Tax Rates and Revenue: Putting Reaganomics to Bed Once and For All

THIRTY YEARS IN THE MAKING!

What About Population Growth?
Those who talk about tax revenue going up or down, or the GDP going up and down, never include population statistics. It makes all the other talk silly, because since 1947, the US population has more than doubled. It stands to reason, that this accounts for more jobs and more consumers, thus increasing GDP and tax revenue no matter what the government does. So, the best we can do is to look at relative changes, or where the trend was going before it changed. It should always go up at at least this rate of population growth.




When We Talk About Tax Revenue, Are We Talking About Personal Taxes or Corporate Taxes Or Both?


This also makes a difference. If we look at the difference that lowering personal income taxes has made from Reagan on, we see both ups and downs with most of the downs occurring in the last 10 years from GW Bush through the present. There is a flattening during Bush senior when he raised taxes to stop the growth of the Federal deficit, and then it improves again as a result of the Clinton era economic growth.

But, you will never see the GOP make the point that during Reagan's first 4 years, personal income tax revenue was flat to a little down between 1982 and 1983. Unemployment was at 9.5% in 1982. Reagan lowered the top tax rate from 70% to 50% in 1981, and lowered it again in 1986 to 28% which increased the National Debt far more than it increased revenue. We don't see any wondrous increase in the tax revenue in this graph, do we? Not until the Clinton years.

The National Debt went from 33% in 1980 to 51.9% of GDP by the end of 1988. And, to cover the debt, we increased borrowing from $700 billion to $3 trillion and went from being the world's largest creditor nation to being the world's largest debtor nation. This is far more evident in the graph below. This is the result of Reaganomics.

During Reagan's administration, it is recorded that Federal receipts grew at 8.2%, but since 2.5% of that was his increase in Social Security receipts, his income tax receipts grew at only 5.7% and his Federal outlays grew at 7.1%. This is why our National Debt increased. In Reagan's defense, most of this was an increase in Defense spending, bringing the defense budget back to where it had been at the end of the Vietnam conflict even though we weren't at war. Why do I say, "In Reagan's defense"? Because the GOP does not seem to count DOD expenses in the budget. When the GOP talks about reducing the Federal Budget, they are not talking about the DOD portion.

According to a United States Department of the Treasury economic study, the major tax bills enacted under Reagan, in the short term, significantly reduced (~-1% of GDP) government tax receipts. Separated out, however, it is clear that the Economic Recovery Tax Act of 1981 was a massive (~-3% of GDP) decrease in revenues over the long term.

Corporate taxes were decreased during the Reagan era which not only contributed to the Federal deficit, but also shifted the Tax burden from almost 50% to 50%, individuals and corporations, to largely a burden on individuals. Note that the left side of this graph below are the Truman, Eisenhower, Kennedy and Johnson years.

The drop below 30% represents the Nixon, Ford, Carter to Reagan period. And, although the original Tea Party was a revolt against the secret deal between King George and the British East India Company, this Tea Party does not even know that it was conned by it's favorite president -- Reagan. Once corporate share of tax revenue dropped below 20%, only Clinton's boon got it back to a tiny bit over 20% again. Bush's war chest raised it above 20%, but wasn't that our billions, or, more correctly, China's billions which were lavished on the military industrial complex coming back in some tax revenue? I suspect that this is a large part of the distress felt by the members of the Neo-Tea Party. Individuals are now carrying the burden which was previously shared more equitably with Corporations.

The Shift From A Manufacturing Country to a Financial Country:

Reagan not only moved us from being a Creditor nation, to being a Debtor nation, but he made possible the transition from being a manufacturing and exporting nation, to being a financial and importing nation. It is this that allowed our banks to become "too big to fail." He encouraged the banks to offer credit cards, which increased their revenue stream, and gave consumers a way to increase their life style even though their wages were flat. This was the Reagan mystique. Middle class Americans felt they were in a boon time, when only the wealthiest 2% were actually doing better. There was no boon. There was an enormous increase in the debt of individual Americans which fueled business recovery at that time and our recent financial collapse.

This change from being a manufacturing and exporting country to being a financial and importing country is the reason we weren't able to add armor to our Hummers in Iraq. We aren't making steel any longer. We import it from China and Japan. Does this make you feel safe?

This change is also one of the reasons that our balance of trade is skewed in the wrong direction.

What Do We Need to Change?

Obama's investment in the research and development of green products: batteries, cars, solar and wind turbines and storage facilities is an attempt to create a new product line that can be manufactured in the USA. This may make up for any decrease in funding to the military-industrial complex.

This will not only create jobs when new products are ready to build, but it will increase revenue through both individual and corporate taxes, and will also help to correct our balance of trade. This will give us a way to correct the deficit that was launched by Reaganomics.

Tea Partiers, we welcome you to our side. Let's support policy that will move all of America forward rather than burying her beneath a mountain of debt to make the top 2% of Americans gluttonously wealthy. How much does a man need after the first billion dollars?

A billion dollars is $1,000,000,000, or enough to give away $1 million dollars, each month for 83 years and that is if the 1 billion isn't in a bank or invested in any way. They could buy 5 new Bentleys a month for as long as they lived. Or, they could pay all the expenses of Presidential candidate at the rate Barack Obama spent, for the next 10 presidential elections without a single other contributor.

The final insult, is that those earning a billion dollars are too often not producing anything. The top 12 hedge fund managers last year EACH earned more than a billion dollars and the top man earned more than $7 billion. This did nothing for our balance of trade, or our unemployment. Nothing was produced. Nothing was built. Nothing was discovered. Yet, 12 men now have the power to buy 10 presidents. Buying a few Congressmen was just the beginning.

