Recently, Arizona columnist Robert Robb, well known for his conservative economic views, wrote a post on his Substack defending Senator Kirsten Sinema’s resistance to Democratic priorities for changes to the tax code in the Inflation Reduction Act – specifically increases on certain top corporate and personal rates, and eliminating the grotesque ‘carried interest’ exception for hedge fund managers – claiming her actions “saved the country from a serious recession.” He states that Sinema’s opposition to increasing tax rates on the highest earners and capital gains “is the principal reason the private sector investment climate wasn’t seriously impaired.” Lucky for him that is a counter-factual claim that can never be tested empirically.
But his rationale for that conclusion can be tested – and has been over 40 years. That rationale is his belief that tax rates have a significant and controlling effect on the performance of the economy as a whole by their effects on private investment. He writes, “[t]hese and other [tax increase] provisions would have seriously depleted and discouraged private investment. And that is what the economy now relies on to avoid a serious recession or to recover quickly from one.”
Let’s take a look at the evidence for Robb’s view on the effect of tax rates on growth. Simply put, there isn’t any. What we have here is merely Robb’s strong belief in the jejune and evidence-free assertions of the supply-side economic rhetoric of conservatives since the 1980s, during which Robb formed his core political philosophy. Instead of the widespread growth in economic output promised as a result of tax rate cuts, what slashing top tax rates actually achieved with great alacrity and efficiency were massive decreases in government revenues, an explosion in the national debt, and a radical increase in the personal wealth of top earners, greatly exacerbating the wealth and income inequality in America over the past 40 or so years. The much-promised increases in productive investment and concomitant overall economic growth have NEVER materialized. In fact, the economy tends to perform better as a whole when Democrats are in charge and do their best to raise marginal rates on the wealthiest.
One way one can tell that Robb is not serious about his interest in overall economic growth or productive investment is his apparent opposition to one positive tax provision that did make it past Sinema’s veto pen: a 1% tax on stock buybacks:
Robb writes, “Contrary to bipartisan skepticism about them, stock buybacks are an efficient and useful way to redeploy capital. This excise tax will do far more to inhibit the productive flow of capital than subjecting general partner performance bonuses to individual income tax rates rather than capital gains ones. A true supply-sider would never have made that exchange.”
An efficient and useful way to redeploy capital? Could Robb possibly be serious? What stock buybacks mainly achieve is greater capital gains to stock investors, but they especially benefit those in the C-Suites holding options with a below-market strike price. Buying back stock to retire those shares simply achieves the opposite of issuing new stock: the former concentrates the firm’s existing value in now fewer shares, whereas the latter dilutes each share’s value. The result is similar to giving shareholders a dividend, but it rewards insiders whose compensation depends largely on increasing share prices far more. It is essentially stock price manipulation by corporate insiders which has been legalized. That was not always the case: until 1982, the practice was considered by the SEC what it actually is – potentially illegal stock price manipulation. No capital is “redeployed” in any meaningful amount – the result merely to further enrich the already wealthy and corporate insiders, not to grow the economy as a whole or invest in corporate expansion. In fact, such buybacks actively redeploy corporate profits away from investment in the firm’s expansion or research and development for future growth.
Finally, Robb makes this claim, “The business community lobbied Sinema to oppose the tax increases the Biden administration was proposing and virtually all other congressional Democrats supported. Yes, she has raked in campaign contributions as a result. But I don’t think that’s her main motivation. Either from sincere belief or desired political imaging, she wants to be regarded as pro-business.”
How naive and brainwashed are Robb’s readers to even credit the idea that campaign contributions (and sotto voce golden parachutes to lobby and consult waiting in the wings for Sinema’s retirement [voluntarily or otherwise…] from the Senate) were not the primary motives for her opposition to taxes on the wealthiest? Sinema is protecting wealth concentration and inequality, not the business environment. Want to know how I know? Simply because there is zero empirical evidence that marginal tax rates have ANY appreciable or predictable effect on the overall growth of the economy. There is ample proof, however, that they DO have a strong and predictable effect on income inequality and wealth concentration.
Robb is doing what he’s done his entire career: give cover to economic policies that strongly benefit the wealthy and powerful under the guise of promoting the general welfare using baseless claims that policies that benefit the economic elite will benefit us all. The supply side hustle has always been a fact-free lie, and we have 40 years of data to prove its falsity.