This article appears in the Summer 2018 issue of The American Prospect magazine. Subscribe here.
If you think the Trump/Ryan tax cuts haven’t been a huge success, you don’t know trickle-down economics.
In Kansas City, Missouri, 800 Harley-Davidson employees are losing their jobs as the iconic motorcycle manufacturer uses its tax savings to shift production to Thailand. Kimberly-Clark, the maker of household brands like Kleenex, Scott, and Huggies, told investors it would use its tax savings to help pay for a restructuring plan that would close ten manufacturing plants, eliminating as many as 5,500 jobs. And on the very same day that Walmart made headlines by doling out $1,000 one-time bonuses to a whopping 7 percent of its largely poverty-wage workforce, the retail giant announced it would use tax savings to offset the expense of closing 63 Sam’s Club stores, costing nearly 10,000 workers their jobs.
Altogether, corporate America has announced more than 140,000 job cuts since the 2017 Republican Tax Act passed—nearly 87,000 shed by Fortune 500 companies alone—while sharing just 9 percent of its $76 billion tax windfall in the form of wage hikes and one-time bonuses. But to quibble over jobs and wages would be to entirely miss the point. Wealthy shareholders like me? We’re doing great, thanks to an astonishing $480 billion (and counting!) in stock buybacks announced since the Tax Act’s passage—more than 68 times the return to workers. By that metric, the tax cuts are working exactly as intended.
Of course, nearly everyone knew the Republican tax plan was just another trickle-down scam—a massive and destructive financial giveaway masquerading as pro-growth tax reform. But as disreputable as the trickle-down brand has become, its economic narrative remains so deeply rooted in our national politics that Republicans can still run and expect to win on tax cuts, despite the predictably dismal results.
That’s why if Democrats want to take back Congress—and hold it—they must do more than just attack trickle-down economics; they need to replace it with an alternative theory of economic growth that places the American people back at the center of the American economy. Democrats can’t just run against the Trump/Ryan tax cuts; they need to run for substantially raising taxes on me and my wealthy friends—not on the grounds that it’s more fair (or because of “The Deficit!”), but on the sound, if radical-sounding, economic principle that taxing the rich is the only plan that would increase investment, boost productivity, grow the economy, and create more and better jobs.
Taxing the Rich is Sound Economics and Effective Politics
Now, I know what you’re thinking: That’s crazy talk! For decades, rich guys like me have been selling you tax cuts on the merits of pure economic stimulus. The rich are “job creators,” we’ve told you. The more money and incentives we wealthy few have to invest in creating jobs, the better the economy is for everybody—especially you. And you bought it. Even many of you Democrats. Even when you fight for fairer taxes, some Democrats and their economic advisers still believe that there is always a trade-off between fairness and growth.
As a venture capitalist and serial entrepreneur who’s made a personal fortune founding or funding more than 30 companies, I can tell you firsthand that this classic trickle-down narrative represents more than just a fundamental misunderstanding of how market capitalism works; it is in fact a con job and a threat—an intimidation tactic posing as a theory of growth. The con works like this: If we can get you to believe these three things—that if you raise taxes on the rich, we’ll refuse to invest; that if you regulate corporations, they’ll be less competitive; and that if you raise the minimum wage, we’ll hire fewer workers—then you will accede, to some degree or another, to a 1 percent–enriching trickle-down agenda of tax cuts for the wealthy, deregulation of the powerful, and wage suppression for everyone else. Yet despite these claims, what you’ll never get from trickle-down is faster growth and better jobs. Because economic growth doesn’t come from making the rich richer; it comes from making the middle class and working people generally stronger.
To be clear: There is simply no empirical evidence or plausible economic mechanism to support the claim that cutting top tax rates spurs economic growth. Zero. Zilch. Nada. When President Bill Clinton hiked taxes, the economy boomed. When President George W. Bush slashed taxes, the economy ultimately collapsed. It wasn’t until after most of the Bush tax cuts expired during the Obama administration that the post–Great Recession recovery started to pick up steam—an ongoing recovery that, as uneven as it has been, has grown into one of the longest economic expansions in U.S. history.
And then, of course, there’s Kansas.
