Politics & Law

The new tax deal: Reaganomics redux

Robert Reich

More than thirty years ago, Ronald Reagan came to Washington intent on reducing taxes on the wealthy and shrinking every aspect of government except defense.

The new tax deal embodies the essence of Reaganomics.

It will not stimulate the economy.

A disproportionate share of the $858 billion deal will go to people in the top 1 percent who spend only a fraction of what they earn and save the rest. Their savings are sent around the world to wherever they will earn the highest return.

The only practical effect of adding $858 billion to the deficit will be to put more pressure on Democrats to reduce non-defense spending of all sorts, including Social Security and Medicare, as well as education and infrastructure.

It is nothing short of Ronald Reagan’s (and David Stockman’s) notorious “starve the beast” strategy.

In 2012, an election year, when congressional Democrats have less power than they do now, the pressure to extend the Bush tax cuts further will be overwhelming.

Worse yet, the deal adds to the underlying structural problem that caused the Great Recession in the first place.

Since Ronald Reagan was president, median hourly wages have barely budged, and America’s vast working and middle classes have taken home a steadily smaller share of the nation’s income (adjusted for inflation). The typical male worker today is earning less than the typical male worker thirty years ago.

Yet the richest 1 percent of Americans is now taking home a larger percentage of the nation’s income than at any time since 1928. And we recall what happened in 1929.

Unless the vast majority of Americans has enough purchasing power to keep the economy going without going ever more deeply into debt, the economy will eventually go over a cliff.

That’s what happened in 1929 and 2008.

By the late 1990s the middle and working classes could keep spending — and thereby keep the economy moving — only by adding debt. This strategy ended when the housing bubble burst in 2007.

Without their spending, there can be no buoyant recovery.

Yes, the pending tax bill will give America’s middle and working classes slightly more cash next year. But only for one year. They won’t spend it. They’ll use it to help pay down their debts.

Will lower taxes on the rich spur them to create more jobs? Not a chance. Since 1980, Reagan’s supply-siders have said lower taxes on the rich will trickle down to everyone else. Nothing could be further from the truth.

Look at history.

During the almost three decade spanning 1951 to 1980, when the top rate was between 70 and 92 percent, the average annual growth in the American economy was 3.7 percent.

Between 1983 and the start of the Great Recession, when the top rate ranged between 35 percent and 39 percent, average growth was 3 percent.

Supply siders are also fond of claming that Ronald Reagan’s 1981 tax cuts caused the 1980s economic boom. There is no evidence to support this claim. In fact, that boom followed Reagan’s 1982 tax increase. The 1990s boom likewise was not the result of a tax cut; most of it followed Bill Clinton’s 1993 tax increase.

Nor did George W. Bush’s tax cuts trickle down. Between 2002 and 2007 the median wage actually dropped. And Bush’s record of job creation was pathetic relative to Bill Clinton’s, when taxes were higher. Under Clinton, America added 22 million net new jobs. Under Bush, barely 8 million.

So why are Democrats voting for Reaganomics?

They say they have no choice — either vote for this or watch taxes rise on everyone starting January 1.

That Democrats have allowed themselves to get into this fix is a testament to either their timidity, obtuseness, or dependence on the campaign contributions of those at the top.

Cross-posted from Robert Reich’s blog.

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Comments to "The new tax deal: Reaganomics redux":
    • Yes you are absolutely correct, only the top 1% are winners of this bogus Tax Deal. Now, the remaining 99% must face reality and admit we had a part in this financial meltdown, too. We are not victims, and if we are willing to take rigorous inventory of our actions, motives and true intentions then we (99%), will not be caught in between a rock and a hard place, the next time. In the mid-1970’s, when housing prices started to skyrocket did anyone ask why, who and what was going on? Because in the early 70’s our parents were able to purchase 3 bedroom homes in Northern California for around $60,000. Then literally overnight, the $60,000 became $120,000 and then $300,000 within 18-24months it went to $450,000 and continued to increase almost hourly. Prior to the sudden increase, our grandparents generation had sold their homes for a modest return, average purchase price $6,000 sold 20 years later for $60,000. Did incomes suddenly increase? (the answer is not hardly) What had been an unspoken bond of one generation helping the next generation was shattered by plain old greed. A small group of individuals working with realtors/appraisers in collaboration w/loan companies starting purchasing vast quantities of our grandparents properties for $60,000 immediately turning around and selling them for $120,000. In the 1980’s another ‘no brainer’ the Credit Card which was suppose to be used only in the case of emergency, became our reward for everything including breathing because “we deserved it”. We (99%) have to get back to the basics, and like our grandparents work hard with integrity and do not buy it if we cannot pay cash.

      [Report abuse]

    • Yes you are absolutely correct, only the top 1% are winners of this bogus Tax Deal. Now, the remaining 99% must face reality and admit we had a part in this financial meltdown, too. We are not victims, and if we are willing to take rigorous inventory of our actions, motives and true intentions then we (99%), will not be caught in between a rock and a hard place, the next time. In the mid-1970’s, when housing prices started to skyrocket did anyone ask why, who and what was going on? Because in the early 70’s our parents were able to purchase 3 bedroom homes in Northern California for around $60,000. Then literally overnight, the $60,000 became $120,000 and then $300,000 within 18-24months it went to $450,000 and continued to increase almost hourly. Prior to the sudden increase, our grandparents generation had sold their homes for a modest return, average purchase price $6,000 sold 20 years later for $60,000. Did incomes suddenly increase? (the answer is not hardly) What had been an unspoken bond of one generation helping the next generation was shattered by plain old greed. A small group of individuals working with realtors/appraisers in collaboration w/loan companies starting purchasing vast quantities of our grandparents properties for $60,000 immediately turning around and selling them for $120,000. In the 1980’s another ‘no brainer’ the Credit Card which was supposed to be used only in the case of emergency, became our reward for everything including breathing because “we deserved it”. We (99%) have to get back to the basics, and like our grandparents work hard with integrity and do not buy it if we cannot pay cash.