The National Debt and TARP - Your Money?

Back to serious matters. There have been so many questions about the banks and the bailout money and the Federal Deficit -- your money?

First, since there is such attack on Obama and Democrats right now, I'd like to talk about the national debt in graphic form. If you look right now at the graph of the National Debt from 1940 to the present, you'll see a modest increase during WWII, and then it's almost flat until the Viet Nam War. From 1975 to 1980, it begins to go up. This is the period of Gerald Ford to Jimmy Carter. Gerald Ford came into office during double digit inflation (topping 12% in 1974), high oil prices, and low confidence in government as a result of post Viet Nam, and post Watergate and Richard Nixon's resignation. By March of 1980, inflation and interest rates were topping 18%. Even so, the debt went up moderately, and if you look at the other chart comparing it to GDP, the debt continued a down trend through Carter's presidency.

Then, came Reaganomics, and top-down Supply Side Economics, and huge tax cuts for the rich. Look at the two big rises in National Debt as compared against GDP. Both rises were during the big tax cuts of Reagan and both Bush's. Clinton took back some of the giveaway and reduced the budget still constrained by pay-as-you-go, and the National Debt was greatly curbed. Compared against GDP, it was reduced.

At the beginning of Reagan's term, the National Debt was about $1 trillion. By the time a Democrat was back in the White House, it had climbed to over $3 trillion. Clinton kept it below $6 trillion, tapering off significantly during his last 4 years. Bush lowered taxes again, raising the National Debt to $10.6 trillion by the time he left office.

Now, let's look at the National Debt as compared to GDP, and you'll see that the differences are even more pronounced. National Debt goes down during Democratic control, and up during Reaganomics and the Bush eras.

Finally, the graph from Emmanuel Saez (below) showing the income share of the top .01% of earners, that Paul Krugman published in August of this year. As Thom Hartman keeps saying, tax breaks for the rich result in bubbles which inevitably pop. The dot-com bubble caused by the excitment of a new industry increased incomes across the board, but also created some tremendously wealthy entrepreneurs. The stock market decrease approaching 2000, the end of Clinton's term, lowered the top income from 5% to 3% of total income share and lower than it was in 1986 when Reagan lowered the income tax for the top incomes from 50% to 28% and raised the lower level taxes from 11% to 15%.

George Bush came into office and again lowered taxes every chance he got until we have another serious recession, bordering on depression, and the highest spread of income ever -- at 6%. The peak in 1928-29 resulted in the Great Depression. A peak in 1986 was followed in 1987 by Black Monday and a stock market crash. Again, as Thom Hartmann points out, tax reductions for the rich results in a bubble that pops. This was repeated in 2000 when the stock market crashed again after the .com bubble.

And, this has come to that: The Bank Bailout

There's a list of recipient banks here: at CNN
which shows that about $200 billion was borrowed and about $70 billion has been paid back so far.

Now, where did the money come from in the first place? It was called the Capital Purchase Program and the effort was to prop up capital and make available additional money for lending. It didn't come from the taxpayer. It was part of TARP.

The TARP (Troubled Asset Relief Program) allowed the US Treasury Department to buy preferred (non-voting) shares of hundreds of banks. The US taxpayer was told that there would be a modest return including a 5% quarterly dividend. To date, we've seen better than expected profits of 15% or a total of $334 million in profit from the large banks who have repaid their debts and an additional $35 million from 14 smaller banks.

However, to stay realistic, Citigroup and Bank of America are still troubled, and neither is going to repay their bailout money soon. Their stocks have surged this summer, but they are both still sitting on mortgages that don't look good.

Will the Paybacks happen soon enough?

The US Treasury is subject to a Congressional debt limit. In February it was raised to $12.1 trillion. It currently stands at $11.7 trillion and was scheduled to hit the limit in mid-October. There are steps it can take short term to free up cash but none of them are long term solutions. Some of them are an avoidance of investing in Federal employees pension or G fund, or in the Civil Service Retirement and Disability Fund. Payments to this fund are normally $5.63 billion every month.

The Fed has been one of the biggest buyers of US Treasury's and government backed mortgage debt. What does this mean? The regional banks comprising the Federal Reserve System have agreed to buy the debt of their weaker brothers. In the second quarter, the Fed bought $164 billion of the $339 billion in new Treasurys. The Fed has been buying upward of 80% of the bonds issued by Freddie Mac and Fannie Mae. This has propped up the Real Estate market, but in October the Fed is scheduled to stop buying those bonds.

Luckily, US Households have been buying US Treasurys at an unusual rate. Is this because they are unsure about their local banks? This week, the government is auctioning a record $112 billion in debt. If the US citizen continues to buy our national debt, we can at least keep our debt out of foreign hands.

US Debt of George Bush: From $5.6 trillion to $10.6 trillion 1/20/09.

US Debt during year 2009: From $10.6 trillion to $11.8 trillion.

Obama has returned to pay-as-you-go which created the dip in National Debt that we saw during the Clinton years. Please support this practice as it seems to be the only way to constrain the lawmakers. Additionally, the top tax rates are now below what they were during the 1950's and the Eisenhower presidency. This is not helpful. A return even to the Reagan tax rates would greatly reduce the National Debt.

There is a myth being perpetrated that Republicans handle the Nation's money better. Not so. It would seem that they handle their money and our money better while the Nation goes deeper into debt!