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Monday, October 30, 2017

A Radical Populist Budget

                                                                                                
A Radical Populist Budget                                     
                                                                                                
The Trump budget, and the Ryan-Republican budgets in years before, are all terrible ideas. Eighty percent of the tax reductions in Trump’s budget goes to just 1% of all households, stated an early estimate. Now it appears that the 1% will get 31% of cuts in the first year and 48% in the last year (there are several reports from the Institute on Taxation and Economic Policy.) Approximately two thirds of Americans, the lower-earning 2/3s  with incomes below $75,000, would experience a tax hike or a reduction in a government benefit, effectively a net loss of income, according to this Washington Post article. The Ryan budgets in past years would decrease spending by 42% on social programs that benefit mostly elders, disabled adults and poor children. 

A report (and a shorter article) from the Washington Center on Equitable Growth shows that between 1980 and 2014 the wealthiest 1% increased their yearly incomes by 200%, a tripling of income, from $420,000 to $1.3 million per adult. In the same period the lower-earning half of U.S. adults saw their incomes creep upwards by 1%, from $16,000 to $16,200. There has never been a worse time to give away massive tax cuts to the wealthiest. And with at least 30% of the population living in precarious economic conditions, it’s not a time to cut their support. 

This Radical Populist Budget (RPB) radically shifts who we tax and how we spend (I list nine tax and spending changes below); it helps the poor, the middle-income, and the upper income households -- but not the ultra rich. The process is five-fold: 1) Raise revenues by taxing the income of the 1% and taxing wealth 2) eliminate certain unneeded deductions,  3) cut certain unwanted programs such as excessive military spending, and 4) add certain spending that has a high social payoff, such as enlarging the Earned Income Tax Credit (EITC) and creating a public jobs program. (Recently even the former Secretary of the Treasury, Robert Rubin proposed this program.) The fifth step is to provide a large tax reduction to households whose incomes fall between $50,000 and $150,000 a year. That’s a progressive budget.   

We already have a progressive budget, it’s called the People’s Budget, promoted by the Congressional Progressive Caucus, and it's well worth examining. But my plan goes beyond the CPC budget and points towards a more progressive agenda. My two main sources for this rumination are 1) the budget put forward by Representative Jan Schakowsky in 2011; and 2) two articles (here and here) by Jared Bernstein, who was chief economic advisor to former Vice President Biden. And I’ve added some support from the Bernie Sanders’ platform, from the Chicago Political Economy Group (CPEG), from the Political Economy Research Institute (PERI), and from the Institute on Tax and Economic Policy (ITEP), and other sources. 

Summary

I call this budget the Radical Populist Budget (RPB), and it raises $1.644 trillion in new revenue and re-allocated spending --- $1,346 billion in new taxes, $187 billion by eliminating loophole deductions, and $111 billion by reducing military spending — for a total of $1.644 trillion. It increases the federal on-budget budget by 32% (the off-budget portion of the budget deals with only Social Security). This year's budget taxed 85%, borrowed 15%, and spent 100%. The RPB would tax 132% and spend 132%. The budget pays off the deficit and adds more revenue for programs that have high social value, and adds enough for tax cuts to some middle to high incomes. It helps at least 90% of the population.    

The current 2017 U.S. budget raised $2,911 billion in “on-budget” revenue, spent $3,364 billion, and was in in deficit by $453 billion (see Tables 1 and 2). It taxed 85%, borrowed 15%, and spent 100%. The RPB revenues adds $1.6 trillion to the already $2.9 trillion in revenues, for a total of 4.5 trillion. This increases federal spending to almost 24% of GDP, which is high. Additional expenditures I envisage include a $200 billion jobs creation program (for infrastructure improvement and human services provision) and a doubling of the Earned Income Tax Credit, an increase from $70 billion to $140 billion (see the plan by Senator Sherrod Brown and Representative Khanna). 

The proposal to create a single-payer Medicare for All program is not included in the RPB. Information for the budgeting effects of this proposal can be found at Dollars and Sense magazine. Nor does the RPB include benefit increases to Social Security (S.S.) recipients, as these are called “off-budget” expenditures, which is a nomenclature for the self-funded Social Security program. A proposal to increase S.S. benefits can be found at the Bernie Sanders’ site. Basically he calls for an increase of 5% in Social Security benefits, about $50 billion, funded by increasing the S.S. payroll tax on wage earnings above $250,000.  

Presently there is nothing similar to the RPB budget, it’s purely an imaginative exercise. But it is important to look forward, to dream. My main complaint about our economy is the utter waste of our surplus. The surplus or "economic growth" benefits only a small fraction of Americans and most of it is never used productively, which I explain below. The public federal debt is 14% of total private net worth, the budget is just 4% of  net worth, and this past year’s deficit was 0.5%. If I had $1,000 in the bank, the debt would amount to $140, the annual budget $40, and the deficit $5. 

The nation has private net worth of $96.2 trillion, and only a third of it is taxed. (See Flow of Funds report, page 2 and 138) The only asset we tax is “tangible property” such as homes and real estate, while the total value of financial assets, more than double that of “tangible property”, goes untaxed. The idea of taxing financial assets is off the table. “State and local governments collected a combined $488 billion in revenue from property taxes, or 17 percent of general revenue in 2015.” states the Tax Policy Center. A commensurate tax on financial assets would yield $1.1 trillion,  equal to 39% of all “on-budget” revenue. The budget I propose taxes financial assets lightly, just $186 billion. 

Rana Foroohar, former economics editor for Time magazine, in her book Makers and Takers, cites evidence that 15% “of all financial flows now go into projects in the real economy. The rest [85%] simply stays inside the financial system, enriching financiers, corporate titans, and the wealthiest fraction of the population . . .” (page 7, and she cites Adair Turner's book Between Debt and the Devil, and this NBER report) Since January 2009, when the total private "household net worth" stood at $48.8 trillion, net worth has doubled to its present size, $96.2 trillion. How much of this new wealth has gone into the actual work-a-day world of the productive economy? An enormous stock bubble effected this explosive gain in financial values, now at $78 trillion. (See Federal Reserve, Flow of Funds, Table B.101, page 138) 

This inefficient misuse of the surplus begins with corporate profits. William Lazonick documented the disposal of corporate profits in an award winning article at the Harvard Business Review, “Profits without Prosperity”. Some 91% of profits over a 10 year span of the 500 largest companies in America went to either stock buybacks or dividends to shareholders, and that left little for wage increases or research expenses. 

