Republicans and Democrats Disagree Over Taxes – What’s Best for the Economy?

Rachel Pappy, Tax Attorney Polston Tax Comparing the Main Economic Theories of the Republican and Democratic Parties

Republicans: Democrats:

-Laissez-Faire/Free Market -Keynesian Economics Economics -Combination of Private Sector -Supply Side Economics and Government Help -Tariffs -Control over the Money Supply and Federal Reserve Interest Rates Republican Party Economic Theories

Opposes a government-run single- Laissez-faire economics is best. payer health care system and is in This includes less spending by the favor of a personal or employer- Free markets and individual government and eliminating based system of insurance, achievement are the primary factors government run welfare programs in supplemented by Medicare and behind economic prosperity. favor of private sector nonprofits and Medicaid. (With a mixed record of encouraging personal responsibility. supporting Social Security, Medicare, and Medicaid.) Laissez faire economics is the belief that economies and businesses function best when there is no interference by the government.

The premise is that human beings are Laissez-Faire naturally motivated by self-interest, and when there is no interference in their Economics - economic activities, a natural and more Explained efficient balance in society exists.

This economic theory believes that each individual's self-interest to do better, strong competition from others, and low taxes will lead to the strongest economy, and therefore, everyone will benefit as a result. In the 19th century, this philosophy became mainstream in many countries. However it didn’t take long before companies gained monopoly power which resulted in poor treatment of workers, and lack of safety in the workplace

By the mid-19th century, governments in Laissez-Faire most advanced countries became more involved in protecting and representing the Economics – safety and concerns of workers, protecting the environment, and the general Problems population.

This was the beginning of many of the laws, including consumer protection laws, that are still being established and modified today to protect against large inequality gaps, and boom and bust economic cycles. Supply-side economics believes that economic growth can be most effectively created by lowering taxes and decreasing regulation. Consumers will then benefit from a greater supply of goods and services at lower prices and employment will increase.

Many Republicans consider the income tax system to be inherently inefficient and oppose Supply-Side graduated tax rates, which they believe are unfairly targeted at those who create jobs and Economics - wealth. Instead they support reducing high tax rates which they believe will result in economic growth, which in turn will increase government Explained revenue.

Many Republicans believe private spending is usually more efficient than government spending. Studies of supply-side policies demonstrate the increase to federal deficits, income inequality and overall lack of growth for the economy.

In the past several decades, tax cuts in the U.S. Supply-Side seldom result in more than a minimal impact on GDP growth, and have not recouped revenue Economics - losses. Problems Cutting marginal tax rates often primarily benefits the wealthy, so it is perceived as being politically motivated because the wealthy can contribute large sums to a political campaigns, both in dollars and public support. Tariffs - Explained

• Tariffs have historically served a key role in US Foreign Trade Policy. Tariffs were one of the pillars that allowed the rapid development and industrialization of the United States. • Their purpose was to generate revenue for the federal government and to allow for import substitution industrialization (industrialization of a nation by replacing foreign imports with domestic production) by acting as a protective barrier around infant industries. • They also aimed to reduce the trade deficit and the pressure of foreign competition. The United States pursued a protectionist policy from the beginning of the 19th century until the middle of the 20th century.. After 1942 the U.S. promoted worldwide free trade. Tariffs - Problems

• Economists generally agree that free trade leads to increased levels of economic output and income, and trade barriers such as tariffs reduce economic output and income. • Tariffs may be passed on to producers and consumers in the form of higher prices: • Tariffs can raise the cost of parts and materials, which would raise the price of goods using those inputs and reduce private sector output. This would result in lower incomes for both owners of capital and workers. • Similarly, higher consumer prices due to tariffs would reduce the after-tax value of both labor and capital income. • Because these higher prices would reduce the return to labor and capital, they would incentivize Americans to work and invest less, leading to lower output. • Although the U.S. dollar may appreciate in response to tariffs, the more valuable dollar would make it more difficult for exporters to sell their goods on the global market, resulting in lower revenues for exporters. This would also result in lower U.S. output and incomes for both workers and owners of capital, reducing incentives for work and investment and leading to a smaller total economy. Democratic Party Economic Theories

Generally support a type of Support a progressive tax Keynesian economics which Support universal health care, includes infrastructure system, higher minimum wages, and social security, public education, and public development and government- housing, equal economic sponsored employment programs with occasional support for opportunity, a basic social in an effort to achieve economic cutting the size of government development and job creation, safety net, and strong labor and reducing market unions. while stimulating private sector job regulations. creation. Keynesian Economics is the belief that a well-functioning and flourishing economy may be created with a combination of the private sector and “government help”.

