“Shame on You, Grandpa!”

The rush to cut taxes and increase the deficit simply to please major partisan donors by adding more profit to businesses that have reported record profits for the past 5 years, and shift the cost to future generations, is the most unpatriotic policy I’ve seen in my lifetime.  If passed, this generation will be the first one in my lifetime of almost 70 years to put their own self-interests above the interests of future generations, and we will deserve the shameful scorn from the generation of Americans in the second half of this century. 

I can imagine our grandchildren making the following statements about our generation:

·        Shame on you for failing to sacrifice during your life to help make the lives of future Americans better than yours; 

·        Shame on you for passing the debt you created from the tax cuts of the 1980’s through the late 2010’s, culminating in the tax cuts of 2018, onto our generation;

·        Shame on you for adding to existing debt in 2018 instead of taking responsibility to pay down that debt and make sure you would not pass it on to future generations; 

·        Shame on you for putting the future economic security of the country at risk during our generation, a country you claimed to love deeply in your lifetime, while choosing not act responsibly to protect the country from serious economic risk in the future. 

Every generation of Americans, beginning with our Founding Fathers in the days before we were a county, has sacrificed some of their own quality of life in order to ensure a better quality of life for future generations. Our generation has benefited greatly from the sacrifices of our grandparents’ generation, who have rightly been called “The Greatest Generation”.  Not only did they make great sacrifices to secure a lasting peace during and after World War II, but when they returned home, they continued to act to ensure greater security for our country and future generations … ours.  

So I am wondering what is causing our generation to act with so much self-centered interest in the past 38 years, to focus only on our own needs of the day, to put our future economic security at risk, and to ignore the example of our grandparents’ generation?  When they returned home from World War II, you could not blame them for saying, now it’s my turn.  But, they continued to focus on ensuring the economic security of the country and quality of life for future generations ahead of their own short term needs.

Lessons to Learn From The “Greatest Generation”

Here’s an overview of their selfless and inspiring actions.  From 1950 to 1963, they set the top personal tax rate at 91% and business tax rates were 50%.  Can you even imagine even half that tax rate being considered today?  This obviously required sacrifice by individuals in the country, but those tax rates provided the revenues for several key actions that greatly benefited the country:

1.  Pay down World War II debt and not pass that on to our generation;

2.  Fund a new transportation infrastructure, the interstate highway system, which has been the backbone of our economic growth and personal quality of life over the past 50 years, without passing on debt to our generation;

3.  Pay for sending about 4 million veterans of WW II to college, providing a large educated workforce to support economic growth, again without passing debt on to our generation;

4.  Provide funds to help rebuild the economies destroyed by WW II, in Europe and Japan, of both our Allies and our Enemies, leveraging the learning from the rise of fascism out of the destroyed economies of WW I, a key part of how their generation helped create a largely peaceful/non-violent world for nearly 60 years.

Deficits Rise From Revenue Cuts 

The annual deficits were quite small from 1950 through 1980, with tax rates declining from a high of 91% in the first decade to 50% in 1980.  The progression of top tax rate cuts over time since the end of WW II have dropped from a high of 91%-92% during 1950-1963, to a low of 28% in 1988-1989. Tax rates were raised in 1993 to help reduce growing deficits following tax cuts in the 1980's, then were cut in 2003 to 35%, but raised again for deficit reduction purposes to 39.6% in 2013.   

As shown in the above chart, annual deficits started rising with the tax cuts of the 1980’s as tax rates were cut to 50% and then to 28%, while military spending increased dramatically.  It was “projected” at the time that the lower tax rates would pay for the extra spending, without the need to raise tax rates to pay for the increased spending.  This projection did not turn out to be what resulted, and deficits grew substantially.  So by the late 1990’s, bi-partisan action was taken to reduce the annual deficits by enacting a small reduction in spending and a small increase in tax rates to 39.6%, resulting in small budget surpluses in 1999-2000.

Dramatic Deficit Growth Since 2001

Beginning in 2001, spending increased due to the Iraq war spending, which was not funded by raising revenues via tax rates, but by increasing the deficit, were followed by cutting taxes on 2003.  Once again, these tax cuts were “projected” to grow the economy and offset the extra spending.  But once again, this projection did not happen and annual deficits in 2001-2008 increased dramatically.

The actions taken by business after the 2003 tax cuts, and their impact on the economy, incomes, the deficit and stock buy backs, is clear.  Most of the profits were used to buy back stocks, increasing stock prices above that deserved by earnings, and contributed to the severity of the market collapse and recession of 2009-2010.  In 2009, the economy suffered the collapse of housing prices, at a time when the profits from the 2003 tax cuts were being invested not in building the economy or growing incomes, but in buying back stock and increasing executive compensation.  This created a bubble in stock prices which also collapsed when the housing prices collapsed.  The deficit, as shown above, grew dramatically, the economy continued to experience slow growth before and after the largest recession since 1929, and incomes remained flat or declining slowly.