It's interesting to note the progress of  U.S. household net worth (see page 104). In 2006 it hit a high of $64.520 trillion, only to fall in 3 years to $48.475 trillion in Q1 of 2009, a drop of $16.0 trillion, or a drop of 25%. In 2017, Q2 it stands at $96.2 trillion. (see here, page 2 and 144). This almost doubles net worth in almost 9 years, from $48 trillion to $96 trillion. How, one should ask, is it possible to double the nation's private net worth in the middle of the agonizingly slow recovery, millions of home foreclosures, a plunge in employment rate, and the economic performance well below potential? How does private net worth surge in the environment of high government debt and deleveraging financial debt? Is it extraordinary savings? What could cause this explosion? The savings rate in the 9 years averaged 5.6% (see BEA.gov, Table 2.1). The annual national income averaged at $14.3 trillion over 9 years. The total savings amount sums to $7.2 trillion. The net worth grew by $47 trillion. Where did the other $40 trillion come from? Corporate buybacks added about $4 trillion (see here, graph 11), but the rest? 

This is, by the way, real money, not just marks on paper. It can be cashed-out to buy food, houses, time with your attorney or surgeon, railroads, other corporations, etc.. The total 9 year's worth of income amounted to $129 trillion, so the $47 trillion in new net worth is more than a third of the total income over 9 years. It's almost double the total expenditures of the federal government in these 9 years. It's almost 5 times the growth of the national debt. These are assets that have no productive or constructive purpose. They  flowed into a financial bubble. They are hoarded. If they were squandered, then at least there would be a secondary effect in added employment and income to some workers who would be employed shining the chrome on limousines. 

The article mentioned above from the WCEG states, "From 1980 to 2014, for example, none of the growth in per-adult national income went to the bottom 50 percent, while 32 percent went to the middle class (defined as adults between the median and the 90th percentile), 68 percent to the top 10 percent, and 36 percent to the top 1 percent. An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics." To restate, 32% of growth went to percentiles 50 to 90, 32% went to percentiles 91 to 99, and 36% went to the top 1%. And much of the growth, since 2009, went into the financial markets, is my guess. 

To sum up, we squander our surplus. If all these assets were boxed and sunk into the Mariana Trench, we'd would be better off.  See the article from the New York Times. This chart marks the percentiles that received income growth, 1980 is grey, 2014 is red. 






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The Radical Populist Budget, a summary: 
I break down my budget policy into five categories: Tax Increases, Tax Deduction Eliminations, Spending Cuts to Existing Programs, Additional Program Expenses, and Tax Cuts. 

The table from the Institution on Taxation and Economic Policy (ITEP) shows the “overall effective” tax rates for different income levels. The word “overall” means a combination of local, state and federal taxes, and “effective” means taxes as a percentage of total personal income. 

Image result for "Who pays taxes in America in 2017?"


























The top-earning one percent of all households earns 21.7% of all income and pays 23.8% of all taxes, and that includes not only federal but state and local taxes too. The lower-earning 90% earn 54% of all income and pay 50% of all taxes. This is barely progressive taxation, not to mention the bizarre imbalance in income distribution. The budget proposed by Representative Paul Ryan in 2016 would have reduced the share of taxes paid by the top one percent from 23.8% to 21.0%, meaning an income of $129,000 would have paid a higher tax rate to all government than an income of $1,800,000, states the document from ITEP. 

#1 — Raise the Personal Income Tax Rate on High Earners. 
I propose to increase their overall effective rate for the 1 percent, from 34.1%, to about 50%. That would indicate an increase of revenues by (15.9% times 21.7%) 3.4% of all national income, a revenue increase of between $540 billion and $560 billion. During the 1950s the highest overall effective rate for federal taxes is estimated at between 40% and 45% during the decades of the 1950s (See Piketty, Saez, Zucman, page 29). The addition of state and local taxes on the 1% would lift that rate to over 50%. So this level of high taxation is not a historically high rate. The deficit for 2017 was $453 billion, so this one measure eliminates the deficit. 

We might call it a day, after that tax shift. But we are only beginning. 

#2 — A Wealth Tax 
The total net worth of all households on September, 2017, stands at $96.2 trillion (Federal Reserve, Flow of Funds, page 2, and Table 101.B). That comes to an average net worth per adult, age 20 and older, of about $400,000 — an indication of how wealthy the U.S. actually is. The top one percent own 38.5% of all net worth, or $37 trillion. I propose a tax rate of 0.5%, which in 2017 yields $186 billion. As I mentioned earlier, a financial tax commensurate with the property tax on tangible assets would yield $1.1 trillion. Only this last month France had a tax of 1.5% on high wealth (see here). James Kwak also has proposed “A Retrospective Tax on Wealth” that would “replace most existing taxes on capital (the estate tax, the corporate income tax, and most individual taxes on investment income) while maintaining the current overall tax burden.” 

#3 — Taxing Capital Gains and Dividends at the Standard Personal Income Rate
This was proposed by Representative Jan Schakowsky in 2011, and she indicates it would raise $88 billion. And the ITEP estimate is $84 billion per year. 

#4 — A Financial Transaction Tax (FTT) would raise $250 billion, says the PERI institute. A more recent study from PERI places the revenue stream at $220 billion. The Chicago Political Economic Group estimates a much greater revenue stream. 

#5 — Estate Tax reform, according to Jared Bernstein’s report, would raise $45 billion

#6 — A Minimum Income Tax on Corporate Earnings, an effective rate of 19% would raise about $35 billion, states Bernstien.  

