Trump Tax Cuts and the Napkin

The Trump administration tax cuts for the wealthy, and Republican plans to slash Social Security, Medicare, and Medicaid, can all be traced back to a line drawn on a napkin in 1974.

Sometimes a little information, a few words, can complete a picture. Sometimes that’s all it takes for things to fall neatly into place.

Like when I was told about the earlier name of the Beatles. They called themselves the Quarry Men. There were other names between the Quarry Men and the Beatles. But the Quarry came first.

Why?

Think about it. What do they do at quarries? They extract stone and other minerals. Like your expensive granite counter top. It came from a quarry.

So think about John Lennon introducing his little group to an audience.

We are the Quarry Men! We … Dig … Rock.

If they dig rock, calling themselves the Quarry Men was kind of clever, don’t you think?

Sometimes the revelation is a little more obscure. A while back someone explained a reference I see every once in a while about history. There were times when life was nasty, brutish, and short. That’s the phrase: “nasty, brutish, and short.”

It seems that, during the Middle Ages, the age of plagues, illness, and death, life expectancy got very short. In fact, very few people lived past 35. You can look it up. Average life expectancy was 31.3 years of age. As far as people were concerned, there were no middle-aged in the Middle Ages.

Today, average life expectancy is in the mid-to-late 70’s and increasing. Is there any wonder Social Security is under a strain?

In the 1970s, an economics professor from Pepperdine University got hold of a napkin and transformed the economic policy of the Republican party. Dr. Arthur Laffer was having dinner with Dick Cheney and Donald Rumsfeld when he drew on the now famous napkin the now famous line known as the Laffer Curve. It was the sort of bell-shaped curve you see on a lot of graphs. It starts at zero and ends at zero. But it rises between to a high point somewhere in the middle, then goes back down.

The napkin told the Republicans the unbelievable news: you can raise the amount that government takes in by cutting taxes on the wealthy. Got that? You cut taxes on rich folks, and tax revenues will go up.

It sounds bizarre, but the economic concept is not hard to explain. Most of us non-economic folks can understand it with just a little thought.

Imagine a world in which all income, everything, is taxed at a rate of zero. No taxes at all. How much tax revenue will the government take in?

Let’s not all raise our hands at once. Zero!

That’s right. Zero. When you have no taxes, you end up with no tax revenue.

Okay, so let’s go to the other side of the napkin. Suppose all income is taxed at 100%. How much revenue then? Think carefully, this gets tricky.

Does anyone get zero? That’s right zero.

If all income is taxed at 100%, what my very smart uncle called confiscatory taxation, then no matter how much you worked, and how much you earned, you would end up with nothing. The government would take it all. So there would be no reason for anyone to work. If nobody earns anything, then a tax on everything would bring in how much for government?

Everyone get it this time? Zero. 100% tax brings in nothing because 100% of nothing is nothing.

So the most government will bring in is somewhere between zero and 100%. And that’s how the graph got on Arthur Laffer’s napkin, and Republicans got amazed.

You see, everyone knew taxes were too high.

We always know this. You know your taxes are too high. I know my taxes are too high.

So the good news is really good: if you lower taxes, the tax reduction will more than pay for itself.

Which brings us to the problem with stories that are too good not to be true. Sometimes they’re not true anyway. You have to test them.

That’s what Republicans have been doing for longer than most Americans have been alive.

In Kansas, a new Governor, Sam Brownback, took office in 2011. He lowered taxes for businesses and wealthy individuals in what he called the great Kansas experiment. The tax cuts would pay for themselves, the industry would boom. Joblessness would largely disappear.

Growing the economy will create jobs. And more jobs mean more Kansans working, and more Kansans working produces more revenue for the state to fund our important services that we have.

Governor Sam Brownback

So taxes on business and wealthy individuals were cut. Government revenues went down for a while. Then they bounced – – – way, way down. Schools had to be closed, classes had to be cut. Roads went unpaved. Pensions were slashed. Medical care declined. Even death rates climbed.

And industry left. Joblessness went way up, especially compared to neighboring states in the region who had not cut their taxes.

Sam Brownback now works in the Trump administration as Ambassador for Religious Freedom.

In Kansas, with Sam Brownback gone, Republicans may win again this year, as they always do in Kansas. But if they win this year, it will be because of an independent splitting the anti-Republican vote. The tax cut program has been a loser.

In Georgia, Governor Nathan Deal began the same experiment in 2014. And began getting the same result.

In Georgia, Republicans may win again, as always. But, this year, it will be because of blatant vote slashing, attacking African-American voting rights if they missed so much as a period or a comma on any of the many government forms that carry their names.

And, in the federal government:

Ronald Reagan cut taxes for wealthy folks more than 3¾ decades ago. Government income for retirees, and orphans, and interstate highways, and ABMs went way down. So President Reagan raised taxes on working folks to reduce the deficit. To this day, some people boast how Reagan cut taxes while raising revenues. Not quite so.

And this year, the massive Trump cut, the cut that went mostly to the wealthy, was supposed to pay for itself.

The real issue is we’ve incentivized business to invest. So our revenues will go down in the short term because that’s an investment in the economy with immediate expensing and things like that which will create economic growth that will then create additional revenues.

Trump Treasury Secretary Steven Mnuchin

Instead, deficits are now way up. Projected deficits are skyrocketing.

But Republican leaders don’t see a connection. They blame the deficit on something else:

It’s very disturbing, and it’s driven by the three big entitlement programs that are very popular: Medicare, Social Security, and Medicaid.

Senate Leader Mitch McConnell

So Republicans are again talking about cutting Social Security, Medicare, and Medicaid, and eliminating Obamacare altogether. So pre-existing conditions will again be a price factor on healthcare.

Tax-cuts-paying-for-themselves was a good story. Too good not to be true, except it wasn’t true. In fact, the two Presidents in my lifetime who did balance the budget, eliminating deficits completely, were Lyndon Johnson and Bill Clinton.

Great stories, the ones that tie everything together, sometimes need a reality check.

For example, the very short lifespan in the Middle Ages is wrong. The average life expectancy went way down because of infant mortality. Kids died at birth. Lots of folks who got to adulthood lived into their 50s and 60s. The phrase “nasty, brutish, and short” was coined by Thomas Hobbes during the 1600s. He was describing war, not life in the Middle Ages.

And, increases in life expectancy today are caused by decreases in infant mortality. Fiscal problems in Social Security are not caused by increases in life expectancy.

OH. The Beatles really were named the Quarry Men, but it had nothing to do with “We dig rock.” “The Quarry Men” was just a line from a school song where they attended. A great story that is not true.

Perhaps enough analysis will find some reason the tax-cut-on-the-wealthy-that-pays-for-itself goes so wrong everywhere it’s tried.

Maybe the Laffer Curve is valid, but we are never close enough to the 100% line for the theory to work.

Or maybe the tax cuts are aimed at the wrong folks. Those who live fabulous lives by shuffling stock shares tend to buy yachts and jets, while ordinary people buy groceries. The ordinary folks being the ones who stimulate the economy.

Or maybe, just maybe, the Laffer Curve should have stayed on the napkin and Republicans should be sent home.

Many thanks to our friend and colleague Burr Deming, esteemed proprietor of Fair and Unbalanced.com.

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