration of income and wealth.
THE TRUMP MESSAGE: “DON’T WORRY, BE HAPPY”
Fast forward to 2020 and the deficit is forecasted to exceed $1 trillion. By the end of this year, the national debt will in actuality exceed $24 trillion. Historically low rates of interest on this debt have enabled the Federal government to service this debt without dramatic cuts in spending. However, if the Federal Reserve Board should decide to target inflation by increasing interest rates, the situation could become far more serious. At an average rate of interest of just 3%, the Federal government would need to raise $720 billion annually to service the National Debt. Where would this revenue come from?
There is no doubt that the tax policies incrementally adopted since the early 1980s have rewarded those with the highest incomes and individual and household assets. Other changes in law and public policy (implemented by Administrations and Congressional majorities of both main parties) have had similar effects. Back in 2014, I gave a talk[2] tracing the history of tax reduction and financial deregulation that has contributed to the accelerating concentration of income and wealth condemned by Bernie Sanders and others left-of-center. Since Donald Trump’s election as President, the process has continued unabated. A Sanders Administration (or any Democrat-led administration) will likely need a strong majority in both the House of Representatives and the Senate to reverse the nation’s economic course.
The Trump Administration tells us that the policies they have put into place have already resulted in record economic growth and are raising living standards for millions of households. Every party that holds power emphasizes the positive and minimizes the negative effects of its policies. Historically in the United States, sitting Presidents are voted out of office not because of high unemployment but because of high inflation. The reason for this is easy to understand. The chronically unemployed have passed the point of anger and have entered the realm of despair. They are consequently less likely to vote than those who are angered by the rising costs of living.
So, what do the actual statistics say about the present state of the United States economy and our society? After a thorough examination of a broad spectrum of trends affecting our population, our economic output, and our environment, the picture looks to me to be quite bleak.[3] We are a society addicted to debt, and history reveals that the inevitable outcome is financial and economic collapse when the mountain of debt can no longer be serviced let alone repaid.
Most of the media attention has focused on the huge amount of student debt carried by Americans. Other sectors of the U.S. economy are even more highly leveraged. Total outstanding revolving debt, which is chiefly made up of credit card balances reached $1.07 trillion In May 2019. Total household debt hit $13.86 trillion in the second quarter of 2019. This total is $1.2 trillion higher than the previous peak in the third quarter of 2008.
Fortune Magazine reported in June of 2019 that the National Association of Business Economics survey of over 50 professional economic forecasters saw the economy growing but a slower rate in 2019 and 2020. They also believe a recession is very possible by the time the next U.S. President is inaugurated in 2021.
During 2018, banks received $104 billion in interest and fees from their credit card holders. However, Bloomberg reported in May that credit card losses at the biggest banks are outpacing auto and home loans. Collectively, the four largest banks in the U.S. recorded nearly $4 billion in charge-offs from credit cards in the first quarter of 2019 alone.
A growing concern is the aggregate credit card balances carried month to month, which totaled $420 billion in late 2018. The average U.S. household with credit card debt carries nearly $7,000 in revolving balances, subject to high rates of interest that make difficult paying off what is owed. As of the end of the second quarter 2019, payments on about 5.2% of credit card balances were 90 days overdue.
The Federal Reserve Bank of New York reported in May of 2019 that mortgage debt on one-to-four unit properties was $9.2 trillion at the end of the first quarter of 2019. As property prices continue to increase, property buyers are incurring increasing levels of mortgage debt. The economics are straightforward. Historically-low mortgage interest rates enabled buyers to qualify for higher levels of borrowing, and this was capitalized by market forces into higher asking prices for property.
As of the end of the first quarter 2019, Americans owed $1.16 trillion in outstanding automobile loan debt. Banks and other lenders are expressing concern that the average amount financed is rising about 3.1% a year in dollar amounts. Moreover, the average new car loan originated by a finance company is nearly $30,000, an increase of more than $5,000 from 10 years earlier. Serious auto-loan delinquencies––90 days or more past due, jumped to 4.69% of outstanding auto loans and leases in the first quarter of 2019. This put the delinquency rate at its highest level since the fourth quarter of 2011.
IS BERNIE THE RIGHT PERSON FOR THE JOB?
As I hope I have made clear, I am convinced that the problems plaguing the economy of the United States as well as the inequities of income and wealth distribution are systemic. The best that any different Administration can hope to accomplish without fundamental systemic reforms is to soften the effects of unjust laws and unfair taxation. So, the question for citizens deciding how to vote is whether The Sanders Plan has the potential for a higher level of mitigation than the plans put forward by the other Democratic Party candidates. I offer my views on The Sanders Plan in a second post.
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[1] The Phillips Curve was an economic relationship stating that inflation and unemployment have a stable and inverse relationship. It was developed by economist A.W. Phillips.
[2] http://www.cooperative-individualism.org/dodson-edward_cause-of-2008-crash-2014-sep.wav
[3] Every year I pull together statistics for a report on “The State of the U.S. Economy and Society.” I have used this material for a semester-long course taught in the classroom. The PowerPoint-based lectures are all converted into narrated videos and uploaded to my channel on Youtube: https://www.youtube.com/playlist?list=PLTlo8JGtAs0LILQIhj-qhj_Xn8pnV4_ZL
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Ed, that was excellent