#7 — A Corporate Foreign Income Tax and Other Business Tax Reforms would raise $150 billion according to the Institute on Taxation and Economic Policy (ITEP). The ITEP has many studies on corporate taxation, see this one. The ITEP also recommends (and see here) that corporations pay immediately their $767 billion arrears in unpaid foreign taxes. 

#8 — Additional Funding for the IRS to catch tax dodgers would raise $20 billion a year. 

#9 — A Tax on Carbon, says Jared Bernstein, would raise $32 billion.

#10 — Social Security Tax Increase on High Earners, according to Bernie Sanders’ program, would yield $50 billion. But since Social Security is “off-budget”, I do not include that proposal in this set of tax increases. 

The total increase in revenues, not including #10, from these nine changes yields $1,346 billion. 

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Tax Deduction Eliminations:

#1 — Corporate Interest Expense Deduction. Jan Schakowsky’s budget projects an increase of $77 billion due to the elimination of this deduction. 

#2 — Capping total deductions on personal income at 28% (or possible even lower, perhaps even 15%) would yield $64 billion, states Jared Bernstein.  

#3 — Executive Pay, Environmental Rentals, Farm Subsidies, Real Estate — combined, the Schakowsky budget projects an increase of $46 billion through the elimination of these deductions. 

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Current Program Reduction in Outlays

#1 — Reducing the Military Budget by $111 billion. Schakowsky’s plan would release and transfer revenue, making it available for other existing government programs. 

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Outlay Increases

#1 — Increase the Earned Income Tax Credit from $70 billion to   $140 billion per year is the proposal from Senator Sherrod Brown and Representative Khanna. 

#2 — Create a public jobs program, $200 billion a year. A proposal from Philip Harvey shows the effect on employment. The National Jobs for All Coalition, and Representative John Conyers have promoted such job creation programs for years. 
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The math is fairly simple. Revenues increase by $1,346 billion, and $187 billion, and $111 billion for a total of $1,644 billion (8.4% of GDP) available for outlays. Paying off the deficit reduces the surplus by $453 billion, and then by $340 billion from new outlays; the RPB surplus stands at to $862 billion (4.3% of GDP). This is a surplus unheard of, and it is an opportunity for tax cuts to the lower-earning 90% who earn 54.1% of all income and pay 50.1% of all taxes, states the report “Who Pays Taxes in America in 2017?” 

The Supplemental Poverty Measure, from the U.S. Census, (Figure 6) shows that 40.8% of  the “total population” live in households whose income is 4 times above the poverty level. This is before paying taxes. After all taxes and government transfers, only 21.0% are 4 times above the poverty level. About a fifth of Americans move below the 4 times poverty level due to their tax burden. The RPB could reduce their federal tax burden by half! 

Household      poverty     median    4 times      % of population 
Size                   income      income    income

1                     $12,060        $30,367    $48,240           28%
2                     $16,240        $65,627    $64,690           34%
3                     $20,420        $76,936    $81,860           15%
4                     $24,600        $91,036    $98,400           13%
5+        about  $30,000        $82,000   $120,000            9%         

(from U.S. Census, here)

Perhaps this is too big a tax cut, as the resources still are needed for programs such as pre-K education, housing, infrastructure and more. But this tax cut would greatly increase aggregate demand  which powers about 70% of economic activity. It is a complicated analysis. For instance, for single person households, 28% of the population, their median income is $30,367, and 4 times the poverty threshold is an income of $48,240; and 35% have incomes above $48,420. So, 35% would see significant tax reduction. And so on, we could figure out how many would have tax reduction. Without further detail, it’s safe to say that many moderate to high income families, incomes between $50,000 and $150,000 would see tax relief. 

This will recharge the economy that is 70% powered by consumer consumption. It will also improve the savings rate and relieve the precariousness of life for the 78% of full-time workers who live paycheck to paycheck, and the 45% of adults who say they could not pay-off a $400 emergency expense in 30 days. The lives of those with lower incomes will be improved due to the jobs program and the EITC increase. It  improves the standard of living for 90% of America. It has democratic appeal. It’s time for Americans to reflect on their nation's economy and devise practical measures to share our abundant prosperity. 

There are many more reforms needed to improve the economy and end the squandering of the surplus. Only an informed and concerned citizenry can make these reforms.  

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Additional Reading:
My essay "Solutions" best summarizes my vision for improving the economy, December, 2016. 

The report from Citizens for Tax Justice appears to me as the most balanced and comprehensive report on the Trump budget. The top 1% receive 31% of budget cuts in 2017 and 48% in 2027. The most important fact is the distribution of income, not the tax proposals. That's where the real reform must happen. 

Eleven graphs from the best of 2016 from Dollars and Sense magazine, present forecasts of effects of the Sanders' budget in wage increases and budget revenue increases over ten year, and more. And the article "'Medicare for All' Could Be Cheaper Than You Think" is a persuasive argument for creating a dual option for consumers, either insure with private or enroll with Medicare. It reduces total health care costs substantially.  

Here's an excellent article on the state of inequality by Richard Eskow. 

And here's the New York Times editorial critical of the Trump budget. The Tax Policy Center concludes the Trump budget will fail to increase the GDP sufficiently to pay for the tax cuts. Another article claims the budget will reduce housing by over 1 million units in the next decades. And this report from the EPI states the average tax cut for the top 1% will be $207,000. There are many critical appraisals of the Trump budget, just look for "80% of tax benefits go to 1%." 

Robert Pollin outlines a progressive future in this article

Matt Bruenig at Demos provides a very detailed 50 year overview of the composition of all taxes, local, state, and federal, and nontax revenues which accounted for 90% of the new revenue since 1970.

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Median Income data, 2016: 
The Social Security Administration filed its report on wage income, and $30,557 was the median -- the income for the middle worker on the income ladder -- for 163 million workers. From 1990 to 2016 the median has grown by 16% or 0.6% a year. In contrast the "Disposable personal income" per capita in chained dollars, 1990 to 2016, has grown by 52%, 3 times faster. 

The lower half of all earners/workers earned 6.7% of all "Personal Income" (from BEA.gov, personal income, Table 2.1), and they earned 13.5% of all wage income. There are 81.5 million workers in the lower half.  

