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Prioritization of Cutting Taxes Over Pandemic Relief is Bad for the Economy

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Coins representing lost money from cutting taxes

On March 27, 2020, following the largest stock market drop in history, the bipartisan CARES Act, a $2.2 trillion legislative behemoth, was signed into law. It was the most expensive in history. In June of 2020, the U.S. reported the highest monthly deficit on record, $864 billion. However, even with all the infusion of pandemic relief money and expansion of the nation’s safety net, the nation is still reeling from the pandemic. Millions still have not returned to their jobs, and a housing crisis is on the horizon. Another aid package is sure to be coming. 

With GDP down and public expenditures up during this last year, the U.S. federal debt continues to balloon. In September of 2020, the U.S. federal debt was around $27 trillion, which is an estimated 98% of our GDP, according to the Congressional Budget Office, and it is increasing rapidly. By 2023, the US will have the highest debt to GDP ratio ever, higher than even the debt ratio during WWII.

The problem is that debt, even federal debt, brings with it interest payments. In 2019, the U.S. paid $393.5 billion dollars on interest. With rising debt, the interest payments will continue to burden the nation in years to come. Eventually, the budget will have to be balanced, and all our pandemic relief packages will have to be paid for. When debt gets too high, there will be just two choices: increase revenue or decrease expenses. Either America will increase taxes or make austerity cuts.

Over the last few decades, our political parties have established a clear divide on their stances. Democrats would increase taxes in order to expand the safety net. Republicans, on the other hand, would cut welfare and cut taxes as well. These two approaches have been very evident in the two political parties’ approaches towards pandemic relief.

Pandemic relief and politics of cutting taxes

The Democrat-driven $3 trillion dollar Heroes Act passed through the House in the middle of May. It would have continued the $600 per week unemployment bonus, provided hazard pay for essential workers, given a trillion dollars to state and local governments, extended the student loan payment pause, and provided relief for renters. The Democrats made a huge effort to not only extend the safety net provided by the CARES Act but also extend it to points that had not been covered under the CARES Act.

From the start, GOP senators cited concerns about the huge costs of the bill. After two months of letting the Heroes Act languish, the GOP countered the Heroes Act with the HEALS Act, which gave a much smaller $200 per week unemployment bonus, no extension of the eviction moratorium, and fewer benefits than the Heroes Act. Still, many GOP Senators felt that $200 was too much and were pushing for just a $100 per week unemployment bonus. Now that the Senate has entered the August recess, little more work on trying to find a compromise with Democrats is likely to come.

With the Senate failing to find common ground, the unemployment insurance bonus abruptly reached its end, as did the eviction moratoriums. The Republican President Donald Trump stepped in and signed an executive order to provide a $400 bonus per week, which for practical purposes has been cut to $300 because $100 was to come from states, who wouldn’t be able to pay for it due to massive budget shortfalls. Only Montana, West Virginia, and Kentucky are giving the extra hundred

President Trump also signed an executive order, which he stated would lead to stopping the pending evictions. However, the order does not explicitly forbid evictions, so forty million Americans are still at risk of losing their homes. Also, Trump signed a memorandum to allow for the deferral of payroll taxes, which only helps those with a job. And if the deferral of taxes were extended, it would be a major blow to the social security system. The President’s actions have also largely been declared unconstitutional by both parties and a number of lawsuits may happen.

The GOP’s lackadaisical effort to secure a deal shows that much of the Republican party does not see the need for a new pandemic relief package. Perhaps part of the reason is because the economic situation now is markedly different than it was back in March. In August, the stock market was booming. Nasdaq and the S&P 500 reached record highs. Back in March they were tanking. The GOP have often taken on the mantle of being the party of the economy. However, the stock market is not the economy. America’s GDP dropped 8% in the second quarter of this year, the worst drop since the Great Depression.

The federal debt is a problem. However, the pandemic is the greatest health crisis to hit this nation in a century. In 2019, we already had $23 trillion of debt. Much of that debt came as a result of Republican tax cuts. Because of these tax cuts, Republicans can claim no moral high ground for wanting to balance the budget. On top of this, tax cuts for the rich do not appear to benefit the economy as a whole either.

Corporations and the rich benefit from trickle-down economics

Money in wallet may come from cutting taxesThe last time the U.S. had a budget surplus was in 2000, and soon after entering office, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act, the first of two legislative bills that would primarily benefit wealthy households with large tax breaks and the phasing out of the estate tax. The tax cuts had widespread Republican support and minimal Democrat support. The Center on Budget and Policy Priorities (CBPP) estimated that the Bush cuts resulted in the top 1% income bracket having a 6.7% increase in after-tax income. The rationale was that cutting taxes would pay for the cuts themselves by creating more economic growth. This model has been called trickle-down economics.

