gracchusdixit

The Trump administration recently unveiled its plan to reform our labyrinthine tax code.  It should be said that the words “plan” and “reform” are little more than metaphors, designed to mask a rather different reality.  The administration’s plan is nothing but a series of bullet points plucked from a Powerpoint presentation, and its true purpose isn’t to reform the tax code but to provide a massive tax cut for corporations, business owners, and the richest individuals in the land—one of whom, it scarcely needs saying, is Donald Trump himself.  Some accounts indicate that the personal benefit of this “reform” to Trump and his family could exceed $1 billion.  For many of the major corporations and mega-donors who fund the Republican Party, the windfall would be even greater.

Trump and Republicans in Congress are trying to justify this massive give-away on several grounds.  The main one is that lowering income taxes on corporations and capital gains taxes on those who buy and sell their stock would unleash an economic boom, thereby increasing jobs and wages for millions of ordinary middle-class Americans—a warmed-over version of Ronald Reagan’s “trickle down” economics.

It doesn’t take any sort of sophisticated economic analysis, it just takes a bit of math, to see this assertion for what it actually is:  pure mythology.

I recently took a look at our country’s economic performance from 1933 through the end of 2016,  comparing changes in GDP with the prevailing levels of federal taxation on both corporations and individuals.  In each case, I calculated the correlation coefficients between the two sets of information.  This, I realize, undoubtedly sounds wonky.  So, a bit of explanation may be useful.

The correlation coefficient—r for short—is a statistic indicating the degree to which two sets of numbers increase or decrease in lockstep.  When r is 0.0, no correlation exists.  When r is 1.0, a perfect and positive correlation exists: as one number in one set increases, the complementary number in another set increases by the same amount.  When r is -1.0, the match is also perfect but in the opposite direction:  as one number in one set increases, the complementary number in another set decreases by the same amount.  Since perfect correlations between any two sets of real-world phenomena rarely occur, we have to settle for probabilities.  Which leads to the question: when is a correlation between two sets of data significantly greater than chance?  The answer is:  when r is at least 0.5.  Hold that thought.

It is frequently, and rightly, observed, that correlations do not prove cause and effect.  That does not mean they are irrelevant.  On the contrary.  Although a statistically significant r does not prove a cause and effect relationship between two phenomena, cause and effect can’t be proved without one.  Where there is no significant correlation, a cause-and-effect relationship is impossible.

Which (at long last) brings me to my point.

In 83 years of economic record-keeping, no statistically significant correlation—no r that comes even close to 0.5—can be found between lower corporate tax rates and economic growth.  In fact, the record is riddled with exceptions.  During the presidential administrations of John Kennedy and Lyndon Johnson, for example, annual economic growth reached a peak of 8.5 percent, all the while the top corporate tax rate averaged 50 percent.  To put that in context:  last year, our economy grew by 1.8 percent, while the top corporate tax rate was 35 percent.

The same thing is true—only more so—when it comes to the capital gains and income taxes paid by the wealthiest individuals.  The correlation between economic growth and the taxes paid by the top one percent is zero.  Not only does lowering taxes on the rich fail to produce a “trickle down” effect, it doesn’t yield even a drop.  In fact, the opposite seems to be the case. Tax cuts for the lowest quintile—that is, the least well-off 20 percent of the population—are correlated with the biggest gains in GDP, while tax cuts on the top quintile—the most affluent 20 percent of the population—are correlated with the smallest gains in GDP.

When you stop to think about it, this is little more than common sense.  As the Elizabethan philosopher, Francis Bacon, observed:  “Money is like muck, no good except it be spread”.  When money goes to those who already have more money than they can possibly need, it lies fallow, stashed away in rentier investments that make the rich even richer than they already are, but contributing little to the general economy.  When money goes to those who have real and unmet needs, they spend, fueling the economy as a whole.  A million people buying groceries contribute far more to the economy than a thousand people buying Gucci shoes.

Another myth trotted out to support the administration’s tax plan is a promise to benefit small businesses in particular, which, it is claimed, are responsible for creating most of the new jobs in our economy.  Even some Democrats, who should know better, have signed up to this myth.

The US Census defines a “small business” as one that has fewer than 500 employees. Although such businesses account for 99 percent of the commercial firms in the country, they provide only 48 percent of the jobs.  Which means that one percent of the nation’s commercial firms provides 52 percent of the jobs; indeed, fewer than one tenth of one percent provide a third of the jobs.

Whatever the overall numbers, it is routinely claimed that small businesses create two thirds of the new jobs produced by our economy.  Indeed, they do.  But they are also responsible for most of the job losses.  That’s because 20 percent of small-businesses fail within a year, 50 percent fail within three years, and 80 percent fail within ten years.  On an annual basis, the ratio between small-business start-ups and small-business failures is roughly equal.  Which means that, for every small business that creates new jobs, another one goes under, resulting in commensurate job losses.  As a result, net job creation by small businesses adds up to…nothing.  The jobs that last, the jobs that provide decent wages and benefits, the jobs that truly fuel our economy, are produced, not by small businesses, but by big, enduring businesses.

Government policies that ignore these realities, tax “plans” that prefer mythology over math, are doomed to fail.  If Trump’s tax plan by some miraculous means becomes an actual bill and then a law, it too will fail.  There will be no economic boom nor any boon to the middle class.  The rich will get richer, and the rest of the country will get poorer, all because the politicians in charge either won’t or can’t do the math.