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The Economic Consequences of Republican Tax Cuts

by Steven Pressman

Mar 16, 2022 | Economy

PHOTO CREDIT: 
Eric Crama

Since the 1980s, the Republican Party has had one objective—slashing taxes on the wealthy and on large corporations. This tax cut mania began with President Reagan. It continued unabated with the presidencies of Bush 43 and Trump.

Despite Republican promises that their tax cuts would promote more rapid economic growth, nothing has been further from the truth. U.S. economic growth has fallen by half since 1980. It averaged 4 percent from the 1950s through the 1970s but only 2 percent since then. Furthermore, after 1980 most income gains stemming from economic growth have gone to the top 1 percent. Accounting for inflation, wages and median household incomes in the United States have been nearly flat, while CEO pay has soared from 30 times average wages in the 1970s to 350 times average wages in 2020. Republican tax cuts have not trickled down to most Americans.

And these tax cuts have had negative repercussions. Federal government debt in the United States increased from 30 percent of U.S. gross domestic product in the late 1970s to more than 100 percent today. Lower tax revenues, not increased spending, are responsible for this; in fact, government spending has remained steady at around 20 percent of U.S. GDP since 1980. Like a household that loses income while keeping its spending constant, the government has had to borrow to make ends meet. The fiscal history of the past four decades is clear. When Republicans control the levers of power, the government gives large tax cuts to the wealthy and then borrows back this money from them to pay for the tax cuts. In no sane economic world does this make sense.

There is another downside to giving the wealthy large tax cuts. Without tax revenue, it is hard for the government to provide basic services to its citizens, invest in the future of the nation through infrastructure and education, or maintain adequate social insurance programs. And with climate change becoming a climate crisis, more government spending is needed to deal with the consequences and prevent more damage in the future.

Politically it’s hard to cut spending programs that substantially benefit most Americans, which is one reason federal government spending has remained a constant share of GDP. But this hasn’t stopped Republicans from trying to downsize government to deal with large government debt created by their tax cuts. At times they have succeeded. Social safety nets have been cut, leading to more homelessness and more people going to food pantries. Government infrastructure spending has been cut, leading to roads and bridges that are dangerous to drive across. Reduced government aid to colleges and universities led to increased tuition and fees, and students graduating with greater debt.

Government spending has remained a constant fraction of GDP because of some spending increases. Democrats created a few new programs, such as Obamacare. And while opposed to spending that helps the poor and middle class, Republicans support spending that benefits the well-to-do, such as export promotion programs, government grants and subsidies to corporations, and other forms of corporate welfare. Last, but not least, additional government borrowing leads to rising interest rates on government debt, money which again goes to the rich.

Why haven’t Republicans suffered any political consequences from this?

First, Republicans are adept at lying and call any facts they don’t like “fake news.” Their talking points liken taxes to stealing money from hardworking Americans, when in fact most tax revenue is used to benefit hardworking Americans. Republicans attack government programs for fraud and abuse, as in Ronald Reagan’s infamous made-up claim about “welfare queens” driving Cadillacs while collecting welfare benefits. They cite expanded unemployment benefits during the coronavirus pandemic as the reason firms can’t find workers, ignoring the impact of the health crisis itself and the widespread dissatisfaction with low-paying, benefit-free sources of employment. And they attack government spending as the cause of greater government debt, when the real problem is falling tax revenues as a fraction of U.S. GDP due to Republican tax cuts.

Second, a favorite Republican ploy is to call government spending programs “socialist,” knowing that most Americans have a negative view of socialism. People associate it with Soviet communism and the loss of individual freedom.

Republicans attacked FDR in 1934 when he proposed a government program that would provide retirement benefits to working Americans 65 and older in order to help those unable to save enough for retirement. They called the Social Security Act a socialist program, although the government would own no firms and produce little. Social Security mainly uses tax revenues from current workers to pay benefits to retirees. The only part of Social Security that is run and controlled by government is the administrative apparatus.

Despite Republican attempts to dismantle the program (the last by George W. Bush after his 2004 reelection), Social Security has sharply reduced poverty among the elderly (see my piece “Under Cover of Covid, Republicans Will Come After Social Security as They Have Done Repeatedly Before” in the July-August 2020 issue of The Washington Spectator). Everyone who works and pays Social Security taxes for at least 10 years can collect benefits—nearly 100 percent of Americans reaching age 62. With lower administrative costs than private pension plans, Social Security is able to pay more to retirees than a similar national retirement system that is privately managed. On top of this, the government guarantees monthly Social Security benefits. Private plans cannot do this.

In 1945, Republicans attacked President Truman’s national health insurance proposal as a socialist plot. They attacked LBJ’s Medicare and Medicare programs in 1965 and, more recently, Obamacare, as socialized medicine. This is another Republican lie. Medicine has not been socialized. The government funds health insurance through Medicare and Medicaid because the for-profit carriers in the private sector argue they cannot make enough money on their own insuring the elderly or those with low incomes.

Under Obamacare, the government subsidizes health insurance, making it affordable to people not receiving health insurance at work. Still, even as the program has gained in popularity (as measured by increasing levels of public participation), Republicans in Congress have attempted to repeal, modify, or otherwise curb Obamacare at least 70 times since its inception as law on March 23, 2010, promising to replace it with something better. No Republican has suggested what this replacement would look like.

Elsewhere in the developed world, health insurance is provided primarily by the government. In many countries, governments also provide health care, by owning hospitals and employing care providers. When it comes to life expectancy, infant mortality rates, and other key health indicators, the U.S. system performs poorly compared to nations with more socialized medicine. And other nations do this while spending a great deal less per person than the United States on health care. They also manage to do this without forcing people to take on debt or to declare bankruptcy as a result of their medical bills.

Republican scare tactics today focus on President Biden’s Build Back Better plan. One part of the plan is a refundable child tax credit (see my piece “Child Allowances: a Simple Way to Help Families With Children” in the May-June 2021 issue of The Washington Spectator), which provides cash benefits to households with children. Firms won’t provide extra pay to employees with dependent children because it would raise their costs and make them noncompetitive. This is why every developed nation other than the United States provides cash benefits to households with children. The Center on Poverty and Social Policy at Columbia University estimates that monthly payments to households in 2021 reduced child poverty 26 percent, bringing 3.4 million children out of poverty. Build Back Better seeks to extend this one additional year. The child tax credit will pay for itself in the long run because of the additional future tax revenues and the reduced social spending that accrue from having fewer people grow up in poverty. Although the child tax credit is an investment in our nation’s future, every Senate Republican opposes it. Many call it a pathway to socialism. “Tax cuts for the rich good, tax cuts for everyone else bad” seems to be the Republican motto.

With critical elections later this year and in 2024, Democrats need a strategy to deal with Republican fearmongering and lies. President Truman had a simple one—point out that Republicans call anything “socialist” that helps ordinary people. I would add the following. Point out that Republican tax cuts for the rich have been an abysmal failure for the U.S. economy and have done almost nothing for average Americans. They have increased public debt, led to greater inequality, and provided an excuse to try to cut government spending that benefits most Americans. A different approach is needed. If Democrats want to be elected or reelected, if they want to maintain political power, they need to emphasize that their policy agenda—retirement insurance, health insurance, refundable child tax credits, etc.—aids average Americans. Lies can be countered with truth.

Steven Pressman is professor emeritus of economics and finance at Monmouth University and author of Fifty Major Economists, 3rd edition (Routledge, 2013).

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