Bruce Bartlett destroys the GOP’s ‘trickle down’ tax myth that he helped to create

I happened to catch economist and former deputy assistant to the Treasury under George H. W. Bush, Bruce Bartlett, discussing the Trump tax “plan” (actually just an outline) released on Wednesday on The Last Word with Lawrence O’Donnel.

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Bartlett had some harsh words for the faith-based supply side “trickle down” economics that got its start with Arthur Laffer under the Reagan administration, which his boss George H. W. Bush used to deride as “voodoo economics.”

(Beginning at the 10:00 minute mark)

O’Donnell: You recently wrote that “Everything Republicans now say about taxes is wrong.”

Bartlett: “Well, I think that they took a good idea of lowering marginal tax rates and doing tax reform and they simply got carried away. They started making exaggerated arguments saying these tax cuts would pay for themselves with no loss of revenue, and that’s just hogwash, that’s just a lie. And anybody who says it is a liar. And I think that the people who say it know that they’re lying. There is not a single serious study, there’s no serious study of anything by this administration or anybody on the right these days, that would back up in the slightest possible way the talking points that they continually throw out there as just propaganda.

Bruce Bartlett followed up this appearance on MSNBC with an op-ed in the Washington Post today. I helped create the GOP tax myth. Trump is wrong: Tax cuts don’t equal growth.

Four decades ago, while working for Rep. Jack Kemp (R-N.Y.), I had a hand in creating the Republican tax myth. Of course, it didn’t seem like a myth at that time — taxes were rising rapidly because of inflation and bracket creep, the top tax rate was 70 percent and the economy seemed trapped in stagflation with no way out. Tax cuts, at that time, were an appropriate remedy for the economy’s ills. By the time Ronald Reagan was president, Republican tax gospel went something like this:

  • The tax system has an enormously powerful effect on economic growth and employment.
  • High taxes and tax rates were largely responsible for stagflation in the 1970s.
  • Reagan’s 1981 tax cut, which was based on a bill, co-sponsored by Kemp and Sen. William Roth (R-Del.), that I helped design, unleashed the American economy and led to an abundance of growth.

Based on this logic, tax cuts became the GOP’s go-to solution for nearly every economic problem. Extravagant claims are made for any proposed tax cut. Wednesday, President Trump argued that “our country and our economy cannot take off” without the kind of tax reform he proposes. Last week, Republican economist Arthur Laffer said, “If you cut that [corporate] tax rate to 15 percent, it will pay for itself many times over. … This will bring in probably $1.5 trillion net by itself.” [Sadly, this huckster is  still around selling his nonsense.]

That’s wishful thinking. So is most Republican rhetoric around tax cutting. In reality, there’s no evidence that a tax cut now would spur growth.

The Reagan tax cut did have a positive effect on the economy, but the prosperity of the ’80s is overrated in the Republican mind. In fact, aggregate real gross domestic product growth was higher in the ’70s — 37.2 percent vs. 35.9 percent.

Moreover, GOP tax mythology usually leaves out other factors that also contributed to growth in the 1980s: First was the sharp reduction in interest rates by the Federal Reserve. The fed funds rate fell by more than half, from about 19 percent in July 1981 to about 9 percent in November 1982. Second, Reagan’s defense buildup and highway construction programs greatly increased the federal government’s purchases of goods and services. This is textbook Keynesian economics. [Proven economic theory that Republicans today reject as heresy to their false religion of faith-based supply side “trickle down” economics.]

Third, there was the simple bounce-back from the recession of 1981-82. Recoveries in the postwar era tended to be V-shaped — they were as sharp as the downturns they followed. The deeper the recession, the more robust the recovery.

Finally, I’m not sure how many Republicans even know anymore that Reagan raised taxes several times after 1981. [Ronald Reagan raised taxes 11 times in his administration. ] His last budget showed that as of 1988, the aggregate, cumulative revenue loss from the 1981 tax cut was $264 billion and legislated tax increases brought about half of that back. [Under Reagan, the national debt almost tripled, from $907 billion in 1980 to $2.6 trillion in 1988.]

Today, Republicans extol the virtues of lowering marginal tax rates, citing as their model the Tax Reform Act of 1986, which lowered the top individual income tax rate to just 28 percent from 50 percent, and the corporate tax rate to 34 percent from 46 percent. What follows, they say, would be an economic boon. Indeed, textbook tax theory says that lowering marginal tax rates while holding revenue constant unambiguously raises growth.

But there is no evidence showing a boost in growth from the 1986 act. The economy remained on the same track, with huge stock market crashes — 1987’s “Black Monday,” 1989’s Friday the 13th “mini-crash” and a recession beginning in 1990. Real wages fell.

