| The Return of Reaganomics |  |
By: Scott Piraino
The economic excuse Reagan used to pass his massive tax cut was also the same. With the US sliding into recession, his administration proposed lowering tax rates on the wealthiest Americans so they could spend and invest more money. They argued that only this increased economic activity could lift the country out of recession.
Quasi -economic terms like "supply side" and "trickle down" were used to give Reagan's proposal an academic veneer. In fact, Reaganomics was nothing more than intellectual camouflage for cutting tax rates on the rich. And if these tax cuts were unfair and would create the largest national debt in history, well so what.
The recession of 1981 ended the following year. Not because of Reaganomics of course, but because the Federal Reserve lowered interest rates. Paul Volcker, the Fed Chairman at the time, was determined to crush the rampant inflation of the 1970s. His draconian solution was to send interest rates soaring to near twenty percent. This caused the recession of 1981 and the Reagan administration knew it.
The difference between 1981 and 2001 is that Paul Volcker had to stifle the real, chronic, double digit inflation of the 1970s. Alan Greenspan has concerned himself not with real inflation, but with "wage inflation" and "employment costs". More quasi-economic terms, but these are simply Greenspeak for "pay raise".
His battle against wage inflation has been a success. The decade of the 1990s saw the longest economic expansion in US history. Worker productivity increased at its fastest pace in 30 years, while inflation remained at historically low levels. But Alan Greenspan's monetary policy during the 1990s did not allow the US economy to grow so fast that employers were forced to pay higher wages. After adjusting for the miniscule inflation rate, US workers today earn the same pay they did ten years ago.
In addition to not getting a pay raise, wage earners and the working poor have had their payroll taxes increased. Social Security and Medicare are flat taxes on all wage income. That means there are no write-offs or deductions, and all wage income is taxed at the same percentage. Social Security is actually a regressive flat tax because only the first 76 thousand dollars of wage income is taxed.
Payroll taxes account for one third of federal revenue and more than half the present budget surplus. Yet President Bush has not suggested cutting these taxes, or making them fair. Instead the Bush administration will continue the fiction that workers are “contributing” to a “trust fund”, while spending the surpluses from these payroll taxes as general revenue.
Payroll taxes are only paid by Americans who work. The wealthiest Americans don't need jobs because they own capital, invested money that makes more money. The rent or sale of property, interest on money, and profits from investments represents capital gains. Over the last twenty years capital gains tax rates have been steadily reduced, to eighteen percent today. Since capital gains are not wage income, the owners of capital do not pay income tax, nor do they contribute to Social Security and Medicare.
In 1981 the wealthiest Americans received the biggest tax cut in US history. Make no mistake, Reaganomics did exactly what it was supposed to do. It made the richest Americans much wealthier and transferred more of the tax burden to the middle class and working poor.
Now twenty years later, President Bush offers a 1.6 trillion dollar tax cut. Although his plan would reduce income taxes for everyone, even these reductions favor the wealthy, as does the elimination of the estate tax. But there are no reductions in payroll taxes paid by wage earners, or increases in capital gains taxes paid by the rich. Nor is there an explanation for giving the wealthy another tax cut while the rest of us pay down the debt created by Reaganomics.