I don't like to interpret facts and data, but for the sake of some of my friends, this means wages have lagged far behind the growth of the nation, in fact at least half the nation's workers have been left out of most (⅔) of the growth over 26 years. The top one percent saw their incomes triple (an increase of 200% since 1980.) The average growth for the entire lower half was not 16%, it was 1%, according to research from the Washington Center on Equitable Growth

If median had grown by 52% over 26 years then the median today would be $40,091, about a third greater. If the minimum wage were 60% of the average income it would be $15.64 an hour, and if it were 60% of the median it would have been $13.44 an hour in 2016. Instead, it is actually just over half of $13.44 per hour. The average hourly wage for production and non-supervisory workers, 2017 October, is $22.22 an hour. A minimum at 60% of that average would be $13.33 an hour. Instead, today's minimum is 33% of the "average hourly earnings" when it should be about 60%. 
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Tuesday, September 19, 2017

Growth and the Federal Budget

Growth and the Federal Budget: 
          A Sixty-Six Year Historical Analysis 

I address in this essay the question of whether and by how much the federal budget was in deficit, and what the performance of the economy was during the terms of presidents beginning with Truman through Barack Obama. It is a long essay, and it has tedious numerical comparisons. Past the half-way point I insert some tables which allow for comparison between presidencies, and they may be a short-cut through the details of the essay. In short, I think most will find it very boring and long-winded. So only those who have a burning curiosity about the topic should proceed.

************************************************ Readers who wish a quick overview of my thinking should read the essay Solutions, December 2016.
I offer a list, another list, of 14 reforms. It's a utopian vision.

On October 12, 2017, I finished reading Debtors' Prison by Robert Kuttner, written in 2013. I highly recommend it. It is challenging, complex, and thorough. It is a slow, involved read. Better than any other volume, it summarizes the current fragile condition we live in. Kuttner writes for the American Prospect. Here's my summation: Bad debt is, more often than not, the fault of bad creditors creating loans in a speculative market that inflate an asset-market bubble. A cascade of bad loans can and does destroy economies. Debt forgiveness and restructuring is far more productive than crushing strict repayments. Bankers need to be held jointly responsible. Their moral hazard is as great as the borrowers.  Bad debt caused by financial speculation can destroy a national or global economy. Page 282: "What can the experience of the war (WWII) and immediate postwar era teach us as we confront today's high debt levels and austerity programs? Above all, the lesson seems to be that to attain reliable prosperity, we need to relieve debts, constrain speculative finance, and reinvest in the real economy."  

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Recently I read a speech delivered by my anarchist-libertarian congressman, Tom McClintock, and it riled me because of its erroneous claim that Reagan cut federal spending. In fact, Reagan increased federal spending, let me make it clear. McClintock is blinded by his reverence for Reagan to the extent that he is willing to alter history. He gave another short speech in Congress that I admire, see here, but it also lacks a critical analysis of the causes of budget imbalance. The trajectory of today’s budget is dangerous and needs rectifying, but the main cause is a medical and health care system with out-of-control pricing and costs. I have dealt with that in another essay, see here, and it receives much ado in public discussion. This question of the influence of the budget’s deficits, surpluses, national debt, and growth, and shared growth — it’s fascinating. Proceed if you agree. 




Revenue and Expense as % GDP.


Congressman McClintock’s Talk on Tax Reform, 
August, 2017

I annotate the speech with notes in blue, September, 2017. 
The graph at the right 
(click for enlargement) shows that from 1982 to 1989, Reagan's budget years, the expenditures increased while the revenues decreased, and the budget was in deficit by 4.15% of GDP on average for eight years (see Table 1.2, Historical Tables). The source is this CBO report, page 9.   (click "Print Friendly")

NTLF Tax Colloquium
August 18, 2017 Speeches

Thank you for organizing this discussion on tax reform.  

        I believe the most important mandate given to this administration and this Congress is to revive our economy.  Our success or failure will largely be determined on achieving this objective and will be judged by the answer every American gives to Ronald Reagan’s question in both 1980 and 1984: “Are you better off than you were four years ago?

In order for this answer to be a resounding “YES,” our economic reforms have to be enacted this year for them to have time to improve the economy and most importantly, the daily lives of individuals, by next year.

The good news is that we know how to do this because we’ve done so many times before.  When Ronald Reagan took office in January of 1981, we suffered double digit unemployment, 
Fact check: 7.5% unemployment for January, 1981:  
double digit inflation (10.3%) and double digit interest rates (19.08).  Reagan diagnosed the challenge with these words: “In this great economic crisis, government is not the solution to our problems – government IS the problem.”  He rolled back the tax and regulatory burdens that were crushing the economy.  He slashed the top federal income tax rate from 70 percent to 28 percent and cut federal spending by one percent of GDP. (Fact check, wrong, he increased spending, see below)  He produced one of the most prolonged economic expansions in our nation’s history and because of that growth, our revenues nearly doubled.
Fact check: In constant dollars (2009 chained dollars) revenues increased by 25%, 1982 to 1989 inclusive, they did not double. And outlays increased by 19%. But his average yearly deficit was 4.1% of GDP, only surpassed by Obama whose yearly average deficit ran at 4.6% of GDP. The federal debt under Reagan increased from 32% of GDP to almost 50%. (See Historical Tables, Table 1.2 and 1.3. And see Federal Reserve FRED, here.) From 1982 to 1994, the twelve years of Republican presidents, the federal debt increased from 32% of GDP to 64%. (Each president operates the first year on the budget of his predecessor. Therefore I ascribe the years 1982 to 1989 to Reagan, and continue post-dating for all presidents.)    

This wasn’t a uniquely Republican policy.  John F. Kennedy did the same thing in the early 1960’s with the same result.  Harry Truman abolished the excess profits tax in 1945, reduced income tax rates and slashed federal spending from $85 billion down to $30 billion in FY 1946.  Fact check: World War II ended in victory, and the special taxation and spending for the war ended. The increase was needed solely for the war.  The result was the post-war economic boom. To credit tax policy with the economic boom is a wild stretch of the economic facts. Economic growth during the WWII war years exceeded growth of any other period in American history, a direct result of high taxes, borrowing and high spending.  

