During the first Trump presidency, he and the Republicans took America straight down the ineffective road of trickle down, supply-side economics by encouraging domestic investment through tax cuts and less regulation – even though history pretty much tells us trickle down, supply-side economics doesn’t work if your main goal is to encourage economic growth.
Now listen, I’m not saying there is never a time and place for tax cuts. There certainly can be. But tax cuts made absolutely ZERO sense for an economy that had been on a healthy trajectory in terms of stable growth and falling unemployment for over eight years. Essentially, the Tax Cuts and Jobs Act of 2017 (TCJA) – the law that congressional Republicans passed and then President Trump signed on December 22, 2017 – acted as a fiscal stimulus when we didn’t need one.
This was a double-whammy because, not only was it clear from the jump that the Republican tax cuts were going to cost this nation a fortune, but the Federal Reserve Bank of San Francisco made clear at the time that “many recent studies have found that fiscal stimulus has a smaller impact when the economy is strong, implying that the near-term boost to GDP growth could be two-thirds or less of that from previous tax cuts.”
The Feds warning proved 100% correct. Even with the Republican tax cuts acting as a stimulus, the annual gross domestic product (GDP) growth rate was only 2.9 percent in 2018, then fell to 2.2 percent in 2019. Hardly a bonanza.
Here is a quick history of trickle down, supply-side economics in a nutshell. < Please don’t misunderstand, all this negative talk about trickle down, supply-side economics in no way means that the better way is massive tax-and-spending, which may even be worse. More on this this later in this chapter. >
The Republican fantasy about supply-side economics goes something like this: Cutting corporate taxes and rich people’s taxes, together with minimizing regulation, will give corporations and rich people the chance to create so many fabulous opportunities that the benefits will “trickle down” to everyone else and the economy will flourish beyond anyone’s wildest dreams!!!
Obviously, a tax cut means that less money is being collected by the federal government, but supply-side Republicans believe that this tangible loss is more than compensated for by the level of economic growth that the tax cuts will surely bring.
They believe this fairytale because 44 years ago, President Ronald Reagan unleashed “Reaganomics” the moment he signed the Economic Recovery Tax Act of 1981.
But what these Republicans seem to forget is that, although the U.S. economy did indeed experience a boost during this time period – including a net gain of 2 million jobs per year during President Reagan’s two terms (which, incidentally, is less than the 2.6 million jobs per year under President Jimmy Carter) – it was more a combined function of the Paul Volcker-led Federal Reserve’s significant interest rate cuts and increased spending for defense and construction projects.
They also forget that, when President Reagan became the 40th U.S. president, the economy was in recession, interest rates were 19 percent, unemployment was in the double digits, and inflation was almost 10 percent (which are all reasons why the Federal Reserve’s interest rate cuts made such a huge impact). Also, the top marginal income tax rate was 70 percent.
All of us not named Elizabeth Warren, Alexandria Ocasio-Cortez, or Bernie Sanders can probably agree that a top marginal income tax rate of 70 percent was waaaaay too high and, at the time, substantial reform of the tax code was long overdue.
To that end, the Economic Recovery Tax Act of 1981 reduced the marginal tax rate from 70 percent to 50 percent. From the beginning, President Reagan and his team recognized the tax cuts would not pay for themselves, but they anticipated spending cuts would help balance everything out. Typically, the spending cuts never came.
But even back then – with an economy that had negative markers across the board – supply-side economics didn’t work as advertised. Soon after the 1981 tax cut, federal revenues dropped like a rock and the federal deficit blew out, making it clear the tax reduction was too aggressive.
Even so, five years later, President Reagan signed the Tax Reform Act of 1986, bipartisan legislation with the stated goal of “fairness, simplicity and economic growth.” This law reduced the marginal income tax rate from 50 percent to 28 percent and reduced the corporate tax rate from 46 percent to 34 percent.