This theory believes that the Keynesian government can create and fund public works projects such as fixing roads and Economics - bridges and other infrastructure needs Explained of the nation.

These jobs would directly or indirectly go to unemployed people who would then have money to spend, and as they spent their money, private businesses could hire other workers, who are then able to spend, and so on. It is not possible to know how much demand needs to be increased to deal with output gap because the output gap can vary. It takes a long time to change aggregate demand by the time AD increases it may be too late and it leads to inflation.

Keynesian Keynesian economics may encourages big government. In a recession governments increase spending, but, after recession Economics - government spending remains leading to Problems high tax and high spending.

Government spending projects may be designed for the short-term, but once started it creates powerful political pressure groups who lobby the government to hold onto them. Democrats believe a progressive tax structure reduces economic inequality by making sure that the wealthiest Americans pay the highest amount in taxes to provide economic equality and opportunities to those who face difficult hurdles.

They believe the increase in taxes can be spent on Progressive social services as an investment in job creation and the economy, while spending less on the military. They oppose cutting social services, such as Social Tax Structure- Security, as well as Medicare, Medicaid, and various other welfare programs, believing it to be harmful to Explained efficiency and social justice.

Democrats believe the benefits of spending on social services, in monetary and non-monetary terms, are a more productive labor force and that the benefits of this are greater than any benefits that could be derived from lower taxes, especially on top earners, or cuts to social services. Critics of progressive taxes consider them to be discriminatory against wealthy people or high-income earners, and question if it disincentivizes productivity due to the higher tax burden.

The U.S. progressive income tax is sometimes perceived as a means Progressive of income redistribution because nearly 20% of tax revenue is Tax allocated to social safety net programs. Structure-

Problems There may be a trade-off between the degree of progressivity and economic efficiency such that it reduces the incentive to work and can lead to stagnation and inefficiency. Tax codes in all developed countries promote a substantial degree of progressivity. The tax code in the United States is considered less progressive than those in most other developed countries, while tax codes in the Scandinavian countries tend to be among the most progressive. Social Safety Nets - Explained

• Research demonstrates that not only have anti-poverty programs successfully raised millions of families out of poverty, but they also increase the economic mobility of recipients and support broader economic growth. • Evidence demonstrates that safety nets do not provide the mythical “poverty trap”, but instead reduces poverty, increases economic mobility, and strengthens the national economy. • Studies show that many social safety net programs, especially those that target children, offer an excellent return on investment to taxpayers. There is also little evidence that the safety net reduces labor participation. Social Safety Nets in Billion Dollars Spent (Total US Annual Revenue $3,863,000,000,000) 2019* 2018 Refundable Tax Credits - Earned income tax credit (EITC) and child tax credit $ 88 $ 77 Cash is paid to working families who pay no income tax. SNAP - Supplemental Nutritional Assistance Program $ 64 $ 70 Formally food stamp program. Debit cards are distributed to the poor to buy food. Housing Assistance - HUD housing programs $ 51 $ 50 Includes rent vouchers, public housing and community development programs. SSI - Supplemental Security Income $ 57 $ 52 Cash is paid to disabled, blind or seniors over 65 years of age. Pell Grants $ 31 $ 30 Grants are made to students to help pay for college tuition, room and board. TANF - Temporary Assistance for Needy Families $ 16 $ 16 Cash is paid to support low-income families and move them from welfare to work. Child Nutrition $ 23 $ 23 School lunch, breakfast and after school food programs. Head Start - •Preschool program $ 12 $ 11 Job Training - •Various programs & employment support for adults, youth and seniors. $ 5 $ 5 WIC - Women, Infants and Children $ 5 $ 5 •High protein food for pregnant women and children up to five years old. Child Care - •Child care and after school programs $ 7 $ 6 LIHEAP - Low Income Home Energy Assistance Program $ 4 $ 3 Aid for heating or cooling a residential dwelling. Lifeline (Obama Phone) - •Phone subsidy including cell phones $ 1 $ 1 Total costs from 13 Welfare Programs $ 364 $ 349 Medicaid - Health care for low-income Americans $ 409 $ 389 Total Federal Safety Net costs $ 773 $ 738 Social Safety Nets - Problems

