Myth Versus Math
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.
In the wake of the latest and most terrible mass shooting in our history, we are once again witnessing a shadow play that we have seen many times before. Those, who are justifiably outraged by the slaughter in Las Vegas, are crying out for “common sense gun control”. Those, who stubbornly believe that even the slightest attempt to control guns is blasphemy, retort that “now is not the time to politicize a tragedy”. Both send their perfunctory “thoughts and prayers” to the victims and their families, as if thoughts and prayers could somehow bring back the dead and erase all memory of the tragedy itself.
On the evening of April 7, 1775, Dr. Samuel Johnson, who gave us the first definitive dictionary of the English language, remarked to his friend and biographer, James Boswell: “Patriotism is the last refuge of a scoundrel.” We do not know what sparked this now famous aperçu or exactly which scoundrel the redoubtable doctor had in mind—because Boswell didn’t say.
Confronting the cumulative calamities of Hurricanes Harvey and Irma, and now Hurricane Maria, many journalists and even many climate scientists have struck a conspicuously cautious note in discussing the connection between these catastrophes and climate change. Again and again, they have drawn a fine and tortured distinction between the intensity of these events and their frequency, asserting that global warming may affect the one but not cause the other. We can be reasonably certain, they insist, that climate change made these storms worse, but we cannot be absolutely certain that it caused them. This, it has to be said, is a distinction without a difference.
Since the largely unexpected—and to some, still shocking—outcome of the 2016 presidential election, many of the country’s leading liberal thinkers have been asking a question that is now emblazoned on the title page of Hillary Clinton’s new book: What Happened? Not content with trying to answer that question, liberals have gone on to flagellate themselves for failing to see it coming.
In deciding to rescind Deferred Action for Childhood Arrivals, a.k.a. DACA, a policy introduced by President Barack Obama to protect the innocent children of illegal immigrants from deportation, Donald Trump had neither the courage nor the courtesy to announce the decision himself. Instead, he handed this disreputable task to his all too eager Attorney General, Jefferson Beauregard Sessions III.
What has happened, and is still happening, to the people of the Gulf coast of Texas and Louisiana is heartbreaking. Thousands have lost their homes. Thousands more have been displaced. For hundreds of thousands, perhaps millions, it will be many months, even years, before their lives can be pieced back together. A large swath of Houston, our nation’s fourth largest city, is underwater. Much of its infrastructure has been washed away. Many of its streets and schools, bayous and bridges, parks and public places are all but gone. The mere thought of how all this damage is to be repaired boggles the mind.
I recently spent a couple of weeks at the University of Oxford, where I took two courses in political philosophy. One of my classmates was a Labour Member of Parliament from Australia, who had a wicked sense of humor and was an unapologetic Marxist. This unlikely combination—a communist with comedic talent, as if Karl and Groucho Marx had been rolled into one—was hard to resist. In any event, we struck up a friendship that led to numerous sidebar conversations, not only about our coursework, but also about political events in general. During one of these exchanges, my funny friend cast humor aside to express the worry that “identity politics”—based on race, gender, religion or culture—poses a serious, perhaps a fatal, threat to left-leaning political parties throughout the western world.
In the wake of Donald Trump’s shocking rant just 48 hours ago about the tragic events in Charlottesville, Virginia, during which he sought to equate the motives and behavior of Neo-Nazis and white racists with those who gathered to protest against them, Republicans have finally begun to speak out. A few have denounced the president directly. More, like Speaker of the House Paul Ryan and Senate Majority Leader Mitch McConnell, have confined their denunciations to the evils of racism and bigotry without denouncing the evil-doer himself. The latter have been criticized, and justly so, for failing to draw the obvious connection between the bigoted rhetoric of the president and the murderous violence in Charlottesville.
Forty-eight hours ago, the Congress of the United States adjourned for its summer recess. By all accounts, members of both the House and the Senate, particularly those on the Republican side, were relieved to escape not only the notoriously oppressive summer weather of the nation’s capital, but even more so the stormy weather emanating from the increasingly chaotic and floundering presidency of Donald J. Trump.