Why haven’t these tax cuts over the past 30 years grown the economy?  They have always fueled increases in company profits, but because the profits were used to buy back stock, to the level of Trillions of dollars from 2003-2008, and middle class incomes were declining, the economy did not grow. The fact is, economic growth is measured in GDP, which is not driven by profits, it is driven 70% by middle class spending, which requires increases in middle class incomes.  So unless worker incomes are rising consistently, it will be nearly impossible for the economy to grow consistently.  Simply stated, it should be the single most important factor in any economic growth policy that will work.

Following the 2009-2010 mortgage and stock market collapses and the accompanying deep recession and job losses, annual deficits skyrocketed further.  Revenues dropped and spending increased to fund a recovery of the financial industry combined to contribute to that result.  Profits have soared since 2011, reaching annual record levels every year in each of the past 5 years.  Along with these profits, stock buy backs and executive compensation have also soared, sending stock market prices to new records nearly every year.  However, because middle class incomes continued to decline throughout the last 18 years until 2016, the economy has consistently suffered from slow growth even in periods of sustained record profits.  And annual deficits, while declining from the 2009 level, have remained at nearly historically high levels compared to those before the recession.

Tax Reforms Needed

So now there is a proposal to cut taxes further, which is forecasted to increase economic growth, create more high paying jobs and increase worker incomes.  But the current tax policy does not leverage the facts of economic growth or the history or actual results of past tax cuts over the past 30 years, nor is it focused on directly increasing worker incomes.  Instead we are repeating the focus on cutting revenues and taxes and “projecting” strong economic growth to offset the extra deficit impact.   

What would the “Greatest Generation” do today?  Do you think they enjoyed paying 91% tax rates?  That was a sacrifice in their lives to ensure the economic prosperity and security of their grandchildren and the country they loved and defended during World War II.  So while no one enjoys paying more taxes, here’s a proposal for an economic growth policy that reflects the facts of what drives economic growth, and the lessons of past actual actions following past tax cuts:

1.  We should not cut revenues when we have an existing deficit.  In fact, we need to increase revenues to start paying down the existing debt, and to fund investments in infrastructure and more workforce development programs.  We cannot build a world class economy on a second class infrastructure via tax cuts alone.  And many businesses seeking to grow today cannot readily hire the skilled workers they need.

2.  We can reform the business  tax code by eliminating most BUSINESS deductions and credits and setting published tax rates LOWER than current published rates, and closer to the actual tax rates that most large businesses pay after leveraging deductions and credits.  The actual business tax rates today are much lower than the published tax rates, and these actual rates are about equal to the average tax rates of our global competitors.  The premise that as a country, we need reduced business tax rates to be more competitive globally ignores the fact that actual tax rates paid by businesses are already about in line with most global competitors.

This approach will also correct the imbalance between large and small business.  Small businesses can’t afford the tax specialty staff to find and structure the business to take maximum advantage of a complex tax code.  This should be the focus of tax code simplification, as small businesses create most of the jobs in today’s economy.  It is a false claim that reducing the number of tax brackets reforms and simplifies the tax code.  The tax code remains thousands of pages if all deductions and credits remain in place.  Fewer tax brackets makes the rate differences between brackets larger, which in fact can be a disincentive to move up to higher income brackets.

But most importantly, these proposed business tax cuts are simply unnecessary for economic growth. We’ve had 5 years of record profits with slow growth because it is middle class incomes that drive economic growth, not business profits.  Cutting business taxes will explode the deficit because once again, growth will not offset the loss of revenues without an increase in middle class incomes. The tax cuts will lead to more stock buy backs and executive compensation increases, creating another, larger bubble in stock market prices. None of those outcomes is good for the economy or the country.

3.  When deductions are eliminated, a range of tax rates will be set in each profit bracket.  The lowest tax rate in each bracket would be applied to those earned profits that are shared with workers, not with executives.  A higher tax rate would be applied to profits invested in business expansion and hiring and executive compensation, and a much higher tax rate would be applied to profits used to buy back stock. 

4.  With incentives in place to use record profits to share with workers, there will be a greater impact on middle class incomes than the proposed personal tax cuts, without having an impact on deficits or company profits.  It will also minimize the impact on creating a stock price bubble.

Conclusion

These proposals are not partisan, they do not seek to favor any single segment of citizens.  They seek to benefit all citizens by focusing on the actions that will grow the economy for all citizens.  They will not grow the deficit, and as middle class incomes grow, the growth in the economy will increase revenues and minimize or possibly eliminate annual deficits. This should be an outcome that both parties and most citizens would welcome. The future economic security of our country, and the quality of life of our grandchildren, depends on our choices.  I hope we have the courage and the selflessness of previous generations to act to deserve the admiration, not the scorn, of our grandchildren.