Trump tax plan to further crush America’s middle-class

Cross-posted from The Conversation:

The U.S. middle class has always had a special mystique.

It is the heart of the American dream. A decent income and home, doing better than one’s parents, and retiring in comfort are all hallmarks of a middle-class lifestyle.

Contrary to what some may think, however, the U.S. has not always had a large middle class. Only after World War II was being middle class the national norm. Then, starting in the 1980s, it began to decline.

President Donald Trump has portrayed the tax plan Congress is wrapping up as a boon for the middle class. The sad reality, however, is that it is more likely to be its final death knell.

To understand why, you need look no further than the history of the rise and decline of the American middle class, a group that I’ve been studying through the lens of inequality for decades.

The middle class rises

The middle class, which Pew defines as two-thirds to two times the national median income for a given household size, began to grow after World War II due to a surge in economic growth and because President Franklin Delano Roosevelt’s New Deal gave workers more power. Before that, most Americans were poor or nearly so.

For example, legislation such as the Wagner Act established rights for workers, most critically for collective bargaining. The government also began new programs, such as Social Security and unemployment insurance, that helped older Americans avoid dying in poverty and supported families with children through tough times. The Home Owners’ Loan Corporation, set up in 1933, helped middle-class homeowners pay their mortgages and remain in their homes.

Together, these new policies helped fuel a strong postwar economic boom and ensured the gains were shared by a broad cross-section of society. This greatly expanded the U.S. middle class, which reached a peak of nearly 60 percent of the population in the late ‘70s. Americans’ increased optimism about their economic future prompted businesses to invest more, creating a virtuous cycle of growth.

Government spending programs were paid for largely with individual income tax rates of 70 percent (and more) on wealthy individuals and high taxes on corporate profits. Companies paid more than one-quarter of all federal government tax revenues in the 1950s (when the top corporate tax was 52 percent). Today they contribute just 5 percent of government tax revenues.

Despite high taxes on the rich and on corporations, median family income (after accounting for inflation) more than doubled in the three decades after World War II, rising from $27,255 in 1945 to nearly $60,000 in the late 1970s.

The fall begins

That’s when things started to change.

Rather than supporting workers – and balancing the interests of large corporations and the interests of average Americans – the federal government began taking the side of business over workers by lowering taxes on corporations and the rich, reducing regulations and allowing firms to grow through mergers and acquisitions.

Since the late 1980s, median household incomes (different from family incomes because members of a household live together but do not need to be related to each other) have increased very little – from $54,000 to $59,039 in 2016 – while inequality has risen sharply. As a result, the size of the middle class has shrunk significantly to 50 percent from nearly 60 percent.

One important reason for this is that starting in the 1980s the role of government changed. A key event in this process was when President Ronald Reagan fired striking air-traffic control workers. It marked the beginning of a war against unions.

The share of the labor force that is organized has fallen from 35 percent in the mid-1950s to 10.7 percent today, with the largest drop taking place in the 1980s. It is not a coincidence that the share of income going to earners in the middle fell at the same time.

In addition, Reagan cut taxes multiple times during his time in office, which led to less spending to support and sustain the poor and middle class, while deregulation allowed businesses to cut their wage costs at the expense of workers. This change is one reason workers have received only a small fraction of their greater productivity in the form of higher wages since the 1980s.

Meanwhile, the real buying power of the minimum wage has been allowed to erode since the 1980s due to inflation.

While the middle class got squeezed, the very rich have done very well. They have received nearly all income gains since the 1980s.

In contrast, household median income in 2016 was only slightly above its level just before the Great Repression began in 2008. But according to new unpublished research I conducted with Monmouth University economist Robert Scott, the actual living standard for the median household fell as much as 7 percent due to greater interest payments on past debt and the fact that households are larger, so the same income does not go as far.

As a result, the middle class is actually closer to 45 percent of U.S. households. This is in stark contrast to other developed countries such as France and Norway, where the middle class approaches nearly 70 percent of households and has held steady over several decades.

The Republican tax plan

So how will the tax plan change the picture?

France, Norway and other European countries have maintained policies, such as progressive taxes and generous government spending programs, that help the middle class. The Republican tax package doubles down on the policies that have caused its decline in the U.S.

Specifically, the plan will significantly reduce taxes on the wealthy and large companies, which will have to be paid for with large spending cuts in everything from children’s health and education to unemployment insurance and Social Security. Tax cuts will require the government to borrow more money, which will push up interest rates and require middle-income households to pay more in interest on their credit cards or to buy a car or home.

