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Economy in Decline

Since the re-election of Obama there has been a decent amount of discussion going on about the “Fiscal Cliff” and taxes. I thought I would expand upon my thoughts in my original “Economy in Decline” blog with this update and do a more in depth write up on what I covered when it came to income taxes and their affect to our economy, trade policies and job creation. I also wanted to make a point of giving my ideas on how to fix our economy instead of just pointing out how it’s failing. I do not mean this to be an attack or an argument to lift up one major party over the other but it gets practically unavoidable if you look at the facts since the 80’s. I will add that this is write up is only about economic policies when it comes to the Presidents mentioned below and not meant to be an all-encompassing judgment of their Presidency. This write up is mainly meant to pin point what mistakes we have made economically and how we can fix those mistakes and prosper as a nation.
Ben Stein (a lifelong Republican) and though I have disagreed with some opinions in the past I believe he is mostly correct when talking about taxes in the video below. He states the Romney tax plan would be a big mistake for the country. I have to give him some credit for having the guts to go on Fox news and also being one of the first Republicans to admit that the Romney/Ryan tax plan was not a good one.

http://www.youtube.com/watch?v=OFZ8h2ygIcg

One of the key points Ben brings up which not many people are aware of is the fact that we were more prosperous as a nation with HIGHER tax rates on the wealthy from 1941 – 1973…I’d expand that myself and say throughout the 70’s because those tax rates were still a high 70% on the wealthiest Americans but that changed drastically with Reagan but we did have an economic decline towards the end of the 70’s but that was partly due to the oil crisis. By the time Reagan left office, his administration slashed the top tax rate by more than half the amount it was at when he entered the oval office. This in mine and many others opinion is a big key to why we are in this mess today…That theory has been called “Trickle-down or Supply-side economics” and it did not work then nor will it ever work.

Now let’s delve into this further.

In the 1950’s and 60’s the income tax rate for the wealthiest people was over 90%…yes over 90% and what do you think happened during that period? If you guessed more poor people, less people working, economy not doing, well simply put…You would be wrong . Contrary to popular belief higher tax rates does not equal a bad economy, massive jobless rates, etc. Actually during that time period the stock market boomed and the middle class was bigger and more stable and our deficit wasn’t out of control. Also really low tax rates on the wealthy appear to go hand and hand with unsustainable economic highs that only last briefly until eventually plummeting the economy (perfect example was in the 81-89 and also 2001 – 2009). Not to even mention that they appear to correlate with very high inequality or bigger separation between the poor and the wealthy.

Now this tax bracket changed from over 90% income tax rate to around 70% by the 1970’s still kept things somewhat stable until the oil crisis in the late 1970’s. This was changed in the 80’s with a few reform bills put into place during the Reagan administration. In 1981, the Congress enacted a bill that was the largest tax cut in U.S. history, which brought the highest income bracket down from a 70% tax rate to a 50% rate. It was estimated to have been a 750 billion dollar tax cut over six years. In 1982 and 1984 though there was a partial plan to reduce some of this tax loss by two acts which generated around $265 billion….Obviously not nearly enough to pay for that big of a tax cut. Further with this on Oct. 22, 1986, the Tax Reform Act was signed into a law by President Reagan which was the biggest reform since the introduction of the income tax. This reform lowered the top tax rate (for the wealthiest) even more on individual income from 50% to incredibly low 28%…Which was the lowest this tax bracket had been since 1916.

I will argue that because of this huge tax decrease during the 80’s we have been on a decline ever since. This is obvious if you take a look at how our deficit and debt skyrocketed (almost tripled) as a country during Reagan administration (9 billion to 2.9 trillion after 8 years) and the following administrations (with the exception of Clinton’s years). Now to be fair all of the Presidents following Reagan have been guilty of going along with relatively the same tax rates, with the highest spike being with Clinton raising the top bracket to 39.6% (which is the same proposed rate by Obama for his second term). If you look at George H.W Bush’s, Bill Clinton’s, George W. Bush’s and now Obama’s current tax rates you will find that it’s stayed around the same range and never has gotten back to before 1981.

Top Income Tax rates when leaving office (starting with Dwight D. Eisenhower).