Strenuous efforts by economists to find any growth effect from the 1986 act have failed to find much. The most thorough analysis, by economists Alan Auerbach and Joel Slemrod, found only a shifting of income due to tax reform, no growth effects: “The aggregate values of labor supply and saving apparently responded very little,” they concluded.

The flip-side of tax cut mythology is the notion that tax increases are an economic disaster — the reason, in theory, every Republican in Congress voted against the tax increase proposed by Bill Clinton in 1993. Yet the 1990s was the most prosperous decade in recent memory. At 37.3 percent, aggregate real GDP growth in the 1990s exceeded that in the 1980s.

Despite huge tax cuts almost annually during the George W. Bush administration that cost the Treasury trillions in revenue, according to the Congressional Budget Office, growth collapsed in the first decade of the 2000s. Real GDP rose just 19.5 percent, well below its ’90s rate.

We saw another test of the Republican tax myth in 2013, after President Barack Obama allowed some of the Bush tax cuts to expire, raising the top income tax rate to its current 39.6 percent from 35 percent. The economy grew nicely afterward and the stock market has boomed — up around 10,000 points over the past five years.

Now, Republicans propose cutting the top individual rate to 35 percent, despite lacking evidence that this lower rate led to growth during the Bush years, and a drop in the corporate tax rate to just 20 percent from 35 percent. Unlike 1986, however, this $1.5 trillion cut over the next decade will only be paid for partially by closing tax loopholes.

Republicans’ various claims are irreconcilable. One is that the rich will not benefit even though it is practically impossible for them not to — those paying the most taxes already will necessarily benefit the most from a large tax cut. And there aren’t enough tax deductions, exclusions and credits benefiting the rich that could be abolished to offset a cut in the top rate.

Even if they had released a complete plan — not just the woefully incomplete nine-page outline released Wednesday — Republicans have failed to make a sound case that it’s time to cut taxes.

Nor have they signaled that they’ll commit to a viable process. It’s worth remembering that the first version of the ’81 tax cut was introduced in 1977 and underwent thorough analysis by the CBO and other organizations, and was subject to comprehensive public hearings. The Tax Reform Act of 1986 grew out of a detailed Treasury study and took over two years to complete.

Rushing through a half-baked tax plan, in the same manner Republicans tried (and failed) to do with health-care reform, should be rejected out of hand. As Sen. John McCain (R-Ariz.) has repeatedly and correctly said, successful legislating requires a return to the “regular order.” That means a detailed proposal with proper revenue estimates and distribution tables from the Joint Committee on Taxation, hearings and analysis by the nation’s best tax experts, markups and amendments in the tax-writing committees, and an open process in the House of Representatives and Senate.

There are good arguments for a proper tax reform even if it won’t raise GDP growth. It may improve economic efficiency, administration and fairness. But getting from here to there requires heavy lifting that this Republican Congress has yet to demonstrate. If they again look for a quick, easy victory, they risk a replay of the Obamacare repeal fight that wasted so much time and yielded so little.

Extra Credit Economics Course: The professor, Paul Krugman, explains Voodoo Gets Even Voodooier:

I liked Binyamin Appelbaum’s historical comparison of the Trump tax cut with Reagan and Bush, although such a comparison risks suggesting that the previous rounds made sense. They didn’t. The Reagan tax cut caused a sharp reversal in the long-run trend toward a declining debt-GDP ratio, the Bush tax cuts undid the fiscal progress of the Clinton years. And conversely, the Clinton tax hike helped produce surpluses even as the economy experienced a large boom, totally the opposite of what the usual suspects on the right predicted.

FRED Federal Debt

That said, Trumpcuts are an even worse idea than Reaganomics, and not just because we start from much higher debt, the legacy of the financial crisis, which cut deeply into revenue and temporarily boosted spending. It also matters that we start from a much lower top tax rate than Reagan did.

Here’s the modern history of the top marginal rate:

Marginal Tax Rates

So Reagan was cutting taxes with a starting rate of 70%; Trumpcuts would start from only a bit more than half that. Why does this matter?

Actually, two reasons. First, tax cuts are supposed to spur growth by increasing the amount of an increment in income someone can keep for himself or herself. When you start from 70% taxation, cutting the rate 1 percent raises the take-home component by 1/30, or more than 3%. When you start from 39.6%, the same size cut raises the take-home slice by 1/60, or half as much. In other words, we’d expect the incentive effects of a given tax cut now to be only half what they were under Reagan.

And suppose for the sake of argument that you do get some extra growth. How much of this feeds back into higher revenue? That depends on the marginal tax rate — which is much lower now, only a bit more than half, than it was in 1981.