The benefits of the Republican tax bill go primarily to the very wealthy, who will get 83 percent of the gains by 2027, according to the Tax Policy Center, a nonpartisan think tank.

Meanwhile, more than half of poor and middle-income households will see their taxes rise over the next 10 years; the rest will receive only a small fraction of the total tax benefits.

From virtuous to vicious

While Republicans justify their tax plan by claiming corporations will invest more and hire more workers, thereby raising wages, companies have already indicated that they will mainly use their savings to buy back stock and pay more dividends, benefiting the wealthy owners of corporate stock.

So with most of the gains of the $1.5 trillion in net tax cuts going to the rich, the end result, in my view, is that most Americans will face falling living standards as government spending goes down, borrowing costs go up, and their tax bill rises.

This will lead to less economic growth and a declining middle class. And unlike the virtuous circle the U.S. experienced in the ‘50s and ’60s, Americans can expect a vicious cycle of decline instead.

Article by Professor of Economics, Colorado State University

Comments

  1. Big corporate CEO’s will use the tax cuts to buy back stock….they are like politicians – always short sighted.
    On the other hand, 53% of the US workforce is employed by small business. Small businesses are the ones that hire and they are the ones that drive the economy.
    Bleet all you like commies – unlike in Oz, the US will see employment conditions and wages improve immensely. But your probably right – our problem is we don’t tax ENOUGH…..sound logic there.

    • The Horrible Scott Morrison MP

      The big corporates have already announced wage hikes for low earners, staff bonuses, capital investment plans, coffee machines being converted to champagne machines, and free coke in the biscuit tins. This is undeniable proof that all tax cuts to rich people benefit only the poor workers.

    • The real world called, they said trickledown economics is a load of bollocks. “Save the small businesses” argument is a well worn defense of corporate tax cuts, thanks for dusting it off and explaining why all the previous efforts have mystically had no impact on growing inequality.

      • From Bloomberg, by Bloomberg:

        Last month a Wall Street Journal editor asked a room full of CEOs to raise their hands if the corporate tax cut being considered in Congress would lead them to invest more. Very few hands went up. Attending was Gary Cohn, President Donald Trump’s economic adviser and a friend of mine. He asked: “Why aren’t the other hands up?”

        Allow me to answer that: We don’t need the money.

        Corporations are sitting on a record amount of cash reserves: nearly $2.3 trillion. That figure has been climbing steadily since the recession ended in 2009, and it’s now double what it was in 2001. The reason CEOs aren’t investing more of their liquid assets has little to do with the tax rate.

        CEOs aren’t waiting on a tax cut to “jump-start the economy” — a favorite phrase of politicians who have never run a company — or to hand out raises. It’s pure fantasy to think that the tax bill will lead to significantly higher wages and growth, as Republicans have promised. Had Congress actually listened to executives, or economists who study these issues carefully, it might have realized that.

    • Who do you vote for when there are idiots on both sides of politics?

      Note that much like Australia it was the supposed centre-left side of politics that contributed to trade deals and privatisations that eroded the middle class.

  2. shocking how the american populace keeps voting in these rupublicans. how is it possible they keep voting against thier own best interests.

  3. Why is household ‘borrowing costs’ going up a bad thing? ‘Easy credit’ has been a disaster for everyone other than banksters.

  4. Check out the sources! Really bringing the big guns of objectivity to bear there, mate. LBS’s solution, double down on the same neoliberal garbage that has gotten us to where we are now.

    Get back to me in a few years time, you can tell me all about how the corporate tax cut completely reversed the fortunes of the other 90% of Americans.

  5. Hey mikedrinking, I feel like you’re the perfect man for this perpetual motion machine I’d like to sell you for a bargain price. Interested?

  6. Posted this on another thread today, but relavent to Donalds America
    If you take an introductory course on economics, you can pretty much count on being told that the modern science of economics was launched by Adam Smith. Like so much conventional wisdom about history these days, this is false, and it’s false for at least two different reasons.