Dwight D. Eisenhower

Top Income Tax Rates: 92%

Maximum Capital on Gains Rate:  25%

John F. Kennedy

Top Income Tax Rate: 91%

Maximum Capital on Gains Rate:  25%

Lyndon B. Johnson

Top Income Tax rate: 91%

Maximum Capital on Gains Rate:  25% – 26.9%

Richard M. Nixon

Top Income Tax Rate: 70%

Maximum Capital on Gains Rate:  27.5% – 36.5%

Gerald R. Ford

Top Income Tax Rate: 70%

Maximum Capital on Gains Rate:  36.5% – 39.875%

Jimmy Carter

Top Income Tax Rate: 70%

Maximum Capital on Gains Rate: 39.875% – 28%

Ronald Reagan

Top Income Tax Rate: 28%

Maximum Tax Rate on Capital Gains: 20% – 28%

George H.W. Bush

Top Income Tax Rate: 31%

Maximum Tax Rate on Capital Gains: 28% – 28.93%

Bill Clinton

Top Income Tax Rate: 39.6%

Maximum Tax Rate on Capital Gains: 29.19% – 21.19%

George W. Bush

Top Income Tax Rate: 35%

Maximum Tax Rate on Capital Gains: 21.17% – 15.35%

Barack Obama

Top Income Tax Rate: 35%

Maximum Tax Rate on Capital Gains: 15%

Finally here is the proposed tax rates for 2013+

Mitt Romney

Top Income Tax Rate: 28% (Note same as what the country had under Ronald Reagan )

Maximum Tax Rate on Capital Gains: 15% (wants to keep current rates for top earners)

Barack Obama

Top Income Tax Rate: 39.6% (same as Clinton’s increase)

Maximum Tax Rate on Capital Gains: 20% (an increase of 5% for top earners)

I believe from a logical standpoint that as Americans we have gotten so used to our current tax rates of the last 30+ years that if we were to change them to be even 10% higher, most people would freak out even though that would still be way below the rates prior to the 80’s. This generally due to most everyone in the United States being told their whole life that taxes are bad (generally due to billionaire funded think tanks that own big chunks of our mass media outlets) which is why you don’t see any major candidate on the Democrat or Republican side advocating for a bigger increase in taxes. Republican’s and especially neo-conservatives are against high taxes as they continue to follow the Reagan-era economic ideology even though it obviously does not work. Also if you look back to the great depression and even World War 1 and 2; taxes were increased during these periods not lowered. In 2001 and in 2003 though the Bush administration put through two separate tax breaks and kept those even after becoming involved in two wars. Bush even ignored his security of treasury Paul O’Neil in 2003 when he was against another tax reduction as he thought it would be a mistake especially when going to war with Iraq that year (later Paul O’Neil was fired even though he was correct in hindsight). It was the opposite of any normal logical conclusion, I don’t think Reagan and I know George H.W Bush wouldn’t of been that illogical to keep those tax cuts during war time. George H.W. Bush to his credit actually raised taxes during his term even though he promised he wouldn’t when he ran for president the first time but he saw that the country was in danger and it was the right thing to do. The two wars in the George W. Bush years were not paid for mostly due to the two tax cuts which is an essential factor as to why we are in the mess we are in today. Now World War 1 and 2 were bigger wars but the Presidents during those time period didn’t decrease taxes, they increased them to pay for the war, it was the responsible thing to do but the Bush administration did not, essentially putting those wars on a credit card.

Raise the Capital Gains tax:

If we really want to tax the wealthiest Americans this could be the best way to do it as currently we are at an incredibly low 15% which if you compare to the 28 percent Reagan had it at when he left office that is a huge difference. This capital gains tax was brought down to a very low 15% during the Bush Administration. This rate is lower than it’s ever been before which has made it a great legal low tax rate for wealthy individuals to not pay much taxes at all. Reagan lowered it to 20% and actually raised it to 28% before leaving office because he came to his senses later on and found it to be too low when he saw that our deficit was getting too high. Mitt Romney the Republican candidate for President this year is a good example of someone that mainly pays his taxes with the capital gains tax since he only paid 14% in his only released tax report.  This tax is what many wealthy American’s pay, especially those that deal with wall-street or investments. Many of these wealthy individuals like I pointed out before are retired and they just collect checks, meaning not earning what qualifies for the income tax through having a normal 9-5 job.

 

Does higher income tax rates for people making more than $250,000 a year hurt job creation?