So even if you believed that voodoo economics worked under Reagan — which it didn’t — it would take a lot more voodoo, in fact around 4 times as much, for it to work now.

Which makes you wonder: how can they possibly sell this as a responsible plan? Oh, right: they’ll just lie.

As Republicans have been lying for 37 years. It’s time to consign their false religion of faith-based supply side “trickle down” economics to the ash heap of history.

16 Responses to Bruce Bartlett destroys the GOP’s ‘trickle down’ tax myth that he helped to create

  1. The economy grew nicely afterward.

    Really, Obama closed out with 1.6% and 1.9% growth. “Nicely”

    Reagan closed out with 9.3%.

    You can only maintain this massive fiction by not looking at the countries of Europe.

    In 1980, they did what you recommend for us. They stuck with high marginal tax burden on growth under the insane idea that people work just as hard and creatively when they are taxed heavily.

    Since 1980, France has lost 3 billion hours of annual work while we have gained over 85 billion hours of annual work.

    Our stock market at $28 billion (new record as of yesterday afternoon) is projecting 4% growth.

    Europe’s stock market at 7 trillion (world bank, probably 8 billion now) is projecting .9% growth for them.

    • For Sure Not Tom

      Tax cuts do not pay for themselves.

      And Thuckhead, I say this as a concerned internet commenter, you may be sunsetting, your posts are getting more and more incoherent.

      I hope you’re okay.

      • Reagan’s tax cuts hugely paid for themselves and you can see this by comparing us with Europe.

        Even though Bush, Clinton and Obama sliced away at Reagan’s reduction from 72% to 28%, 32 points of his tax rate cut are still in place and you can see that strength in comparison to Europe.

        We have 147 million jobs up from 138 million jobs in 2008. The EU has exactly the same number of jobs it had in 2008.

        The comparison becomes more dramatic when you reach all the way back to 1980. Since 1980, France has lost 3 billion hours of work while the US has gained over 85 billion hours of work.

        I wish I had total EU employment for European Union countries in 1980, I have only been able to retrieve the data country by country.

        A growth comparison between the EU and the US over the last 37 years would not be a pretty picture.

        The EU is following your advice and it shows. They are growing at less than 1%.

        And, Obama did his best to Europeanize the US and as a result, we look a lot more like them now.

        Your “growing nicely” is producing very poor job growth for our young people even if it is strong growth relative to Europe.

        There are no jobs for their refugees and immigrants anywhere but England and few in England.

  2. “Rushing through a half-baked tax plan, in the same manner Republicans tried (and failed) to do with health-care reform, should be rejected out of hand.”

    Something that seems long forgotten by the people on this blog is that the democrats rushed through a half baked health care plan in the ACA. At the time it was passed, large portions of it had not been reviewed completely for it’s impact on the budget and the economy. The democrats pushing to make the ACA a law had no real idea what was in it.

    Having said that, I think it is stupid for the Republicans to follow suit and pass ill thought out and sketchy plans of any kind, whether tax reform, health care, or anything else. If nothing else, the steady decline and failure of the ACA should prove the folly of not doing it right the first time.

    • “Rushing through a half-baked tax plan, in the same manner Republicans tried (and failed) to do with health-care reform, should be rejected out of hand.”
      
      Yeah, you’re right Steve. Democrats taking a year to craft a plan, soliciting input from Republicans, allowing them to add their amendments only to have them vote against it sure qualifies as “rushing through a half-baked healthcare plan. As opposed to Republicans taking seven years of umpteen votes to repeal the ACA, having no replacement ready, then concocting a half-assed plan that’s really just another massive tax cuts for those who don’t need them, while shutting out Democratic input, rushing for a vote before the CBO has a chance to deeply examine & score it. Yeah, the Republican approach is anything but half-baked. Do yourself a favor Steve and extricate your head from the right wing media sewer. Do it before any brain damage is permanent.

      • “Do yourself a favor Steve and extricate your head from the right wing media sewer.”

        Wileybud, you make some good points and I agree the Republican approach thus far has been far worse than what happened with the ACA. But the thing you are forgetting is that within a couple of days prior to passage of the ACA, Nancy Pelosi made her now famous admission that no one really knew what was in the bill and the only way to find out would be to pass it. So despite the fact that I agree with you in a general sense, I still hold that the ACA was a half baked plan that sewed the seeds of it’s own destruction in the way it was written. The approach may have been measurably better to get it passed, but at it’s heart it was still a crap shoot as to whether it would work or not. The ACA was passed with as much pure hope it would work as advertised as it was of substance.