After his drubbing in 1994, Bill Clinton announced that the era of big government was over.  He approved what amounted to the biggest capital gains tax cut in American history (Fact check: not accurate, see the graph, the 1976 Tax Reform bill passed under President Ford holds that distinction), overhauled entitlement spending – in his words, ending welfare as we know it – (Welfare is only one aspect of so-called entitlement spending. Social Security and Medicare are far larger, and Clinton did not cut them.) and cut federal spending by 4 percent of GDP. By 3.1% of GDP. He also raised taxes by 3.0% of GDP. The fact that Clinton raised taxes is carefully avoided by Mr. McClintock, it does not fit into his always-cut-taxes proposal.  

The efficacy of these policies should be beyond reproach.  But I would like to offer a few caveats. (McClintock cannot acknowledge that Clinton raised taxes. That’s a caveat for the reader to offer.) 

FIRST, we DO need to worry about debt.  Tax reductions without spending restraint simply shifts taxes to the future and crowds out investment capital that would otherwise be available for economic expansion as government borrows to cover the difference.  Reagan’s one percent cut in spending relative to GDP — the basic error of McClintock’s speech — still increased debt relative to GDP -- but our debt was less than $1 trillion.  Today it is over $20 trillion.  (Debt is properly measured as a percentage of GDP, not as a nominal money amount. This comparison, $1 trillion to $20 trillion is meaningless and misleading. See the table below for the range of Debt to GDP over the years. The idea that government borrowing “crowds out investment capital” is wrong. Keynes dealt with idea in his open letter to Roosevelt published in the New York Times in January, 1933. See paragraph 5.)

Fact check:  Wrong. Reagan did not cut “spending relative to GDP”. Just the opposite. Federal outlays before Reagan, between 1975 and 1981 (inclusive 8 years), averaged 20.2% of GDP (Historical Tables, U.S. Budget, Table 1.3). Reagan increased spending by 1.4% of GDP, from 20.2% to 21.6% of GDP as an average for the 8 years in office. This was a record high in federal spending since World War II, only to be exceeded by Obama’s 8 years, who’s spending averaged 21.7%, or just 0.1% higher than Reagan’s average spending. McClintock will never admit that Reagan almost outspent Obama, just missing by 0.1% of GDP. Reagan also cut revenues (from 17.8% of GDP to 17.5%) while raising expenditures (from 20.2% of GDP to 21.6%). That’s a swing of 1.7% of GDP, equal to $323 billion per year in today’s dollars, or $2.6 trillion over 8 years. National debt increased from 32% of GDP to almost 50.0% of GDP under Reagan.   

Keynes in the 1930s urged Roosevelt to run a deficit, to spend, to go into debt, which Roosevelt did. Between 1933 and 1941 the deficit averaged 3.5% of GDP per year. (See note at end of essay.) There was no alternative but to inject capital into the economy, Keynes explained. Private investors saw no positive outcome, and purchasers had lost their incomes and savings. Only government had the means to create employment and inject purchasing power into the economy. This Keynesian policy is what Reagan did in the 1980s, although what he did is referred to as “military Keynesianism” because predominantly he invested in the military. Roosevelt invested in public works and direct public employment. 

Reagan while cutting taxes increased spending  — the perfect recipe for creating debt — and his average deficit was 4.2% of GDP for his 8 year term, and the national debt grew from 31.3% to 50.0% of GDP. 
See Historical Tables of the U.S. Budget, 2017, pages 29 and 30, and 35 and 36. After cutting taxes in his first year, Reagan raised taxes eleven different times, see this article that quotes Reagan’s biographer who says, “And so there's a false mythology out there about Reagan as this conservative president who came in and just cut taxes and trimmed federal spending in a dramatic way. It didn't happen that way. It's false.” In the interview David Stockman, Reagan's budget chief comments about Reagan raising taxes subsequent to the early tax cut, "He wasn't very happy about it. He did it reluctantly. But at the end of the day, the math was overwhelming.
And according to this article he raised taxes and took the wrong side on many issues.  

                              average revenues          outlays            deficit             national debt as % GDP

                                                                                                                32.0% in 1973
Eight years before Reagan: 17.8%                20.2%          3.3% of GDP 31.3% in 1981
          1974 to 1981
Eight Reagan years            17.5%                21.6%           4.2% 50.0% in 1989
         1982 to 1989

G. H. W. Bush, Bush I, ran into a recession in 1990. His job growth creation and his GDP growth per capita were both one quarter the rates of Reagan’s years, but his imbalanced spending and taxing ratios were the same. Bush I grew the national debt by 12.8% of GDP in only  4 years, rivaling Reagan’s 8 year growth of 14.1%. The median household income also fell during Bush I’s term. 

In Clinton’s first budget year, 1993, revenues came in at 17.0%, and outlays were 20.7%, the deficit was 3.8%. By year 2000, Clinton had reversed this so that budget revenues were 20.0%, and outlays 17.6%. Instead of being in deficit by 3.8% he ran a surplus of 2.3%, a swing of 6.1% of GDP, which today would equal $1.17 trillion . In other words, Clinton raised taxes by 3.0%, while cutting spending by 3.1%. Representative Tom McClintock studiously avoids mentioning Bill Clinton’s tax increases, and ignores Reagan's very high spending.

Clinton cut spending by 4 percent of GDP 
Fact check: Clinton cut spending by 3.1% of GDP (U.S. Budget, Historical Tables, Table 1.2). 
 and was successful in reducing debt relative to GDP. (Clinton also raised tax revenues from 17.1% under G. H. W. Bush, to 18.7%. See the table below) The budget pending before the House starts that process, but we have a long way to go, and we can’t safely count on economic growth to fully offset lost revenue. 
Trump projects a growth rate of 2.9% per year for ten years, a rate 1.1% above the CBO projection and ridiculed as fantasy thinking. The CBPP states, “Unrealistic growth projections not only make deficit-increasing tax cuts appear more affordable than they actually are, but could also add to pressure for cuts in programs for low- and middle-income families if the promised growth fails to materialize.”