This notion that raising the tax rates for those making $250,000 or more being bad for job creation is something the GOP likes to hammer people on. The problem with that is…it has not been the case when you look at the history of our tax rates, job creation and distribution of wealth between poor, middle class and the wealthy. One thing you will not hear from the Republicans these days is the fact that raising the top two income tax rate brackets only affects around 3% of our businesses….yes only around 3%. Also look at the job numbers during the years with higher tax rates, did jobs plummet? Were jobs not created with a whopping 90% or 70% rate that existed before the 80’s? In all reality what has been found that with higher tax rates on the rich it creates a bigger middle class and the gap between the poor and the rich shrinks (like I stated above). Now keep in mind that since 2001 up until now (2012) we have been going off of quite low tax rates and still with these incredibly low income tax rates on the wealthy we have a good number of people unemployed in the United States. In other words where are all the jobs that should have been created with the low tax rates that we’ve had for about 11 years (counting the 2001 tax reduction)? You have to remember that these tax rates are not something put into place 4 years ago in 2008 but in 2003 which we have kept in place for 9 years now.

The only recent comparison we can make is comparing the Bush tax rates of now to the Clinton rates of the 90’s…Which time period had more job growth? The answer to that is by far during the Clinton administration where 20 million jobs were created but that can’t be right according to the lower taxes theory? why wasn’t there more jobs created under Bush with lower tax rates? Studies have also shown that wages tend to go up more with higher taxes as well, not generally in the first year but usually in the second year to balance out the tax hikes while low taxes lead to very slow increases if any at all. Another important element to note is that corporation profits are at an all-time high the last two years. Profits did tank a bit in 2009/10 temporarily with the recession (but I’ll add that still around the same level as the 90’s) but went way up in 2011 and 2012 to the highest margin ever. In contrast to this though studies has seen that the distribution of wealth between what the corporation makes (profit) and what their employees get paid is also at an all-time imbalance (meaning the people at the top of the chain are making more profit than ever but the employees are making scraps in comparison). The point of this being that corporations can afford higher taxes or even to hire more people and could even pay their employees more money.

Here are some good charts to take a look at:

http://www.businessinsider.com/politics-economics-facts-charts-2012-6#our-businesses-are-doing-remarkably-well-corporate-profits-just-hit-an-all-time-high-6

Another misconception is that all wealthy people create jobs. I mean sure some do, but a decent amount of these wealthy people also just collect checks because they have retired or they don’t work which means they don’t pay an income tax rate but instead pay a capital gains tax from their investments, stocks, etc. These individuals generally hold onto money, watch it grow with investments, sometimes stashing it in Swiss banks or other offshore bank accounts. In other words their money just sits and grows and in some cases is never spent anyways. Many CEO’s also get a lot or more of their wealth yearly through stock options which also qualify for the capital gains tax which like mentioned above is at a conveniently low 15%.

Think about it this way…with lower taxes we would have to borrow from other countries, millions and billions of dollars when we could be getting it from the wealthy people of our own country. What is the positive affect of borrowing from Japan, China instead of getting those funds from wealthy Americans? We are essentially doing the same exact thing but currently getting money from other countries who we are now in debt with.

The idea in general that lowering income tax rates for the wealthy being good for the country is a pipe dream, wishful thinking and sadly just has not worked. Now if we are talking about corporate tax rates or payroll taxes that is a different story but this is strictly about lowering income tax rates. Studies have shown that the separation between the rich and poor has increased significantly since the 80’s when the new tax reform took place and the only time our debt shrunk and our budget was balanced was during the Clinton administration with the slightly raised tax rates on the top two income rate brackets. The argument between higher and lower income taxes on the wealthy is as simple as saying on one hand you have a solid method to generate revenue for our economy versus a hypothetical way (the maybe factor) to generate revenue for our economy…Which are you going to go with? Which method is truly more fiscally responsible and frankly…..more conservative?

In Regards to Spending…

The Republican’s big argument for lower taxes is that we can reduce the deficit by reducing spending not reducing taxes…Which I might add is a newer conservative ideology since Reagan, in the past it was more about less government. While this is a perfectly understandable argument the problem is we have not had lower spending by a Republican President in some time and only a Democrat with Clinton had the lowest spending of the last 30 years. You also have to keep in mind that we have a lot more people and will continue to have more people in this nation so spending generally increases anyways due to population always growing. This of course means more money coming from the government for programs to support all these new people. This creates a problem for lowering taxes because we’d have to eliminate important programs that help grow our economy if we were to keep the low current tax rates like funding for education, health care or of course vastly reduce the amount we spend on military (I’ll cover that below). George W. Bush was the heaviest spending President we’ve seen since FDR (especially on Military) which is in vast contrast with how the Republican party started with its low spending policies. Not only did we have lower taxes during his presidency then what was the case in the 90’s but we also had bigger spending than the Clinton administration which in effect equals economic disaster. Also an interesting note like mentioned above is that if you look at the spending during these low tax eras starting with Reagan’s administration. You will find that government spending was actually at its highest during the Reagan, George H.W Bush and George W. Bush’s administration, while it went down during Clinton’s administration when he had higher taxes. In short and ironically the experiment of supply-side economics ended up having the opposite affect then it’s intention. I don’t understand how anyone, going over the our economic policies for the last 30 years can come to the conclusion that trickle-down economics works. We have been living in this experiment since the 80’s, only to have a short prosperous time in the 90’s when this policy was briefly abandoned and then once again going back to it tenfold from 2001-Current. If Republicans want to once again claim to be the fiscal responsible, less government spending party they need to abandon this worship of Reagan’s economic policies as this experiment we’ve been on for the last 30 years was a failure.