• Complexity, of multiple programs and "red tape" versus simplified system. • Inconsistent treatment of all low-income individuals in qualification, delivery and benefits. • “Make Work Pay” to encourage gainful employment if possible. American Economic Policies In Practice Over the Years The 1920s

• After World War I, the highest tax bracket, which was for those earning over $100,000 a year (worth at least $1 million a year now), was over 70 percent. The revenue acts of 1921, 1924, and 1926 reduced this tax rate to less than 25 percent, yet tax revenues actually went up significantly. • The share of income taxes paid by the higher net income tax classes fell as tax rates were raised. With the reduction in rates in the twenties, higher- income taxpayers reduced their sheltering of income and the number of returns and share of income taxes paid by higher-income taxpayers rose. The 1960s

• Democratic President John F. Kennedy advocated for a drastic tax- rate cut in 1963 when the top income tax rate was 91%, arguing that "[t]ax rates are too high today and tax revenues too low, and the soundest way to raise revenues in the long run is to cut rates now". • The Revenue Act of 1964 emerged from Congress and was signed by Kennedy's successor Lyndon Johnson on February 26, 1964. • The stated goals of the tax cuts were to raise personal incomes, increase consumption and increase capital investment. The 1980s

• During the1980 Presidential campaign, the key economic concern was double digit inflation, which Republican Presidential candidate described as "[t]oo many dollars chasing too few goods", but rather than the usual dose of tight money, recession and layoffs, with their consequent loss of production and wealth, he promised a gradual and painless way to fight inflation by "producing our way out of it". • The Federal Reserve began a policy of tighter monetary policies such as lower money supply growth to break the inflationary psychology and squeeze inflationary expectations out of the economic system. • The Congress under Reagan passed a plan that would slash taxes by $749 billion over five years. • Critics claim that the tax cuts increased budget deficits while Reagan supporters credit them with helping the 1980s economic expansion that eventually lowered the deficits and argued that the budget deficit would have decreased if not for massive increases in military spending. 1980s continued

• Income tax revenues in “constant dollars” decreased by $2.77 billion in that year. • FICA tax revenue increased because in 1983 FICA tax rates were increased from 6.7% to 7% and the ceiling was raised by $2,100. For the self-employed, the FICA tax rate went from 9.35% to 14%. The FICA tax rate increased throughout Reagan's term and rose to 7.51% in 1988 and the ceiling was raised by 61% through Reagan's two terms. • Those tax hikes on wage earners, along with inflation, were the source of revenue gains in the early 1980s. • It has been contended by some supply-side critics that the argument to lower taxes to increase revenues was a smokescreen for "starving" the government of revenues in the hope that the tax cuts would lead to a corresponding drop in government spending, but this did not turn out to be the case. The 1990s

• Republican President George H.W. Bush raised marginal income tax rates in 1990. • Democratic President Clinton presided over the budgets for fiscal years 1994–2001. From 1998 to 2001, the budget was in a surplus for the first time since 1969. • President Clinton sought to adopt some of the pro-market orientation associated with the ascendancy of the Republicans in the 1980s, and marry it with traditional Democratic values such as concern for the environment and a more progressive income distribution. • Clinton signed the Omnibus Budget Reconciliation Act of 1993 into law, which raised income taxes rates on incomes above $115,000, created additional higher tax brackets for corporate income over $335,000, removed the cap on Medicare taxes, raised fuel taxes and increased the portion of Social Security income subject to tax, among other tax increases. The 1990s continued