G.W. Bush’s presidency was marked by large tax cuts in 2001 and 2003, and large expenditures for wars in Iraq and Afghanistan, and by a policy of regulatory laxity that resulted in the self-destruction of the financial system, and the collapse of an enormous asset bubble in the price of housing. As the banks began failing, the greatest recession in 75 years was instigated. During G.W. Bush’s last 14 months the economy slid into a deepening recession, and Obama ended the recession 4 months into his term of office. Obama’s revenues fell to 14.6% of GDP for two years, in 2009 and 2010, a drop of 5.4% from Clinton’s highest revenue total of 20.0% in year 2000. The recession pushed Obama’s revenues to 27% less revenue than Clinton’s revenues. A drop of 5.4% of GDP in today’s economy is $1.03 trillion. 

Revenues during the Bush II presidency averaged 16.5% of GDP, this is 2.2% lower than the Clinton 8 year average. That would equal $442 billion in today’s money, and continued over 8 years would reach a $3.5 trillion shortfall. Bush II failed to raise adequate revenues, and he ran the economy into the ground. Obama later in his second term managed to revive the economy, 14 million jobs were created, but revenue totals for his entire presidency averaged just 16.8% of GDP, slightly higher than the Bush II average, and lower than Reagan’s revenue average of 17.5% of GDP. G.W. Bush average revenue total of 16.5% of GDP are the lowest of all presidents since Truman in 1950. (see page 29)

If lower taxes make for a good economy, then Bush II’s term definitely refutes this argument. The decade 2000 to 2010 witnessed the slowest growth since the 1930s, slower than any decade by half. Professor Andrew Sum summarized this decade: “First, the nation’s real Gross Domestic Product, a measure of the aggregate output of final goods and services, grew by only 17% over the past decade, the worst economic performance in 70 years. In the 1990s, the US economy grew by 40%, and we never experienced a GDP growth rate below 37% since the 1930s. Adjusted for population growth, real GDP per capita increased by only a little over 7%, again a 70 year record low.

Obama had the misfortune of serving during the worst depression in 75 years. As Robert Kuttner argues in his book Debtors’ Prison, Obama presided over a debt-deflation depression caused by a financial crisis. Obama’s deficit spending reflected increases to pay for the crisis in employment: unemployment insurance, food stamps, and added social aid for families and households thrown out of work, and bailing out the banks, but not the home owners. Almost 9 million workers (6% of all workers see here) were permanently laid off from their jobs, and 7.2 million (or one in every eight mortgage holders) lost their homes.  

SECOND, (with apologies to the Bill Clinton campaign) IT’S THE SPENDING, STUPID.  The European experience with austerity programs in the 1990’s illustrates this nicely.  Austerity was a combination of tax increases and spending cuts.  Those countries, such as Spain, Italy and Portugal that relied on tax increases did poorly.  Those countries, such as Sweden, Finland, Denmark and Norway, which relied on spending cuts did very well.  Between 1993 and 1997, Sweden reduced spending from 71.5 percent of GDP to 51 percent and its economic growth rate doubled relative to the prior decade. (See the comparison of government spending from an OECD study. The U.S. total is 37.6% of GDP. The U.S. ranks sixth lowest out of 30 other advanced nations. And see Chart 9 here, describing the austere spending since 2009 compared to all other U.S. recessions. In another speech, this one in the House, Representative McClintock argues that our tax rate is now verging on the highest possible “natural” amount, after which tax evasion and moving citizenship to other lower tax nations will occur. This is patently false. Twenty-four other nations have higher rates.)

THIRD, flattening and broadening the tax base is just as important as lowering rates.  The Mercatus Center at George Mason University estimates that tax compliance costs the economy $1 trillion annually including capital misallocation caused by political preferences littering the tax code.  The more we flatten and broaden that code, the fewer distortions in the flow of capital and the greater the productivity of capital allocations. (The $1 trillion figure is meaningless, it probably just reflects normal accounting activity. By “flatten” he must mean tax all incomes at the same “flat tax” rate, and “broaden” must mean eliminate tax deductions which are also called tax expenditures. Since 2011 the Republican budget plan has advocated cutting tax expenditures, but never have they presented specific cuts, leaving one to conclude that they won’t risk offending anyone, or that they really do not have a plan whatsoever.)

FOURTH, lowering rates does matter.  In the last sixty years, the top income tax rate has been as high as 92 percent and as low as 28 percent, but income tax revenues have stayed remarkably steady at between 13 and 20 percent of GDP.  (The economy grew faster and shared its prosperity with all income levels when the top marginal income tax rates were 90% on income in excess of $1 million. This is indisputable. See here— State of Working America. (And see here and here and here and here — compare years 1946 to 1976 (when the lower 90% of earners received about 72% of all growth), and then compare years 1976 to 2008 (when the lower 90% received 1% of all growth). Also the corporate tax was much greater. For instance, in 1949 corporate taxes equaled 72% of the income tax, and in 2015 they equaled 22%.) Indeed, some of the lowest income tax revenues came when the top tax rate was at its highest.  Some of the highest revenues came when the top rate was quite low.  But although the tax rate within this envelope has remarkably little effect on revenues relative to GDP, it has a huge impact on the growth of GDP, and thus the growth of total revenues. (He offers no example of this claim. The tables I present below investigate the relationship between growth and deficits. The economy grew at its fastest during the period 1946 to 1976, a fact. The highest income tax rate varied from 91% to 70% on incomes over $1 million. In the 30 year period, 1947 to 1976 inclusive, the federal government ran a deficit of 0.6% of GDP per year, on average. In the same 30 year period personal income increased at a rate of 3.3% per year and all income groups saw their incomes double in inflation adjusted dollars. This was the greatest era of shared prosperity in American history. The highest tax rates were between 70% to 91% on income above $1 million. The effective tax rate on high incomes was between 45% and 55%. Saez, Piketty and Zucman.) 