And furthermore….Military Spending:

If you watched this year’s presidential debates between Obama and Romney (especially the 3rd debate over foreign policy) you might of noticed a lot of military spending flexing by both sides. One of the biggest misconceptions by the American people is that we have a weaker military than four years ago and that we are going to all of sudden have a weak military if we don’t spend billions every year. I remember hearing this back when Clinton was in office from republicans which was silly then and is even more silly now since our military spending did not go down from the high numbers that were put in place during George W. Bush’s administration. In fact military spending has gone up in the last 4 years of the Obama administration . The problem with all of this is that for one we spend more on defense/military than the next 10+ countries combined…Yes combined (USA now spends around 600 billion per year on defense, which is 41% of military expense worldwide). Secondly we have more military bases around the world than any other country has ever had in the history of the world. Third, one way to lose our military might would be for our economy to collapse so cutting down on military spending might actually keep us stronger in the long run. The fact is we are not in the cold war anymore and are now out of Iraq, we don’t have to do an arms race with any country and no other country is even trying or close to reaching our level of spending. Why we are continuing to spend an unjustifiable amount of money on defense?

Good article on military spending:

http://www.globalissues.org/article/75/world-military-spending#USMilitarySpending

Government Spending When Needed:

If you look at the history of our nation, one of the arguably best times to implement government spending or government creation of jobs is during a recession or a depression. This is something that is debated to this day of course but seeing how our economy did turn around during the depression due partly to government jobs being created with FDR’s “New Deal”. One could argue that the bail out of the auto industry and stimulus bill during Obama’s first years got us out of our recent recession. President Hoover who had the unfortunate dilemma of dealing with the Great Depression when it hit the United States believed heavily in the free market and that the only way for the economy to get back on track was if the free markets picked up again…Sound familiar? The problem was…This just wasn’t happening as the economy kept getting worse and worse during Hoover’s presidency. Even Roosevelt who originally shared these same ideas as Hoover began to come to the conclusion that to get the United States out of the economic disaster it was in, it would need Federal help. When Roosevelt became the next President defeating Hoover he implemented his plan called the “New Deal”. With the “New Deal” many government jobs were created putting people back to work which also put money back in the people’s pockets which could be pumped back into our economy (since they would have money to spend). More recently Obama tried to follow that same blueprint with the stimulus bill during his first year. This stimulus didn’t have a fancy name like New Deal but it was essentially based off the same idea to get people back to work and get our economy moving again. Now this stimulus bill did create jobs but unfortunately with the way our trade system is setup these days (with free trade run rampant), many of these jobs ended up being overseas unlike the time period when FDR was in office (as tariffs existed). This of course had the Obama administration and economic planners within that administration shaking their heads, wondering why weren’t more jobs created here? Why didn’t it work as well as we thought it would? This brings me to the next subject…

For the United States to decline as an economic power, not only did tax rates change drastically in the 1980’s but some other economic factors occurred as well which have hurt us immensely in the long run.

Imports/Exports:

Before the 1980’s the United States was the leading first world country in the world. We were the largest exporter of manufactured goods on earth and the largest importer of raw material on earth (iron, nickel, copper). We manufactured that into computers, cars, etc. In short we made them and then exported them to other countries. This was where America was at in 1980 right before Reagan took office and Free Trade became the new trade mantra. Flash forward to present day and we are now the world largest importer of manufactured (finished goods) and exporter of raw material like iron ore, copper, coal, wood. Now what that means is we did a flip flop in the last 30 years, where now we are importing (buying from other countries like China) to the US where before we would sell to them. This kind of outsourcing that started with the Reagan administration and continued for 30 years + by George H.W Bush, Bill Clinton, George W. Bush and now under Obama is one of the biggest reasons for our economic decline and the major reason why we are losing jobs in America. With that in mind this isn’t specially a fault of any particular political party as three Republican Presidents and now two Democrat presidents have continued down this same path. Case in point would be with NAFTA (North American Free Trade Agreement) which was implemented in 1994 under the Clinton Administration. NAFTA has also created much outsourcing of jobs and added to our trade deficit since it was implemented. To get back on track we need to reverse what has been done the last 30 years and go back to being the number one exporter of manufactured goods, and below I will explain a few ways to do that.