      [Report abuse]

    • I agree that our main problem is a severe imbalance in the income and wealth distribution in the country. This problem is epitomized by the immature characterization of the estate tax as a “death tax”. This is the problem epitomized by calls for a flat tax. We can’t have government operating on thin air. If we believe in government, then we must believe without apology in progressive taxes, or the sharing of the burden. The rejection, popular in the wealth supported media, of proportionate assessment of the income stream and assets of the country for the support of government is leading to national bankruptcy. And this state of affairs is fully the fault of the wealthy, because, very simply, no leader in politics or law or business or health or the media can be named, who is not wealthy. The wealthy call the shots. In order for the country to get its senses back, the wealthy must be brought to account. That must be the operating principle. As in PROBATE LAW, where heirs do not get anything until the debts of their forebears are paid, so for the country as a whole, if the leaders and the wealthy have consumed the income and assets of the country, leaving it in dire debt, then the heirs of that generation of the wealthy, who put their country in debt, should not reap and enjoy their inheritances scot free until estate and income taxes have brought their country back to solvency, until their wealthy forebears profligacy has been repaid. That is the reason progressive income taxes and estate taxes are always a necessary part of the operating machinery of prudent, solvent, and long-lived countries. To whom much is given, much is expected.

      [Report abuse]

    • Kurt

      Well, the milk is spilt. I had so hoped that the milk. the $700 billion revenue produced by not extending the Bush tax cuts for the top 2%, could have funded reimbursing private employers for the cost of hiring the unemployed. A $230 billion outlay a year could have resulted in the hiring of well over 5,500,000 unemployed Americans immediately, and this support to the economy could have been sustained for 3 years with the money now thrown away on the rich by Obama and his Republican collaborators. The unemployment rate could have immediately been dropped down to 6%, which would have brought immediate collateral relief for the foreclosure crisis. And it would not have raised the deficit. Well the moment for America to have demonstrated its smarts is now lost. Which shows the price of polarized government. “A house divided cannot stand.” Especially with 25,000.000 unemployed and under-employed.

      To regain composure let me suggest a weaker, but still smart way forward. Certainly it would not in any way increase the deficit to reimburse private employers who hired the unemployed by paying those employers the $300/week unemployment insurance they would be saving the government and paying those employers the income taxes those hired employees are now able to pay the government thanks only to the fact of those private employers’ act of hiring. Some more milk for Washington to spill ?

      [Report abuse]

    • kurt

      I agree that our main problem is a severe imbalance in the income and wealth distribution in the country. This problem is epitomized by the immature characterization of the estate tax as a “death tax”. This is the problem epitomized by calls for a flat tax. We can’t have government operating on thin air. If we believe in government, then we must believe without apology in progressive taxes, or the sharing of the burden. The rejection, popular in the wealth supported media, of proportionate assessment of the income stream and assets of the country for the support of government is leading to national bankruptcy. And this state of affairs is fully the fault of the wealthy, because, very simply, no leader in politics or law or business or health or the media can be named, who is not wealthy. The wealthy call the shots. In order for the country to get its senses back, the wealthy must be brought to account. That must be the operating principle. As in PROBATE LAW, where heirs do not get anything until the debts of their forebears are paid, so for the country as a whole, if the leaders and the wealthy have consumed the income and assets of the country, leaving it in dire debt, then the heirs of that generation of the wealthy, who put their country in debt, should not reap and enjoy their inheritances scot free until estate and income taxes have brought their country back to solvency, until their wealthy forebears profligacy has been repaid. That is the reason progressive income taxes and estate taxes are always a necessary part of the operating machinery of prudent, solvent, and long-lived countries. To whom much is given, much is expected.

      [Report abuse]

    • Ella

      Yes you are absolutely correct, only the top 1% are winners of this bogus Tax Deal.

      Now, the remaining 99% must face reality and admit we had a part in this financial meltdown, too. We are not victims, and if we are willing to take rigorous inventory of our actions, motives and true intentions then we (99%), will not be caught in between a rock and a hard place, the next time.

      In the mid-1970’s, when housing prices started to skyrocket did anyone ask why, who and what was going on? Because in the early 70’s our parents were able to purchase 3 bedroom homes in Northern California for around $60,000. Then literally overnight, the $60,000 became $120,000 and then $300,000 within 18-24months it went to $450,000 and continued to increase almost hourly.
      Prior to the sudden increase, our grandparents generation had sold their homes for a modest return, average purchase price $6,000 sold 20 years later for $60,000.
      Did incomes suddenly increase? (the answer is not hardly) What had been an unspoken bond of one generation helping the next generation was shattered by plain old greed. A small group of individuals working with realtors/appraisers in collaboration w/loan companies starting purchasing vast quantities of our grandparents properties for $60,000 immediately turning around and selling them for $120,000.
      In the 1980’s another ‘no brainer’ the Credit Card which was suppose to be used only in the case of emergency, became our reward for everything including breathing because “we deserved it”.
      We (99%) have to get back to the basics, and like our grandparents work hard with integrity and do not buy it if we cannot pay cash.

      [Report abuse]

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