    First of all, economics isn’t a science. What sets apart a science from other kinds of human knowledge is that the assertions of a science are tested against what actually happens. When a scientist makes a claim, at least in theory, other scientists run the same experiment or observe the same phenomenon and see if they get the same results. If they don’t, the claim made by the first scientist—again, at least in theory—goes into the wastebasket alongside such discarded notions as phlogiston and the luminiferous ether. Nowadays, this doesn’t always happen, and that’s one of the core reasons that the sciences these days are facing a catastrophic crisis of legitimacy, but that’s an issue for another post; when a science does what it’s supposed to do, every claim is tested to see if it can be replicated. That’s what makes it a science.

    Economists don’t do this. They don’t even pretend to do it. Mainstream economists like to make claims about what will happen when their preferred policies are put into place, mind you, but the mere fact that those claims simply aren’t true never gets considered when repeating them. Consider the way neoliberal economists to this day rehash David Ricardo’s claim that free trade will make poor countries rich. They’re wrong; history shows that when poor nations embrace free trade, they become even poorer, while poor nations that reject free trade schemes generally prosper. Yet the total disconfirmation of free trade theory in practice has yet to register on the economic mainstream. As far as economists are concerned, Ricardo said it, they believe it, and that settles it.

    So economics isn’t a science. It also wasn’t founded by Adam Smith. What Adam Smith founded, rather, was political economy. You won’t hear much about that field of study these days, and that’s not an accident. Political economy, as the name indicates, explores the relations between wealth and power in a society. For reasons that I suspect my readers will have no trouble understanding, this is something that a great many wealthy and powerful people in today’s industrial nations don’t want to discuss—and that, my children, is why we don’t have courses on political economy in universities today. We have courses on political science, which claim to study power without taking wealth into account, and courses on economics, which claim to study wealth without taking power into account, and both of these highly praised, well-funded fields of study by and large duly churn out vast amounts of poppycock instead of offering useful insights into the societies in which we live.

    We’re going to talk about political economy in this week’s post. We’re going to do that because it’s not really possible to understand why the world’s industrial nations are running themselves into the ground without understanding the self-destruct button hardwired into capitalism, and it’s impossible to understand that latter bug—or is it a feature?—without talking about the ways that wealth and power form feedback loops in an industrial society.

    The most important thing to understand, if you’re trying to make sense of political economy, is who owns the means of production. Means of production? That’s a convenient bit of shorthand. Every human society produces goods and services; the means of production are the sum total of the arrangements made to do this necessary task. Now of course a category this diverse is going to include things owned by an equally dizzying array of people, but in most societies, ownership of the most important means of production tends to follow specific patterns.

    Examples? Consider a feudal society—early medieval England, let’s say. It’s an agrarian society in which most people are employed in farming, and the means of production that matter most can be summed up in one word: land. Who owns the land? That’s a simple matter. The king owns all the land; he grants the right to use it to his immediate vassals, the great dukes and earls of the kingdom, in exchange for their loyalty and obedience; they pass on the same right to barons, the lesser fish of the feudal system, on the same terms; the barons then do exactly the same thing, and we proceed straight down the feudal pyramid to Higg son of Snell in his peasant hovel. Higg has his hovel and the farmland that goes with it because he’s a vassal of Sir Hubert de Ware, who is a vassal of Baron Fulk of Lewes, who is a vassal of Duke Geoffrey of Sussex, who is a vassal of the king. Understand that pattern of ownership of the means of production—that pattern of political economy—and you understand early medieval English society.

    Okay, let’s consider another example: early twentieth-century America. It’s an industrial society. and factories and offices are the means of production that matter most. Who owns the factories and the offices? That’s also a simple matter. The factories and offices are owned by corporations. Who owns the corporations? Their investors. How do you get to be an investor? By having enough capital to purchase stocks and other investment vehicles. How do the investors exercise their ownership? By electing boards of directors in elections in which each share of stock has one vote; the boards of directors then hire and fire the people who run the factories and offices. (Remember, this is early twentieth-century capitalism; things are different now.) Understand that pattern of political economy, and you understand early twentieth-century America.

    Notice, before we go on, that there are two crucial differences between the political economies of feudal England and industrial America. The first has to do with the relationship between power and wealth. In feudal England, that’s totally explicit: the king is the head of state and also the landowner of last resort; the dukes and barons are political officer as well as economic magnates. In industrial America, it’s not explicit: in theory—mind you, only in theory—the government is entirely separate from the economic sphere. In practice the wealthy buy and sell political offices and voting blocs the way they buy stocks and bonds, and since there’s no explicit relationship between power and wealth, there’s nothing to keep them from doing whatever they want.