The Kansas Experiment and the Trickle-Down Myth
In 2012, Kansas Governor Sam Brownback famously embarked on what he called a “real live experiment,” pitting pure trickle-down theory against economic reality. Unfortunately for Kansans, reality won. Kansas has dramatically underperformed its neighboring states and the nation as a whole both in economic growth and in job creation since slashing taxes on individuals and corporations to as low as zero. Compare that with California, which in 2012 elicited the usual apocalyptic warnings from trickle-downers by daring to raise its top income tax rate to a highest-in-the-nation 13.3 percent. By 2015, California had one of the fastest-growing economies in the nation. Kansas? One of the slowest.
Not enough data points for you? The economist Jared Bernstein and the Center on Budget and Policy Priorities gathered data on the intersection between top marginal tax rates and economic growth from 1947 to 2015, assembling them into easy-to-visualize scatterplot charts (see right).
If trickle-down theory is correct—if cutting top tax rates reliably boosts economic growth—we’d expect to see a chart like the fictional one on the left: a downward sloping “best-fit” line reflecting an inverse relationship between top tax rates and GDP growth. What we actually see (the real chart on the right) are random dots. And the same holds true of every other economic indicator that the trickle-downers go on and on about: revenue growth from taxes, investment growth, employment growth, productivity growth, real median income growth—if they show any statistically significant correlation between top tax rates and growth, the slope is positive, suggesting that taxing the rich actually spurs growth.
And if former Vice President Joe Biden’s economic adviser is too partisan for you, don’t just take Bernstein’s word on it. Both the nonpartisan Congressional Research Service (CRS) and the centrist Brookings Institution (perhaps the think tank cited most frequently from both sides of the aisle) report remarkably similar results. “[B]oth labor supply and savings and investment are relatively insensitive to tax rates,” a statistical review by CRS researchers concludes, while a 2014 Brookings report looking at data from 1945 to 2010 found that “neither the top income tax rate nor the top capital gains tax rate has a statistically significant association with the real GDP growth rate.” In their conclusion, the Brookings authors bluntly expose trickle-down for the myth it is: “The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel,” the authors noted. “However, theory, evidence, and simulation studies tell a different and more complicated story.”
A lot more complicated.
In fact, the real economy is immensely more complex than the “Supply and Demand” fairy tale they teach you in Econ 101, for while tax rates don’t have zero effect, there is nothing magical about them. For decades, Republicans and some Democrats have taken it as an article of faith that, fairness issues aside, cutting taxes increases growth while raising taxes impedes it. But as we have just documented, there is absolutely no correlation. So, given the anecdotal and empirical evidence, how do Republicans justify their relentless trickle-down agenda?
Former Kansas Governor Sam Brownback on January 24, 2018, in Topeka
It is a well-worn (and unhelpful) cliché that economics is the science of the allocation of scarce resources, and the allegedly scarce resource that trickle-down tax-cutters are obsessed with allocating is private investment capital. The market always allocates resources more efficiently than government, the theory goes. So, allow wealthy individuals and corporations to keep more of their earnings, and they will have both the incentive and the capital to efficiently invest in growing their businesses and creating more jobs. Two hundred years ago, at the dawn of the industrial age, this may have even been true. But in the 21st century, where the availability of capital and the cost of innovation have respectively risen and fallen exponentially, access to capital is no longer the primary constraint on market capitalism.
A World Awash in Money
Some may find this assertion heretical, but investors like me are already struggling to cope with what Bain & Company terms “capital superabundance.” In a 2012 report titled “A World Awash in Money,” Bain explained that global financial capital more than tripled between 1990 and 2010 to some $600 trillion, and was on track to increase by half again by 2020. Meanwhile, financial innovations are dramatically expanding access to global debt and equity markets, leading to what can only be described as the commoditization of capital.
But even as the global financial glut continues to grow, new technologies are dramatically reducing demand for capital throughout the most dynamic segments of our economy. It once cost billions to finance a new steel mill, the symbol of the old economy, but mighty Google’s first round of financing? Just $25 million. Amazon? Only $1 million. It is this “investment supply–demand imbalance,” writes Bain, that is decisively shifting power “from owners of capital to owners of good ideas.”
You can actually see this glut of financial capital accumulating on corporate balance sheets and in private bank accounts in the form of unprecedented reserves of nonproductive cash. According to various estimates, U.S. companies are now hoarding as much as $2.6 trillion in cash and marketable securities through foreign subsidiaries, and another $1.9 trillion here at home. Add to that the $2.7 trillion of investor cash earning next to nothing in money market funds, and another $2.1 trillion of excess reserves banks are hoarding at the Fed, and that’s more than $9 trillion in available cash in those four categories alone. Just sitting there. Doing absolutely nothing.
