This won’t fuel growth. Corporations expand and invest only when customers are eager to buy what they produce. And most of these customers are middle-income and below, who spend just about all they earn. The rich spend only a small fraction.
Profits are now at record levels but corporations aren’t investing them. They’re using them instead to pump up share prices and executive pay.
After the Bush tax cuts of 2001 and 2003, economic growth stalled and then dissolved in recession. After the 2004 corporate tax holiday for bringing foreign profits home, corporations didn’t invest or expand. The Reagan tax cut of 1981 didn’t cause wages to rise; they flattened.
What’s the real formula for growth? Better access to education, healthcare, and transportation, all of which make workers more productive.
These more productive workers command higher wages. With higher wages, they purchase more goods and services. These purchases motivate companies to expand and invest, and create more and better jobs.
American experienced this virtuous cycle for thirty years after World War II. We invested unprecedented sums in education, healthcare, and infrastructure. We financed these investments through higher taxes on the rich and on big corporations.
The economy boomed and wages shot upward. The wages of the bottom fifth rose even faster than the wages of the top fifth. This unleashed consumer spending, which generated more growth.
The Clinton administration tried this formula on a much smaller scale in the 1990s, raising taxes on the top and investing in education and infrastructure. The economy boomed, 23 million new jobs were created, and for the first time since the late 1970s the typical American’s wage rose.
The Trump-Republican tax overhaul would take us in the opposite direction. It raises taxes on the middle class, which would reduce their purchasing power. The Senate version would cut the Affordable Care Act, causing millions to lose coverage.
It also explodes the federal debt, which will stymie growth. Debt service itself would likely require cuts in other programs such as Medicare, Medicaid, education, and transportation.
Senator Orrin Hatch warned last week that the Children’s Health Insurance Program may not be refunded “because we don’t have money anymore.”
The current tax proposal would also eliminate the state and local tax deduction, which would likely cause states to cut back spending, including education and infrastructure.
All of this would slow economic growth.
For years, Republicans have been selling tax cuts by lying that they spur growth, which trickles down to average Americans.
For just as long, Democrats have been selling fairness, but without explaining why a fairer economy is also more productive and prosperous.
It’s time for Democrats to make the case. It has the virtue of being true.