    The second difference has to do with the distribution of wealth. In both societies, wealth is very unfairly distributed—the rich are very rich and the poor are very poor—but the feudal system has a counterbalance to the tendency of wealth to flow uphill. If you, dear reader, were a duke or a duchess in early medieval England, and you had the brains the gods gave geese, you would know that your influence, your security, and your survival depended on having plenty of vassals who would come running with drawn swords any time you needed them. How do you get vassals? By granting them landholdings—that is, transferring wealth down the ladder.

    But your vassals are in the same situation you are. They need vassals of their own, and their vassals need vassals, all the way down to Higg son of Snell, who will not only come running with a billhook in his hands when Sir Hubert needs him in battle, but puts in the daily labor that puts bread on everyone’s tables. Thus feudal societies constantly move wealth down the pyramid. As a direct result, they tend to be extremely stable—so much so that when complex societies collapse, a feudal system is almost inevitably what takes shape amid the ruins.

    Capitalist societies don’t do this. Quite the contrary, in a capitalist society like early twentieth century America, all the incentives keep wealth flowing up the social ladder, and nothing brings it back down. The investors who own stock in corporations have an understandable interest in maximizing the return on their investment, so they reliably vote in boards of directors who will hire management who will force down wages as far as possible. The investors who own stock in corporations also have an understandable interest in keeping as much of their wealth as possible out of the clutches of the tax man, so they reliably pressure and bribe government to spend as little as possible for the benefit of anybody outside the investor class.

    As a result, capitalist societies are anything but stable; they suffer from savage cycles of boom and bust. The process at work here is quite easy to understand, and in fact it was very widely understood three quarters of a century ago; regaining that understanding is a crucial step toward making sense of the mess we’re in today.

    Here’s how it works. Since working class wages get driven down, and government expenditures aren’t allowed to rise to take up the slack, people in the working classes can’t afford to consume the value of the goods and services they produce. Sales accordingly falter, and so do profits in productive industries. Since the investor class is interested solely in maximizing the return on its investment, in turn, investment money flows out of productive industries and into financial instruments of various kinds, where it drives speculative bubbles. As the bubbles inflate, they suck even more money out of the productive side of the economy. When the bubbles pop, in turn, so does the economy, and down we go into a depression.

    That’s what happened all across the industrial world in the nineteenth and early twentieth centuries, over and over again, until the Great Depression hit and the investor class realized that something had to give. What convinced them of that? The rise to power of two rival economic systems that rejected the basic presuppositions of capitalism, and—ahem—worked.

    The first of these systems was socialism. Let’s stop right here for a moment and explain the meaning of the word, shall we? Plenty of people, especially but not only in the United States, have been using that moniker “socialism” to mean any number of randomly chosen things, but the word does actually mean something specific. Socialism is the system of political economy in which the means of production are owned by the national government. That’s what it is, and that’s all it is. (Most of the things that currently get labeled “socialist” in the English-speaking world are actually social democracy, which is an entirely different system that we’ll discuss in a moment.) If it doesn’t have to do with government ownership of the means of production, it’s not socialism, full stop, end of sentence.

    Socialism has its problems. In its most popular form, the version that more or less follows the recipe laid down by Karl Marx, it so consistently produces bloodthirsty dictatorships that a good case can be made for chucking it into the rubbish heap of failed ideologies. The fact remains that as an economic system, it works about as well as capitalism—that is to say, not well, but well enough to stay in power—and it does a much better job of distributing wealth to the working classes than capitalism does, which is why capitalists hate it so much. On the other hand, given a choice, the working classes favor it, for the same reasons capitalists hate it: if you’ve got a choice between two dysfunctional systems, why not choose the one that benefits you most?

    Then there was the other rival system, which has been so obscured by shrill rhetoric over the last three quarters of a century or so that we’re going to have to approach it by a roundabout route. Suppose, then, that some charismatic figure in today’s American scene—somebody toward the center of our overheated political spectrum—were to propose a new system of political economy to replace the mess we’ve got now. We’re going to keep capitalism, she says, but it’s going to have its excesses curbed and its abuses prevented, not by the government, but by an organized movement of citizens under my leadership. Each year we’re going to sit management and labor down at the bargaining table, everybody in a given industry all at once, and make them bargain in good faith, with the citizen movement watching both sides to make sure a fair settlement is reached; there will be no more strikes, no more lockouts, no more labor troubles, just a new contract every year, and the citizen movement will enforce that by whatever means happen to be necessary. What’s more, she tells adoring crowds, the citizen movement will take on the same role in the political sphere, and be ready to yank the chains of officials when they get out of line. Of course the citizen movement will have to have special powers to do this, she says, and here’s the enabling act to give it those powers, just as soon as I become Chancellor…

