Tuesday, September 22, 2015

Jeb Bush’s Tax Plan, Hoover, and Reagan

GOP presidential candidate Jeb Bush announced a tax plan that has drawn the usual charges of favors for the rich, anti-middle class, and “trickle down” economics, due the the across-the-board cuts in federal income tax rates (Bush cuts the top personal rate to 28%, shaves the capital gains tax by 4%, and slashes the corporate rate to 20%).

While I have no particular opinion on all of the features of the Bush tax policy, I did focus in on charges made by a critic from the Left.

In Jeb Bush clings to a failed economic formula, the New Jersey Star-Ledger editorialized:

For three decades now, the American people have been relentlessly pummeled by the dubious claim about how tax cuts create more investment, more jobs, and greater prosperity.

That's the aim of supply-side economics, which should have died after it failed under Hoover, but it became American doctrine after Ronald Reagan went all-in with Milton Friedman, the libertarian economist who believed public parks were socialist.

Now comes Bush, whose plan reprises the greatest trickle-down hits. . .

In conclusion, the Star-Ledger writes:

Gallup says 63 percent of Americans are fed up over wealth inequality, and that 52 percent believe the rich do not pay their fair share of taxes (Republicans: 30 percent). Chances are they will reject the same pernicious assaults on the middle class, lest they are nostalgic over the last Bush presidency.

I left these comments:

An editorial that begins by repeating the myth that Herbert Hoover was a supply side—aka free market, laissez-faire—president is sure to lead to wrong conclusions.

Hoover confronted the 1929 downturn with massive tax and spending increases, coupled with a whirlwind of economic interventions that would eventually be adopted and expanded by FDR in what would become known as the New Deal. Unlike the 1920 post-WW I depression, which Woodrow Wilson met with governmental inaction and was over and done with in 18 months followed by a powerful job- and innovation-filled recovery, the Hoover-FDR depression dragged on for more than a decade.

Hoover the Keynesian was a major interventionist and statist. Contrarily, Reagan’s policies—which featured much flatter, fairer tax rates coupled with a continuation of the deregulations begun by President Carter—ended the stagflation of the 1970s and, beginning in 1983, was followed by a powerful, job- and innovation-filled expansion that carried through the 1990s. Reagan cut top tax rates from 70% to 28%, and inflation and interest rates fell from around 20%—and unemployment from 11%—to low single digits over the next two decades. The period from the mid 1980s to the late 1990s featured broad increases in the standard of living of Americans.

By any objective standard, the reduced tax rates and relatively less interventionism of the Reagan-Clinton era were a success as measured by economic performance, especially when compared to the results of the massive expansion of the regulatory welfare state under Bush-Obama.

Bush’s tax plan would not be a panacea (especially considering the elimination of the property tax deduction; no income should be taxed twice). Today, regulation and government spending are bigger drags on the economy than tax rates. But Bush’s tax rate cuts, at least, would be welcome, including for the sake of fairness. People have a moral right to keep more of the money they earn, whatever their level of income. Polls notwithstanding, economic inequality, when market-achieved rather than government-favor acquired, is not unjust. One person’s success is not attained at the expense of another, but by lifting others through trade, a win-win transaction. Tax rate cuts are not a “pernicious assault on the middle class.” Economic success, integrity, and self-responsibility—not tearing down others—defines the middle class.


One interesting aspect of this editorial is that the sources cited by the Star-Ledger to back up its claim that tax cuts don’t foster economic growth don’t mention the Reagan tax cuts (see here and here), despite the Star-Ledger’s mention of Reagan. Instead, these sourses focus on the relatively minor tax rate changes under Clinton (+8.6 percentage points, from 31% to 39.6%), GW Bush (down 4.6 percentage points, from 39.6% to 35%), and Obama (up 4.6 percentage points, from 35% to 39.6%), to prove that tax rate changes don’t affect economic growth. Conspicuously missing from this litany of relatively minor rate tinkering is Reagan’s gargantuan 42 percentage point cut in top tax rates, from 70 to 28%.

In rebuttal to a correspondent who replied to me by giving full credit to Clinton for his strong economy due to his small tax rate increases, I responded:

GHW Bush also raised tax rates [from 28% to 31%, in his infamous betrayal of his “read my lips, no new taxes” pledge]. But the important thing to keep in mind is that the vast bulk of the Reagan rate cuts remained in place under Clinton, whose top tax rate of 39.6 % was 30.4% below the 70% rate that Reagan inherited. Not to diminish Clinton, who cut capital gains taxes, reformed welfare, and restrained spending, but the Clinton economy owes a lot to “Reaganomics.”

Another correspondent also observed, rightly, that the Republican congress under Clinton deserves substantial credit for the Clinton economic expansion.

Related Reading:

"Trickle-Down Economics": Anti-Capitalists' Insulting Portrayal of the "Common Man"

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