        • Regarding Nancy Pelosi’s “famous admission”, take it away Snopes (Also known as the Urban Legend Reference Pages)!:

          “As you can see, it’s true that Pelosi did utter these words: “We have to pass the bill so that you can find out what is in it”. However, the article leaves out important context, including the next few words:

          We have to pass the bill so that you can find out what is in it, away from the fog of the controversy.

          Like much reporting and commentary surrounding that remark over the past seven years, the Chicks on the Right article also leaves out the remarks made by Pelosi in the lead-up to the now-infamous soundbite.

          She was speaking at the National Association of Counties’ annual Legislative Conference on 9 March 2010, in Washington D.C. You can find a full transcript of her speech here, but we’ve included some relevant context surrounding her comments on the Affordable Care Act:

          Imagine an economy where people could follow their aspirations, where they could be entrepreneurial, where they could take risks professionally because personally their families [sic] health care needs are being met. Where they could be self-employed or start a business, not be job-locked in a job because they have health care there, and if they went out on their own it would be unaffordable to them, but especially true, if someone has a child with a pre-existing condition. So when we pass our bill, never again will people be denied coverage because they have a pre-existing condition.

          We have to do this in partnership, and I wanted to bring [you] up to date on where we see it from here. The final health care legislation that will soon be passed by Congress will deliver successful reform at the local level. It will offer paid for investments that will improve health care services and coverage for millions more Americans. It will make significant investments in innovation, prevention, wellness and offer robust support for public health infrastructure. It will dramatically expand investments into community health centers. That means a dramatic expansion in the number of patients community health centers can see and ultimately healthier communities. Our bill will significantly reduce uncompensated care for hospitals.

          You’ve heard about the controversies within the bill, the process about the bill, one or the other. But I don’t know if you have heard that it is legislation for the future, not just about health care for America, but about a healthier America, where preventive care is not something that you have to pay a deductible for or out of pocket. Prevention, prevention, prevention–it’s about diet, not diabetes. It’s going to be very, very exciting.

          But we have to pass the bill so that you can find out what is in it, away from the fog of the controversy.

          Although the point is not made clearly or explicitly, it appears that the sense of Pelosi’s remarks was that the benefits (in her view) of the bill – rather than the contents of the bill – would only be fully revealed to the public after it was passed and implemented.

          http://www.snopes.com/pelosi-healthcare-pass-the-bill-to-see-what-is-in-it/

          • You’re exactly right. Her choice of words was unfortunate, but her sentiment was not. Instead of saying “what’s in it” she should have said “how it will benefit us”.

            Of course, politicians don’t hesitate to take words out of context, so one needs to accept this reality in order to serve. In the words of Rudyard Kipling, from If:

            “If you can bear to hear the truth you’ve spoken
            Twisted by knaves to make a trap for fools,”

          • Bob Lord said, “Her choice of words was unfortunate…”

            And he is correct. It was an unfortunate choice of words, but it did express her opinion that the ACA was too big and too complex to know everything that was in it and only by putting it into law would we find out what was in it.

            The truth is that when the ACA was passed, I was an enthusiastic supporter of it and stated so on these pages. I thought that, while it was bound to have flaws in it, at least we were moving in the right direction. Since that time I have seen the flaws in the ACA become major problems and nothing is being done to correct them.

            I do not support the GOPs approach to health care because it amounts to nothing more than a cobbled together plan that is ill thought out and likely bound to fail. I also do not support the GOPs efforts to kill the ACA with no plan to replace it. Both are stupid ways to go.

            Edward Cizek asked me what I thought about crafting a Health Care Plan. I honestly said that I have no idea what should be done because I am just not that smart. BUT, since we have the ACA, why don’t we just work on improving it instead of killing it? This is an important issue that requires more than just political squawking, party in-fighting and petty vindictiveness…from both sides of the proverbial aisle.

        • A question for you, Steve:

          What would be your preferred approach to helping to ensure greater access to healthcare, while working to keep costs under control?

          I know that you are not fond of having insurance or payments managed by the government, and I can understand the negatives of that approach. However, I would say that it’s a less-bad approach than relying on employer-sponsored healthcare, an lingering consequence of WWII-era wage-and-price controls. Not only does our current system have wide opacity in pricing and payment structure, but it imposes significant costs on (potential) employers, who are expected to also do insurance program administration and other such tasks, or contract that work out to an HR firm. Certainly, moving away from the expectation of coverage-through-employment would lower business costs and, at least at a first-order approximation, lead to increased hiring at the margin.

