Trump promised up to 6 percent growth as a result of the tax cuts, but that never appeared. Instead, Rattner reports, “At the end of December, Bloomberg Economics estimated that the trade war would cost the U.S. economy around $316 billion by the end of 2020.”
Republicans’ singular focus on tax cuts as the sole engine of growth and jobs needs to be reexamined. Obama’s 2013 tax hike, which raised the top marginal tax rate to 39.6 percent and increased the long-term capital gains rate for wealthy individuals, did not slow the economy. In fact, the Associated Press reported in 2016 that “employers added 5.8 million jobs in 2014 and 2015 — the strongest two-year growth since the late 1990s.” Those two years saw economic growth of 2.45 percent and 2.88 percent, respectively. The growth rate following Trump’s 2017 tax cut, by comparison, was 3.18 percent in 2018 and 2.33 percent in 2019.
That the economy continued to grow despite an increase in taxes for the wealthy in 2013 has led some economists to make the case that “income tax rates on the wealthy would need to be much higher — above about 60 percent — to significantly reduce their share of national income,” the AP reported. Emmanuel Saez, an economics professor at University of California at Berkeley, wrote in a paper that “top incomes do not appear to be very sensitive to top tax rates.” This makes sense, especially as the income inequality has increased and the rich have gotten even richer. They are not going to stop working or investing because only a modest portion of that income will be taxed at a higher rate. They would still be getting richer.
While former vice president Joe Biden says he will raise taxes on those making more than $400,000, Rattner points out: “Moody’s Analytics recently estimated that the economy would expand faster under Mr. Biden, by a full percentage point if the Democrats also retake control of the Senate. In that scenario, Moody’s says, a Biden presidency would also mean 7.4 million more jobs created than under Mr. Trump, who would end his second term without unemployment having fully recovered.”
This highlights why the 1980s supply-side tax philosophy is badly out of date. It made sense that the economy took off when President Ronald Reagan dramatically dropped the top bracket from 70 to 50 percent and then to 28 percent. When Republicans now argue that small reductions are going to have similarly spectacular results, they are selling snake oil. As the Economic Policy Institute put it, “After decades of tax cutting, it is clear that top tax rates are well shy of revenue-maximizing rates. … Economic research does not support claims of large supply-side growth effects in the second half of the 20th century.”
Republicans have never given up their obsession with tax cuts for the rich. One can be charitable and conclude they simply have misapplied a formula that worked in particular circumstances in the 1980s. A more cynical view is that their donors and upper-income supporters want the money regardless of whether the economy as a whole benefits.
If Biden is elected and does increase taxes for the super rich while engaging fiscal stimulus (e.g., investment in green jobs and infrastructure) and providing other income enhancements to working-class and middle-income workers (e.g., a hike in the minimum wage, subsidized child care, guaranteed sick leave), we will see if Moody’s prediction was accurate.
Meanwhile, Republicans from both a policy standpoint and a political strategy will need to rethink an economic philosophy in which the answer for any economic or social ill is “cut taxes for the rich.” They also need to drop trade protectionism and restrictive immigration policies, both of which act as a drag on the economy.
A data-driven approach for the economy would recognize that we need a balanced economic approach geared to 21st-century realities, including massive income and wealth inequality, global competition, decaying infrastructure and climate change. If Biden and a Democratic Congress can pull off that, we may get robust growth once again — and seal Democrats’ political domination for a generation.
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