• This “progressive fiscal conservatism” combines modest attempts at redistribution (the progressive component) and budget discipline (the fiscal conservative component). • The 1993 package included significant spending reductions and tax increases. But it concentrated the tax increases on upper-income taxpayers, while substantially expanding the Earned Income Tax Credit, Head Start, and other government programs aimed at lower earners. The 1980s, 1990s, and 2000s Economic Policies Compared

• The highest income tax rate was 50 percent from 1983 to 1986, but below 40 percent after 1993. And the capital gains tax was 28 percent from 1987 to [1997], but only 20 percent in the booming years of 1997-2000. On balance, there were good and bad things about both periods. But both the eighties and the nineties had much wiser tax policies than we had from 1968 to 1982. • In 2008, the Center for American Progress compared economic and budgetary results from two supply-side periods (1981-1992 and 2001-2007), against the Clinton era (1993-2000) as a counter-example where tax rates were increased contrary to supply-side theory. In terms of growth in wages, real investment, and GDP, results were better during the Clinton era. While the tax cuts in the supply-side periods contributed to greater deficits, the tax increases of the Clinton era contributed to surpluses.[59] • Economist Paul Krugman wrote in 2017 that Clinton's tax increases on the rich provided counter- example to the supply-side tax cut doctrine: "Bill Clinton provided a clear test, by raising taxes on the rich. Republicans predicted disaster, but instead the economy boomed, creating more jobs than under Reagan."[54] • Supply-side economist Alan Reynolds argued that the Clinton era represented a continuation of a low tax policy from the 1980s. The 2000s

• During his presidency, President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 and Jobs and Growth Tax Relief Reconciliation Act of 2003. • In 2007, the Bush administration pointed to the long period of sustained growth, both in GDP and in overall job numbers as well as increases in personal income and decreases in the government deficit. • An analysis of the Bush tax cuts by the Economic Policy Institute claims that the Bush tax cuts have failed to promote growth since all macroeconomic growth indicators were well below average for the 2001–2005 business cycle. These critics argue the Bush tax cuts have done little more than deprive the government of revenue necessary to keep a balanced budget. The 2000s continued

• In 2003, a Congressional Budget Office study was conducted to forecast whether currently proposed tax cuts would increase revenues. The study used dynamic scoring models as supply side advocates had wanted and was conducted by a supply side advocate. The majority of the models applied predicted that the proposed tax cuts would not increase revenues. • In 2006, the CBO released a study titled "A Dynamic Analysis of Permanent Extension of the President's Tax Relief". This study found that under the best possible scenario making tax cuts permanent would increase the economy "over the long run" by 0.7%. Since the "long run" is not defined, some commentators have suggested that 20 years should be used, making the annual best case GDP growth equal to 0.04%. When compared with the cost of the tax cuts, the best case growth scenario is still not sufficient to pay for the tax cuts. Previous official CBO estimates had identified the tax cuts as costing an amount equal to 1.4% of GDP. According to the study, if the best case growth scenario is applied, the tax cuts would still cost an amount equal to 1.27% of GDP. • This study was criticized by many economists, including Harvard Economics Professor Greg Mankiw, who pointed out that the CBO used a very low value for the earnings-weighted compensated labor supply elasticity of 0.14. In a paper published in the Journal of Public Economics, Mankiw and Matthew Weinzierl noted that the current economics research would place an appropriate value for labor supply elasticity at around 0.5. The Experiment

