It is no great surprise that people today are unhappy with the way the economy moves (or doesn’t move, as the case may be). It has become apparent over the last 30 years that wages for middle earners has largely stagnated from the previous 60 years, while the income for top earners has continued to skyrocket and the cost of living has continued it’s constant, slow steady climb. The Reagan era fiscal theory of ‘Trickle Down’ economics was a justification for cutting taxes on the higher earners because when they have cash, they create business and hire workers. This definitely sounds plausible, and has been played up as obvious common sense for so long that no one on the right can see the inherent flaw within this theory. Our economy is not based upon production and creation for the sake of producing or creating, our economy is based upon consumption and the segment of the population that does the most consuming is not at the top, but smack-dab in the middle.
The promise of this country was that you could make it rich, regardless of where you came from, and this promise is still very much alive, but it is very rare. The largest advantage to our society is that, with the exception of those at the very bottom, we are almost all richer than the average citizens in 75-85% of the rest of the world (dependent on whose numbers you look at). And this is what most of us want, we want relative freedom to pursue our passions, less worry about finances and a comfortable living. Most of us are not interested in being wealthy, per se, but pursuing a lifestyle of our choosing and earning enough to do that.
To achieve these desires, we have a relatively free economy (as compared to most, but clearly not all) that rewards great ideas and better products. Now of course a great idea alone won’t make you rich, in most cases, you need to be able to create your product, test it and sell it, so you need capital and for that you need the top earners to invest or a bank to loan you the money. No matter how good your idea or product is, if no one buys it you are screwed, your investors will lose their money and your little business venture will fail. If people buy, you earn, and therefore you can spend those earnings to expand, hire and pay off your debts. If your idea/product is successful enough, you can improve your life and the lives of those around you, those that work for you and their families and hopefully be in a position to help the next guy that comes along to do the same.
Now here is where Trickle Down theory comes into play. Back in the early 70s (and since income tax was first collected) our progressive tax structure was designed to tax disposable income only at progressively higher rates so that those at the top had a higher tax burden than those in the middle and those at the bottom would essentially have none. The system was stacked to give the primary benefits and therefore the best incentives, tax breaks and credits to the middle income earners. This allowed for continued growth in the private sector as the primary consumer base had more to spend, which gave bigger profits to those that produced regardless of level of income, and guaranteed a thriving economy. Of course there were hiccups in the system, usually caused by outside influences or forced manipulation by our Government, but the central concept was fine. And we flourished even though the top marginal tax bracket was over 70%, and not at the historical low of 35% where we currently are. When ‘Trickle-Down’ theory was applied, we had been through one financial upheaval after another, the inflation crisis that brought us to a floating standard (or fiat money as Michael likes to say) oil price hikes and the embargo, as well as a few other hiccups. The right pushed through a concept promising sweeping change that would benefit everyone. By the end of the ’80s, Reagan had reduced the taxes on the top, created the largest tax increase in our history on the middle, simplified the tax code and raised taxes a total of 6 times while increasing deficit spending beyond levels anyone had dreamed of before, establishing a National Debt that will not be paid off for decades. Instead of benefiting everyone, the top earners pocketed the differences and began accruing wealth at never before seen levels. He also froze the Federal minimum wage for 9 years which, in effect gave the lowest earners a pay cut every year as inflation and the cost of living continued to increase. Increasing wage/wealth disparity.
In 1953 the average percentage of corporate profits that went to executive compensation was 22%, in 1991 it was 61%. As a multiple of the average factory workers salary, in 1980 a CEO made 30 times the factory worker, whereas in 1991 it was 130-140 times the average factory worker’s salary. In 1980, before Reagan took office, there were less than 600,000 people in the U.S. that were listed as millionaires, none of which made over 10 million except for 1 Billionaire. By the time Reagan left office there were nearly 3 times as many millionaires, with 100,000 making over $10 million, 1,200 making over $100 million, and 51 people listed as billionaires by the IRS. In 8 years the total wealth shifted sharply up, but never trickled down to the rest of us. The total wages of all people who earned less than $50k a year (about 85% of all Americans) increased an average of 2% a year from 1980 to 1989, which was below the rise of inflation. By contrast, the total wages of all millionaires increased 243% a year for the same period.
The rich have been rewarded for the last three decades, and though those that behave unethically are the exception, rather than the rule, how much longer shall we continue this nonsense. The income for all levels grew consistently from 1950 up until 1973 despite the fact that the top marginal tax bracket was 70% or better (88% during our greatest ‘boom’ years), but since the taxes on the top were reduced, the burden was shifted down as well and average income growth has remained relatively the same where the income at the bottom has gone down because the cost of living and inflation have increased at a faster rate. The only tax bracket that has done well is the top 20% of earners. The GOP has again convinced the population that any increase in taxes on this group will further stall the economy’s growth even though the evidence is to the contrary. The tax burden needs to be shifted back up, consumers need to have more discretionary income and that isn’t going to happen while we have the primary burden for the system resting solely on our shoulders. Another way to look at it is the top 20% owned 80% of American Wealth, or the top 1% owned more than all of the bottom 90% combined.
Lower taxes on the middle class, the consumer class is the only right answer. Continuing to keep the progressive tax system as a marginally progressive system has proved to be far more regressive than Reagan or any other proponents of the system expected, but it continues because everyone has accepted it as common sense, even though it has been proven to be anything but.
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