And yes, that includes the several trillion dollars of foreign earnings the Republican tax plan promised to “repatriate.” The truth is, these “overseas” reserves are largely an accounting trick. According to the Federal Reserve Bank of Atlanta, much of this money is already held in U.S. bank deposits, in U.S. Treasury notes, and in dollar-dominated corporate securities. That’s why, far from boosting the economy, the last time Congress enacted a foreign earnings “tax holiday,” the biggest corporate beneficiaries actually cut thousands of domestic jobs, choosing instead to funnel their after-tax windfall into (surprise!) stock buybacks and dividends. Every “$1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders,” University of Chicago, Harvard, and MIT researchers concluded.
Obviously, a tax holiday can’t possibly deliver a boost in jobs or wages by bringing home dollars that are already here. What it can do and is doing, however, is finance a record wave of stock buybacks—including $100 billion worth from Apple alone.
But even if investment capital was scarce and the trickle-down theories were all perfectly sound (and they’re not), the Trump/Ryan tax cuts still wouldn’t spur much investment or growth, because marginal tax rates were already so low! This isn’t 1950. Or even 1980. At 39.6 percent, the top marginal income tax rate was already low by historical standards—far below the 91 percent top rate during the boom-boom Eisenhower years, the 70 percent top rate when President Reagan took office, or even the 50 percent top rate throughout most of the Reagan administration—while the average effective top tax rate (what rich people like me actually pay after loopholes and shelters and such) was a historically middling 23 percent. And while our statutory corporate tax rate was indeed among the highest in the industrialized world, let’s be clear: Almost nobody paid that. According to the Congressional Budget Office, even before the rate was slashed to 21 percent, the effective corporate tax rate averaged just 18.6 percent. And despite their constant whining, many large companies paid much less. During a joint appearance with Speaker Paul Ryan at the giant 787 assembly plant in Everett, Washington, Boeing CEO Dennis Muilenburg embraced the Republican tax agenda, calling corporate tax cuts “a big deal.” But over the past 15 years, Boeing’s effective tax rate has averaged only 3.2 percent. And mighty Amazon? Its 2016 federal tax bill was effectively zero.
The problem isn’t that corporations and investors don’t have enough after-tax cash; it’s that they’re not productively spending or investing the cash they already have. And it’s a problem greatly amplified by the dramatic rise of income and wealth inequality in recent decades. Over the past 40 years, after-tax corporate profits have doubled, from about 5 percent of GDP to about 10 percent today, while wages’ share of GDP has fallen by about the same percentage. That’s a trillion-dollar-a-year transfer of wealth from paychecks to profits. But it doesn’t even tell half the story. Over the same period, the top 1 percent’s share of total U.S. personal income has more than doubled, from under 9 percent in the mid-1970s to 22 percent in 2015—another $2 trillion a year that used to go to people like you, but now goes to rich people like me. As a result, the top 0.1 percent’s share of total household wealth has more than tripled, from about 7 percent before Reagan took office to about 22 percent today. In fact, the top 0.1 percent (really rich people like me) now own more wealth than the bottom 90 percent of Americans combined.
And this gets to the real cause of our nation’s chronically slow growth in wages, jobs, productivity, investment, and output: our accelerating crisis of economic inequality. We are concentrating cash in the hands of people and corporations who already have more money than they know what to do with, while starving consumers of the spending power that accounts for 70 percent of GDP. The anti-growth consequences of this concentration and hoarding of wealth can be seen in the precipitous decline in what economists call the “velocity of money”—the rate at which dollars recirculate through the economy—which the Federal Reserve Bank of St. Louis calculates as “the ratio of nominal gross domestic product (GDP) to the money supply.”
During the years preceding the Great Recession, every dollar in circulation typically changed hands about 17 times over the course of a given year. For example, you spend a dollar on coffee, which the coffee shop pays to the barista in wages, who in turn spends it on buying a burger, and so on. But in recent years, each dollar in circulation has been spent an average of only five times during a year—one of the slowest rates on record. This means that each dollar in circulation today is generating 70 percent less economic activity than a dollar did just ten years ago. What explains this dramatic slowdown in the velocity of money? “The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it,” explained the St. Louis Fed in a gloomy 2014 blog post.