Time and time again trickle-down economics has been proven false. The Bush tax cuts didn’t pay for themselves. Only weak economic growth was reported between 2001 and 2007. Wars with Iraq and Afghanistan ensued and the 2008 financial crisis broke the banks. By 2008 the federal deficit was doubled. The CBPP estimates that between 2001 and 2018, the Bush era tax cuts increased the national deficit by $5.6 trillion dollars. And they didn’t help the GDP either. In 2012, when the future extension of the cuts was analyzed, the Congressional Budget Office found that an extension on the high-income tax cuts would only increase the GDP by 0.1% in 2013.

The economic model of trickle-down economics should have been thrown out after Bush’s presidency. With the bailouts to mitigate the 2008 financial crisis, the national debt further increased. President Trump, however, jumped right back to embracing the model upon taking office. In 2017, when the national debt was already $20 trillion, a Republican Congress, with no Democrat support, pushed through more tax cuts that heavily favored the rich. The highest income bracket received a 2.6% cut. Estate tax exemptions were doubled. Tax breaks for investments were included, and there was a large corporate tax cut from 35% to 21%. With the tax loopholes and itemized deductions that benefit the wealthy, the top 400 wealthiest families received lower income tax rates than working class taxpayers.

The results of Trump’s tax cuts were $1 trillion of corporate stock buybacks, record high net corporate dividends, and very little economic benefit. The after-tax-cuts growth rate appears to be the same as before. However, the added debt will be $1.9 trillion over 11 years, according to the Congressional Budget Office.

Republican congresses and Presidents have no right to pretend to care about balancing the budget. For the last few decades, when Republican legislative and executive branches acted together, they prioritized giving the wealthy handouts over saving money for future inevitable crises. Even in the first stimulus package, a provision was included that would allow investors to use their losses on real estate to minimize taxes on investments, a provision that would only help those with enough money to invest — the rich. The estimated shortfall due to this change is $170 billion over 10 years.

The main problem with the trickle-down economics model comes from the assumption that the rich are the drivers of the economy. Instead, the evidence points in the other direction.

As reported in the National Bureau of Economic Research, Owen M. Zidar analyzed decades of data looking at how differences in state and federal income tax rates affected aggregate economic activities. When there was a 1% state income tax cut for the top 10%, there was no significant change in the GDP. On the other hand, a 1% state income tax cut for the bottom 90% resulted in 3.4% percentage points of employment growth over two years. A 1% increase in the income tax brought the same results but in the opposite direction. A tax on the top 10% had no significant decrease on the GDP while a tax on the bottom 90% lowered labor participation by 3.5%. It’s the working class that drives the economy, not the rich.

For the last few decades, the wealthy have benefited from tax breaks and thus larger incomes that have not resulted in measurable GDP increases for the rest of Americans. Consequently, the disparity of wealth between the richest and the poorest has increased. Income inequalities have increased to pre-Depression 1920 levels. Coupled with this hard fact, the loss of revenue of the tax breaks has to be recovered somehow. Republicans are keen on cutting programs for the poor. Without government assistance, 24% of Americans would be in poverty; with assistance, 13% would be in poverty. With Republican policies, the rich get richer and the poor get poorer, and the people in the middle don’t gain much.

The Republican delusion that the wealthy are the economic drivers is even more out of step with reality now while we struggle in our economic recovery. Spending is driving our economy, but the wealthy have not been spending. In June, low-income households spent 4% less than pre-Covid-19 times. On the other hand, high-income households were spending 17% less than pre-Covid-19 times. According to the Harvard economists who performed the study, the top 25% income brackets account for two thirds of the reductions in spending since January. Rather than ameliorating the economic problems, the wealthy have added to the suffering.

The pandemic came and without government intervention, our economy would be in much worse shape than it is in now. Government money for pandemic relief was needed. For years, though, largely through Republican initiatives, government revenue has been reduced under the guise of trickle-down economics. We now have record deficits and a giant national debt. The problems due to the pandemic have not yet been resolved.

So, as the Republican-led Senate proposes trimming the pandemic relief package, their motives are suspect. Republican Congresses and Presidents seem to have become enthralled with corporations and giving the wealthy tax cuts even though there is no measurable benefit to the economy or the nation. However, due to their tax cuts, welfare programs that do help normal Americans will have to be cut. In the end, they are prioritizing the wealthy over the rest of us.

One day the pandemic will be conquered. Vaccines will come. However, if there isn’t any more money in our nation’s coffers, our nation will be unfit to combat the next crisis: climate change, decaying infrastructure, environmental issues, or possibly another pandemic. Ultimately, Americans should face the reality that cutting taxes on the wealthy are not the answer; taxes will need to be raised.

Read more on the economy with how America failed its stress test, the prioritization of car payments over health insurance, or how educational inequality could result in a lost year for students.