• In May 2012, the Republican Governor of the state of Kansas, signed into law the "Kansas Senate Bill Substitute HB 2117", which cut state income taxes deeply and was intended to generate rapid economic growth. • The tax cuts have been called the "Kansas experiment", and described as "one of the cleanest experiments for how tax cuts effect economic growth in the U.S." • The law cut taxes by US$231 million in its first year, and cuts were projected to total US$934 million after six years. • They eliminated taxes on "pass-through" income for the owners of almost 200,000 businesses, and cut individual income tax rates as well. • The original bill proposed by the Governor offset the losses expected to result from the cuts with increases in the state sales tax, as well as the elimination of numerous tax credits and deductions, but by the time the bill came to the Governor to be signed these had been removed. • The Governor argued that the cuts would pay for themselves by increasing revenue by boosting the state's economic growth and forecasted his cuts would create an additional 23,000 jobs in Kansas by 2020. Supporters pointed to projections from the conservative Kansas Policy Institute predicting that the bill would lead to a $323 million increase in tax revenue. The Kansas Experiment repealed

• The cuts were based on model legislation published by the conservative American Legislative Exchange Council (ALEC) and were supported by , Supply-Side economist , and anti-tax leader . • By 2017, state revenues had fallen by hundreds of millions of dollars causing spending on roads, bridges, and education to be slashed. • Rather than boosting economic growth, growth in Kansas remained consistently below average. In 2017, the Republican Legislature of Kansas voted to roll back the cuts, and after the Governor vetoed the repeal, overrode his veto. • According to Max Ehrenfreund and economists he consulted, an explanation for the reduction instead of increase in economic growth from the tax cuts is that "any" benefits from tax cuts come over the long, not short run, but what does come in the short run is a major decline in demand for goods and services. • In the Kansas economy cuts in state government expenditures cut incomes of state government "employees, suppliers and contractors" who spent much or most of their incomes locally. In addition, concern over the state's large budget deficits "might have deterred businesses from making major new investments". Kansas vs. California

• Economist Paul Krugman wrote in 2017: ", Governor of Kansas, slashed taxes in what he called a “real live experiment” in conservative fiscal policy. But the growth he promised never came, while a fiscal crisis did. At the same time, Jerry Brown's California raised taxes, leading to proclamations from the right that the state was committing “economic suicide”; in fact, the state has experienced impressive employment and economic growth." • Gov. Brownback himself strongly rejected criticism of his cuts or any need to adjust the law, declaring the cuts a success, blaming perceptions to the contrary on a “rural recession,” and on “the left media" which "lies about the tax cuts all the time”. 2018 Tax Cuts

• President Trump implemented individual and corporate income tax cuts which took effect in 2018, the results were as follows: • The budget deficit rose to $779 billion in fiscal year 2018, up 17% versus the prior year. • Corporate tax revenues were down by one-third in fiscal year 2018. • Stock buyback activity increased significantly. • GDP growth, business investment and corporate profits increased. • A typical worker in a large company got a $225 raise or one-time bonus, due to the law. • Real wage growth (adjusted for inflation) was slightly slower in 2018 than 2017. 2018 Tax Cuts

• reported in August 2019 that: "The increasing levels of red ink stem from a steep falloff in federal revenue after Mr. Trump’s 2017 tax cuts, which lowered individual and corporate tax rates, resulting in far fewer tax dollars flowing to the Treasury Department. • Tax revenues for 2018 and 2019 have fallen more than $430 billion short of what the budget office predicted they would be in June 2017, before the tax law was approved that December. GDP Comparison of Federal Spending, Revenue, IN BILLIONS GROWTH Debt Increase, Deficit, and GDP Growth OF DOLLARS $5,000 10.00%

Tax cuts Deregulation Raised Tax cuts on income Raised taxes, Raised Taxes, cut Tax cuts, more Tax increase, Tax cuts, for Interest tax and tightened ADA, and defense and deregulation, bailouts to auto more personal Rates interest rate and Free Trade welfare spending, enacted Sarbanes- industry and deregulati income tax money supply Agreement more deregulation Oxley, expanded financial on 7.50% Medicare institutions, $3,750 and corporate infrastructure tax package

5.00%

$2,500

2.50%

$1,250

0.00% Coronavirus

$0 -2.50%

-$1,250 -5.00% 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 YEAR Deficit Revenue Debt Increase Federal Spending GDP Growth Conclusion

• No one solution solves the myriad of problems we face.