Great Article about NAFTA:

http://www.epi.org/publication/briefingpapers_bp147/

Fixing our trade deficit and how to create incentives for job growth in the United States (Tariffs and the VAT)

One of the ways to fix our growing trade deficit is to bring back tariffs which were successful for us since the beginning of our country (See Alexander Hamilton’s philosophies on trade) until the 1980’s when Free Trade became the popular trade ideology. Free trade opened up the barrier for trading between countries (allowing more and more goods to be sold) but the problem is that we are losing more and more annual growth with profits year after year due to not being able to compete with other countries who still have a form of tax on imported goods. Now we do currently have tariffs but they are so low that it makes them null and not something companies even consider for the most part. We could make a t-shirt in the United States and also in China but because it’s way cheaper to buy these shirts from China the American companies have no chance to compete.

For instance let’s say we get shoes from China that sell for $30 and the Chinese workers are getting paid $1.00 an hour to make these shoes. Now in the United States let’s say the same worker would be paid $10 an hour to make those same shoes and also sells for $30. The reason they are being made in China is because of the low wages and the fact that we have practically no import tax when they ship those shoes here. It’s way more cost effective for that company to stay in China because they essentially are cutting costs by paying their workers $9 less than they would have to if their plant was here in America. Add to that if we were to export those shoes made here in the USA to China, they have an import tax in place which ends up costing us more to export there…In other words we don’t have a level playing field and this is the case with every other major country. If we put a low import tariff (essentially a tax) of let’s say 30% per import like we had in the 70’s and before it would nullify these low wages and create incentives for these Chinese companies to create jobs here because they wouldn’t have to ship them to us and deal with the tax/tariff. Also we would make profit off of the tax in the first place if they did export those shoes to us.

The VAT:

Another option that is essentially a tariff as well but imposes taxes on all individual elements/parts of a manufactured good is called a VAT or a Value-added Tax. This is a system that most other countries have adopted that taxes added elements to a product, like for instance all the individual parts of a car would have a separate tax. The United States is actually the only major country to not have adopted this trade policy which puts us at a huge disadvantage. For instance to export our goods elsewhere we have to deal with an average 18% tax while when they export goods to the United States they have to do deal with a practically non-existent tax. Lastly we could further create more incentives to create manufacturing jobs here by giving tax breaks for companies that export their goods from the United States to other countries. The fact is because we don’t have a Value-added tax or higher Tariffs like we had in the 70’s and before is the fundamental reason why we have switched from being the number one exporter of manufactured goods to the number one importer of manufactured goods. These countries that have the VAT system in place are seeing surpluses year after year with their trades while we are seeing deficits. The bottom-line being that not having this sort of tax system in place is why we have also accumulated around a 5.4 trillion trade deficit the last two decades.

Here is a great article that goes much more in depth about the VAT system from an old school Republican Thomas Pauken who was on the white house staff for Reagan as well as the chairman for the Republicans of Texas from 1994-97.

http://www.firstprinciplesjournal.com/articles.aspx?article=1793

Final thoughts

To bring back the United States to its former glory we need to implement several changes to get us back on the right track. We need to raise the tax rates for the top two marginal brackets which will bring in quite a bit more revenue into our economy automatically and bring down our deficit. We also need to assess what government programs are essential to our growth and health as a nation and cut funding for those that aren’t really needed (for instance cutting down on our excessive military spending). Lastly we need to change our trade policies by bringing back tariffs or implementing a value-added tax system to create incentives for companies to keep jobs or move jobs here instead of shipping them overseas to cut costs. We cannot continue to go down our current route and thrive as a nation when the gap between the rich and poor is growing at an accelerated rate. It’s not too late to reverse these practices and bring the United States of America back to a prosperous nation it once was.

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  1. October 20, 2012 at 5:26 am

    This is extremely informative and well written. I had no idea about most of this and it really makes sense and at the same time really pisses me off. Thanks for your knowledge and for your detailed post.

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