The Plutocracy Hypocrisy

A half century of anti-public policy

“There are no mistakes, save one: the failure to learn from a mistake.”
Robert Fripp, musician

The definition of insanity, as the saying goes, is doing the same thing over and over again and expecting a different result. Sometimes questionably attributed to Albert Einstein, this old adage has been around in one form or another for along time. It would be hard to believe any reasonably educated adult today has never heard it - except in Washington, D.C., it would seem.

The story goes that some time in 1974, the economist Arthur Laffer was having dinner with Donald Rumsfeld, Dick Cheney and others in a Washington, D.C. restaurant. The discussion was about President Ford’s plan to increase taxes as a way to fight inflation. These men were not in favor of that plan.

Laffer then famously takes a napkin and starts drawing on it. He then goes into an explanation of how he believes that while raising taxes might initially increase government revenues, once the taxes got too high and became too onerous, it would disincentivize work and investment, and revenue would begin to decline. Instead, he said, the government should cut taxes to incentivize work and investment and spur economic growth. This way, he argued, revenues could actually increase with the growth of the economy even while taxes went down. The story is so famous that the napkin itself is now at the Smithsonian Institute.

The rest, as they say, is history as a new political movement was born. The idea became known as supply-side economics, and it not only captivated the imagination of a new generation of neo-liberal economists, it spread into the political sphere and began to affect public policy. Ronald Reagan seized on the idea in his 1980 campaign for president, and his optimistic promises of building a growing economy while lowering taxes was attractive enough a proposition to get him elected.

The general thought was that if enough money could be freed up at the top of the economic pyramid, then it would generate economic activity all the way down the line. The effects would spill over or “trickle down” from the top to the middle class and eventually the less fortunate.

There is only one problem. It has never actually worked the way Laffer predicted. In fact, his theory has failed on nearly every promise it made. Looking at economic data from 1980 when the Reagan administration began implementing the new tax policies based on this theory, it has failed to produce the promised results of increasing government revenues and spurring economic growth. This was true for the last two decades of the 20th century, and it continues to prove true in the 21st century.

There have been four major tax cuts since that time that followed the trickle-down approach. The first came in 1981 followed by further reform in 1986, both under the Reagan administration. Both times, the argument was made that the cuts would pay for themselves by increased government revenues from the economic growth. This didn’t happen. In fact, in the two years after the first tax cut, which lowered the top tax rate from 70% to 50%, tax revenues decreased by about 9%. In 1986, the top rate was further lowered to 28%, but this time in order to compensate the bottom rate was raised from 11% to 15%. The corporate rate was dropped from 46% to 28%, as well, in order to free up capital for economic investment. The result was again not only no growth, but a slight drop in the overall economy according to the Tax Foundation.

The last two major top-heavy tax cuts were done under George W. Bush and during the first Trump administration. Under Bush, the cuts were once again weighted towards the wealthier taxpayers getting the most benefits. Once again, the results were meager, at best. While economic activity did rise somewhat from 2001 to 2007, it did so at a much slower pace than the previous decade and caused significant increases in the debt according to an analysis by the Brookings Institute.

The Trump tax cuts didn’t fair much better. In some ways, it was the best potential test of the trickle-down theory in that it was the most of all the cuts to be skewed towards wealthy taxpayers and corporations. The effect was that after the first two years of growth in corporate investment under the administration, it fell for 7 o the next 8 quarters after the passing of the tax cuts.

One thing that did rise under all four of these tax cuts, however, was the national debt. Starting at $908 billion in 1980, it balooned to over $2.6 trillion by the end of the Reagan administration, or an increase of just under 300%. The Bush tax cut added over $4 trillion more (about 76%) to $10 trillion and the Trump tax cut added another $7.3 trillion (over 34%) to almost $27 trillion. Each time the tax cuts were promised to pay for themselves, and each time they simply failed to do so.

Another consistent feature of these tax cuts was an explosion of income and wealth inequality. From the 1950s through the 1970s, American had the lowest rate of wealth inequality in its history according to the Centre for Economic Policy Research which studied American wealth inequality since its founding. Starting in 1980, this began to change. In 1980, the top 4% of Americans earned as much as the bottom 39%. By 2019, that figure had risen to 57% according to Pew Research. Today, the United States has the largest wealth gap of any of the G7 nations.

All of this evidence would seem to suggest that it would be crazy for Washington to try all of this for a fifth time and expect a different result. But that is exactly what they appear ready to do. The reason why leaves only two reasonable possibilities, and neither of them are very attractive. Either they simply don’t believe (or want to believe) the mountain of evidence that shows how both ineffective and potentially harmful this type of policy is, or they don’t care and just want the tax cuts for them and their wealthy friends. Either option does not make for sound policy.

It is is tempting to end with the famous line by philosopher George Santayana in his 1905 work “The Life of Reason” when he wrote, “If we don't learn from the past, we are doomed to repeat it.” The problem is, maybe they did learn from the past, and are repeating it anyway. In that case, a better quote might be this one from Paulo Coelho who said, “A mistake repeated more than once is a decision.”