Finally, what are the prospects of getting this done?  The good news is that past performance is not (necessarily) an indicator of future results.  I am still optimistic that we will be able to get the tax bill done this fall for three reasons.  First, reconciliation was poorly adapted for policy reform like health care but is very well adapted for tax reform.  Second, the thorniest matter, the Border Adjustment Tax, has been dropped from the discussion.  And third, this HAS to be done and every one of my colleagues fully understands this.

Here is a quote from the Piketty, Saez, and Zucman paper, page 18. It capsulizes the growth imbalances of the past 34 years:

“Table 2 decomposes growth by income groups since World War II in two 34 year long subperiods.
From 1946 to 1980, real macroeconomic growth per adult was strong (+95%) and
equally distributed—in fact, it was slightly equalizing, as bottom 90% grew faster than top
10% incomes.33 In the next 34 years period, from 1980 to 2014, aggregate growth slowed down
(+60%) and became extremely uneven. Looking first at income before taxes and transfers,
income stagnated for bottom 50% earners: for this group, average pre-tax income was $16,000
in 1980—expressed in 2014 dollars, using the national income deflator—and still is $16,200 in
2014. Growth for the middle 40% was weak, with a pre-tax increase of 42% since 1980 (0.8% a
year). At the top, by contrast, average income more than doubled for the top 10%; it tripled
for the top 1%. The further one moves up the ladder, the higher the growth rates, culminating
in an increase of over 600% for the top 0.001%—ten times the macroeconomic growth rate.
Such sharply divergent growth experiences over decades highlight the need for growth statistics
disaggregated by income groups.”


Here’s Warren Buffett’s advice in a New York Times op-ed in 2011: “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.”

For a little perspective, between 1992 and 2008, 16 years, the economy's output per person grew by 35%, by about a third (from $36,064 to $48,697 -- see Measuring Worth). The median household's income grew by 9% (from $51,390 to $56,076). The top earning 400 saw their incomes increase by a 750% -- not 35%. Their tax rate dropped by 26%. Makes you feel good? 

Between 1972 and 2008, a 36 year period, median household income (Table A-1) has grown by 12.7%. The economy's output per person has grown by 99.1%, just about doubled. The wealth of the top 2%  grew by a 122% (1972 to 2007); and from 1972 to 2017 it has grown by 222%, tripling -- a conservative estimate.  Makes you feel good?  

___________________________________________________________

From 1981 to 2017, The Federal Budget, Growth of U.S. Debt, U.S. Job Growth, and More 


Receipts Outlays Deficit             Growth of National Debt as % of GDP
Reagan 17.5% 21.6%           4.1% / yr 35.8% to 49.9%
8 year average                                                                             +14.1%
  1982 to 1989

G.H.W.Bush 17.1% 21.3%           4.1% / yr 49.9% to 62.7%
4 years                                                                                        +12.8%
  1990 to 1993

Clinton 18.7% 18.8%            0.3% / yr 62.7% to 54.9%
8 year average                                                                             - 7.8%
    1994 to 2001

G.W. Bush 16.5% 19.9%           3.3% / yr 54.9% to 77.4%
8 year average                                                                             + 22.5%
    2002 to 2009

Obama 16.8% 21.7%           4.6% / yr 77.4% to 104.1%
8 year average                                                                              + 26.7%
    2010 to 2017 



                  Job Growth                 GDP per capita   Real Median Household Income


Reagan 16.753 mn  +2.0% / yr +2.8% / yr $48,096 to $53,367
                                                                                         + 1.4% / yr

G. H. W.        2.367 mn  +0.5% / yr +0.7% / yr $53,367 to $50,478
Bush                                                                                - 1.4% / yr
Clinton 18.703 mn   + 2.0% / yr +2.9% /yr $50,478 to $56,531
                                                                                           + 1.5% / yr

G. W. Bush 4.374 mn   + 0.4% / yr +0.6% / yr $56,531 to $54,988
                                                                                            - 0.4% / yr

Obama 9.929 mn   + 0.9 / yr        +1.5% / yr $54,988 to $56,516
                                                                                           +0.3% / yr
 
from Dec. 2009 to Jan. 2017 jobs grew by 1.4% / yr, some 14.1 million new jobs    
Obama years median household income: began at $54,988 in 2009, dropped to $52,666 in 2012
rose to $56,516 in 2015 —- between 2012 and 2015 it rose at a rate of + 2.4% / yr

                             see multpl.com
see FRED for median Hh Income

Productivity Growth since 1950s see https://www.bls.gov/lpc/prodybar.htm


*************************************************************************
Tedious calculations go into this analysis. My last tedium is to compare the revenue shortfall of three presidents over their first 8 years of office, Roosevelt, Reagan, and Obama. 

Unemployment rate dropped from 25% to 9.6%, 1933 to 1937 (see here, article by Marshall Auerbach at Roosevelt Institute). Roosevelt was re-elected in 1937 by a landslide mostly because of the reduction in unemployment. He achieved this by over-spending, going into debt. 
During those first four years, 1933 to 1937 (5 years inclusive), average revenues averaged 6.7% of GDP, but his outlays averaged 13.3% of GDP, and the deficit averaged 7.4% of GDP. He really overspent!
(This comes from Table 1.2, Office of Management and Budget, Historical Tables— https://www.whitehouse.gov/omb/budget/Historicals
Between 1933 and 1941 the economic output doubles, and between 1941 and 1945 it increases by 77%, the legacy of the WWII years. The number of citizens employed increased by 40% in the war years. The national debt expanded to 120% of GDP.  