Trickle-down economics assumes that the velocity of money is relatively stable and predictable (indeed, the standard textbook formula MV=PT represents V as a constant); thus money in the hands of the wealthy should have as much velocity as money in the hands of the middle class. But this clearly isn’t true. And for obvious reasons: For example, I earn about a thousand times more per hour than the average American, but I couldn’t possibly buy a thousand times more stuff. I only own so many pairs of pants. My family and I can only eat three meals a day. We enjoy a luxurious lifestyle, but we already own several houses, a private jet, and one too many yachts (turns out, the optimal number is two). Cutting our taxes will make us richer, but it won’t incentivize me or my venture capital partners to spend or invest more than we already do. What’s holding us back isn’t a shortage of cash, but rather a shortage of demand.
The truth is, no amount of luxury spending can make up for the buying power of the great American middle class—a middle class whose size and strength we have been eroding year after year. So then, how do we get money flowing back through the economy again in the face of such unprecedented hoarding due to Gilded Age–level concentrations of wealth? How do we deliver the good jobs and good wages American workers desperately need?
Raise taxes on the rich. Really.
Tax and Spend
Raise taxes on the rich, and almost anything the federal government does with the revenue will pump more money through the economy than what the wealthy are doing with their hoarded cash today. Tax the rich to put money back in the hands of the American people through middle-class tax cuts, and corporations will expand production and payrolls to meet the resulting spike in consumer demand. Tax the rich to invest in roads, transit, bridges, health care, schools, and basic research, and we will create millions of good-paying jobs while building the physical and human infrastructure on which our collective prosperity relies.
As for tax rates, we should create more tax brackets, not fewer, with substantially higher rates on our wealthiest households and our largest inherited estates. You want to simplify the tax code? Here’s an idea: Let’s treat all income equally. For example, eliminate the cap on payroll taxes, apply it to all income, and then slash the rate, increasing the spending power of most Americans. Rich people like me make most of our money from dividends and capital gains, and it’s just plain crazy that I pay a lower tax rate on investment income than a truck driver or schoolteacher pays on their hard-earned wages or a small businessperson pays on her hard-won profits. As for the corporate income tax rate, keep the lower rate if you want—but only if the Trump/Ryan cut is more than offset by eliminating corporate tax loopholes. As a percent of federal tax revenue, corporate taxes already accounted for only a third of what they did in the 1950s, despite years of record profits. What corporate America needs and deserves is a fairer, simpler, more predictable tax code, not a cheaper one.
An Alternative Economic Narrative
President Trump boasted that the “biggest winners” from his tax cuts would be “the everyday American workers as jobs start pouring into our country, as companies start competing for American labor, and as wages start going up.” But you’re never going to get that $4,000 raise Trump promised, because Republicans have economic cause and effect reversed: Low wages and rising inequality are not symptoms of slow growth; low wages and rising inequality are the disease that causes slow growth—and inequality cannot be cured by creating even more inequality.
If top tax rates were high, profits low, private investment capital scarce, unemployment rising, and inflation out of control, Republicans might have had a case for cutting taxes. But that’s not the economy we’re living in today. Our economy isn’t suffering from a lack of access to private investment capital; it is suffering from a homegrown crisis of extreme economic inequality that is eroding both consumer demand and the ability of working- and middle-class Americans to invest in themselves and in their children. And it is this deadly combination of slack demand and declining investment that is the real “job killer.” Indeed, a 2014 report from the Organization for Economic Co-operation and Development concluded that rising inequality knocked as much as 9 points off U.S. GDP growth over the previous two decades alone. That’s more than $1.6 trillion! Just imagine how many more good-paying jobs our economy would have created were it $1.6 trillion bigger than it is today.
What our economy needs now is to get those trillions of dollars of hoarded cash off the sidelines, and back into the hands of working- and middle-class Americans—not because it is fair, but because it is pro-growth. Tell that story. Run on it. Believe it. Give voters a choice between an economic narrative that lionizes the rich as “job creators” or a middle-outward narrative that rightly celebrates the American people as the primary cause and source of growth, and most voters will choose the story that places them back at the center of the American economy.