          I don’t know if single-payer is the best way of providing healthcare. I’d also like to see analysis of ACA-with-public-option, as well as a German-styled system, which might be likened to Medicare Part A for all, with other (private) options available for people who choose to buy more than just major medical & hospitalization coverage.

          • Frances Perkins

            Hospital billing is complete mythology. They bill anything they can get away with, because of cost shifting. Every American hospitalized sees this everyday. My hospital stay was billed with a gross number, and insurance paid. I asked for a itemized bill. It took six weeks to get it. I reviewed the bill. Many detailed items were nonsense. Some were not even mine, and they corrected them. The insurance did not seem to care. I was trying to save money and the insurance paid because the billed amount were within their parameters for the illness. This is the “perfect” system you have now. The Canadian system would work here and we should have it.

          • “What would be your preferred approach to helping to ensure greater access to healthcare, while working to keep costs under control?”

            That is a good and valid question to ask. The truth is I have no idea what the answer is. I am not that smart and it is a huge and complex issue.

            ” I’d also like to see analysis of ACA-with-public-option, as well as a German-styled system, which might be likened to Medicare Part A for all…”

            I think that would be an excellent approach. There are a lot of approaches used by other countries and taking a look at them would be a good start in building a solid and workable plan for the United States.

            The one thing we can’t do is ignore the health care issue. However, the way the GOP cobbled something together to pass off as a “Health Care Plan” in NOT the approach we should take.

  3. student debt is stoping young people from buying houses and even new cars. as one of the marx brothers said a long time ago the rich would get richer and the poor would get poorer. people are so economically desperate that when given a choice between a corporate democrat and trump. they said I agree with trump what have I got to loose! as a lefty who supports the dreamers I notice at least in the short term businesses are looking for help. and these our low paying jobs they want filled. tax cuts are not what is needed free college and student debt forgiveness is!

  4. For Sure Not Tom

    “In the 1980’s Ronald Reagan ushered in a new era in American economics as he cut the top tax bracket from 70% down to 50% and then down again to 28%. In order to get support for doing this from the people, and also from politicians, a very crafty set of lies were produced. As David Stockman, then Reagan’s budget director, put it: giving small tax cuts across the board to all brackets was simply a “Trojan Horse” that was used to get approval for the huge top tax bracket cuts. “Trickle-Down” was a term used by Republicans that meant giving tax cuts to the rich. Stockman explains that:

    “It’s kind of hard to sell ‘trickle down,’ so the supply-side formula was the only way to get a tax policy that was really ‘trickle down.’ Supply-side is ‘trickle-down’ theory.”

    “Yes, Stockman conceded, when one stripped away the new rhetoric emphasizing across-the-board cuts, the supply-side theory was really new clothes for the unpopular doctrine of the old Republican orthodoxy.”

    “…the Reagan coalition prevailed again in the House and Congress passed the tax-cut legislation with a final frenzy of trading and bargaining. Again, Stockman was not exhilarated by the victory. On the contrary, it seemed to leave a bad taste in his mouth, as though the democratic process had finally succeeded in shocking him by its intensity and its greed. Once again, Stockman participated in the trading — special tax concessions for oil — lease holders and real-estate tax shelters, and generous loopholes that virtually eliminated the corporate income tax. Stockman sat in the room and saw it happen.”

    “‘Do you realize the greed that came to the forefront?’ Stockman asked with wonder. ‘The hogs were really feeding. The greed level, the level of opportunism, just got out of control.'”

    The Education of David Stockman – 1981

    Trickle down is voodoo economics. Today I listened to paid liar Gary Cohn during the daily White House presser saying that sure, there may be some short term deficits and the debt may go up, but in 10 or 20 years it’s going to be green grass and high tides.

    Time after time the GOP’s flock falls for this crap, all while screaming about stealing our children’s future.

    Mind-boggling.

  5. Charles Pierce gets to the core of the problem:

    “If you want to spot the moment in time in which the Republican Party first rejected the empirical and embraced unreason as a political identity, don’t look to the Religious Right, look to the day Reagan and his people took supply-side economics seriously. That’s the first bowlful of monkeybrains that the GOP ate. That’s where the prion disease first took hold. Supply-side never made sense as economics; when George H. W. Bush called it “voodoo economics,” he said the truest thing he ever said in public. It was less economics than it was a kind of conjuring spell. It was El Mystico’s block of flats from Monty Python. It required faith as described by Paul in Hebrews as the substance of things hoped for and the evidence of things unseen. This makes for fine theology, but it makes for terrible math. The Republican party opted for the theology and abandoned the math and, once you’ve done that, you’re willing to believe anything.”

    For the rest: http://www.esquire.com/news-politics/politics/a12501917/republicans-economics-supply-side-reagan/