Also I discovered the following about disposable personal income, 1929 to 1944: 
1929 to 1933 — down 26%, or down 6.5% per year
1933 to 1941 — up 67% in 8 years, or 8.3% per year
1941 to 1944 — up 18% in 3 years, or 6% per year 
This originates from BEA.gov, Table 2.1, my own calculations

I questioned the results and checked with Measuring Worth, GDP per capita figures. 
Measuring Worth, and a graph at Visualizing Economics 

http://visualizingeconomics.com/blog/2011/03/08/long- term-real-growth-in-us-gdp-per-capita-1871-2009


1929 to 1933 — down 28.5%, or 7.1% per year
1933 to 1941 — up 80%, or 10% per year
1941 to 1944 — up 44.8%, or 14.9% per year

Deficit hawks may object, they may claim that deficits cause runaway inflation, a sovereign debt crisis that forces high interest rates, and a crowding out of investment — all of this did not happen. The economy revived. With high taxation rates on corporations and high earners, along with strong union rights, the golden years of capitalism brought broadly shared prosperity. 

During the Roosevelt era, his Federal Reserve Chair was Marriner Eccles, serving from 1936 to 1948. About the causes of the Great Depression, Eccles observed in his 1951 memoir, “As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.” 

The greedy giant suction pump, sucking since 1980 until 2016, has sucked prosperity from half of the U.S. population since 1980. See the article by the Washington Center for Equitable Growth for a definitive analysis of the unequal growth over the past 36 years. 


See the following two articles: 
Article at “The Balance” on the deficit and debt over historical time. 
And this article from the Economic Policy Institute about the danger of targeting deficit reduction too rapidly: “Dangerous targets
Why setting a specific deficit reduction target would worsen the economic and fiscal situation”

Why should this be important to Mr. and Mrs. Citizen? Because when Republicans assert flatly that tax cuts and low taxes in general create shared prosperity — this is clearly false. Tax increases on the wealthiest and their wealth, now valued at $94.8 trillion, which is also 6 times the size of the annual national income (see Federal Reserve report, Flow of Funds, page 2, and Bureau of Economic Analysis (BEA.gov) Table 2.1) are necessary.   



revenue outlays deficit Growth in Nat. Debt as % GDP

Truman 16.7% 17.0% -1.3% from 85.6% to 69.2%
down 16.4%


Eisenhower 16.9% 17.3% -3.0% from 69.2% to 50.6%
down 13.6%


Kennedy - Johnson 
                        17.3% 18.2% -0.8% from 50.6% to 35.4%
down 15.2%


Nixon - Ford 17.3% 19.3% -2.0% from 35.4% to 33%
down 1.4%

Carter 18.3% 20.6% -2.3% from 33% to 34.0%
up 1.0%  

_______________________________________________________________________________

job growth Real GDP/capita Real Median Family Income


Truman +13.6% 9.3% —  2.3% / year +3.1% / year


Eisenhower +11.0% 15.2% — 1.9% / year +3.4% / year


Kennedy - Johnson +30.0% 27.0% —  3.4% / year +3.9% / year


Nixon - Ford +18.9% 22.2% —  2.8% / year 1.2% / year


Carter +7.0% - 0.7% — - 0.2% / year                - 1.5% / year


I retrieved the data on Real Median Family Income for these years from State of Working America
The data on Real median Household income is not available from any source for years before 1980.

There are thousands of mitigating factors determining economic growth and its balanced distribution. The U.S. government, at all levels — local, state and federal — spend about 37% of GDP. This is a very large portion of all spending. But the private economy has a far greater effect on the economy than the government’s budget.

The relationship of the deficits, debt and household growth should shed a little light on how important the debt is. The government should attempt to direct the economy towards high efficiency, productivity, and widely-spread prosperity. Over the past 34 years we have not had balanced growth among income classes. Society should direct the economy to provide a floor of basic services and goods. Too often the mantra of free market punishes the many while rewarding the few. 

__________________________________________________
***   ***   ***   ***   ***   ***   ***    ***    ***    ***    ***

          After-thought,          

an article by economist Jeff Madrick, "Donald Trump, Don't Use Reaganomics as Your Model". 
The true measure of economic progress is productivity, the output per hour of work, which is the source of prosperity. For all the tax cuts and deregulation, productivity grew at only 1.4 percent a year under Reagan, far slower than it had between 1950 and 1973 or than it would in the 1990s (after Clinton’s tax hike) into the early 2000s. Business investment as a percent of GDP began to fall a few years into Reagan’s first term, only to reach unusually low levels when he left office.

and, about the Trump budget,   
I left this comment on an article at the Tax Policy Center: 

Since 1980 the top-earning 1% of adults has seen its annual 

income triple (adjusting for inflation), while the lower-earning 

50% has seen a 1% increase, from $16,000 to $16,200 per 

adult average. The gap between incomes has also tripled 

from 27 times to 81 times. Per adult the income of the top 

1% has gone from $433,000 to $1,300,000 in 2014, says the 

research from Washington Center for Equitable Growth, 

authors Saez, Piketty, and Zucman. The tax rate on the top 

1% has shrunk since 1980 when the top-marginal rate was 

70% on income that exceeded $1 million – (in the 1950s it 

had been 90%). Also corporate taxes contributed more, they 

equaled 77% of the amount brought in by personal income 

taxes, now they equal 22%. I write the blog Economics 

Without Greed (http://benL8.blogspot.com) with details of 

this, but the Saez, Piketty, Zucman report can be found at 

WCEG. Another thing, the net wealth has increased since 

2009, Q1; from $48 trillion to $94.8 trillion, says the Flow of 

Funds from the FRB, page 2. Adjusting for inflation 

"household net worth" increased by 77%. These were the 

aftermath years of the greatest recession (or depression) 

since the 1930s. A FTT, financial transaction tax, or a direct 

tax on financial assets? Property taxes levied by states and 

local government brought in $452 billion in 2014, says the 

taxpolicycenter.org -- that is this web page. Financial assets 

are approximately double the value of tangible assets (Flow 

of Funds, Table 101.b), so maybe a tax of $900 billion is 

appropriate. That's about $100 billion more than Social 

Security revenues. If we had corporate taxes equal to 77% 

of income taxes, as they were in 1950s, then this $900 billion 

financial assets tax would be less than the old corporate tax, 

by $200 billion. This leads me to think a 100% tax rate on 

income over $5 million might be the way to go. Simpler.