    That is to say, we’re talking about fascist economics. Yes, I’m aware that this isn’t the sort of thing that comes to most Americans’ minds when you mention the word “fascism,” but that just shows how thoroughly ignorant most Americans are about history. Fascism was never about the unrestricted rule of the capitalist investment class—that’s a falsehood originally manufactured by Stalin’s flacks back in the days of the Third International, and repeated by the misinformed ever since. Fascism attracted the masses in the 1920s and 1930s because it offered an alternative to unrestrained capitalism with its lethal boom-and-bust cycles. Did it work? Not very well, but then neither did unrestrained capitalism, and here again most people forced to choose between dysfunctional systems will choose the one that benefits them personally.

    It was in response to the popularity of the socialist and fascist systems that social democracy came into being. (This, remember, is the thing that Republicans these days call “socialism.”) Social democracy was an attempt to take the best parts of fascist economics and combine them with constitutional government and the rule of law. In place of the “citizen movement” of my sketch above—that’s spelled “The Party” in its historical examples—social democracy puts the elected government of a constitutional representative democracy. In a social democracy, capitalism still exists, but at least in theory, it has to put up with legal checks that keep it from running too far off the rails: laws against monopolies, laws against insider trading, laws forcing banks to have deposit insurance, and so on.

    It’s not a bad system, all things considered—which is to say it’s dysfunctional, but slightly less so than any of the three other alternatives we’ve discussed. Its great weakness was that it came into being because the investor class realized that they would end up dangling from lampposts if they tried to keep unrestrained capitalism going much longer, and it could only survive so long as the investor class stayed scared. Once the Great Depression and the age of rising fascist states faded out of historical memory, though, a new generation of capitalists convinced themselves that all this social-democracy stuff was a useless hindrance to their God-given right to engage in a kleptomaniacal orgy of profiteering at public expense.

    That was when the Republican Party in the US, the Conservative Party in Britain, and their equivalents elsewhere embraced the view that the sole business of government was to make rich people richer while kicking the poor in the face, and when the Democratic Party in the US, New Labor in Britain, and their equivalents elsewhere embraced the supposedly opposite view that the sole business of government was to make rich people richer while mouthing vacuous feel-good verbiage at those of the poor who were sufficiently politically organized to be annoying. The results are predictable: in Britain, a resurgence of old-fashioned socialism under the leadership of Jeremy Corbyn, who will probably become Britain’s next prime minister if the clown car that passes for a Conservative government keeps bungling things as badly as they’ve done so far; in America, a crisis of legitimacy that’s already catapulted a populist demagogue into the White House and may well replace him with something much worse in the years ahead.

    There are alternatives. Next week, in place of the usual ask-me-anything open post, we’ll talk about some of them. The following week? 2018 will have arrived, and it’ll be time for the annual round of predictions about what the new year will hold. Stay tuned!

    ************

    As just mentioned, there will be no ask-me-anything post next week. Instead, I’m going to be trying out a version of the same thing in a different place. My Dreamwidth account at ecosophia.dreamwidth.org is active again — apologies for the long dry spell — and next Monday I’m going to post an ask-me-anything post on occultism. Call it Magic Monday; a lot of my readers seem to have questions about the theory and practice of occultism, and I’ll be fielding those and answering them there. See you then!

    John Michael Greer | December 20, 2017 at 7:13 pm | Tags: democratic syndicalism, economics, fascism, political economy, politics | Categories: Monthly Post | URL: https://wp.me/p8zO30-bg
    Comment See all comments

  7. Right. So allowing people to keep more of what they earn is a bad thing. Lower taxes= bad, high taxes= good. Got it.

  8. BenjaminHDMEMBER

    Reclaiming the State – Reagan’s policies of tax cuts

    Should we therefore conclude that Reagan was a closet Keynesian? Far from it. On the contrary, it has been argued that the expansion of public debt under the Reagan administration effectively functioned as a mechanism of upwards redistribution of wealth from the upper classes, via public debt, as the government went from taxing the wealthiest people to fund government expenditure, to simply borrowing money off the wealthiest people and then paying them interest on the debt (from the tax revenues paid by all taxpayers). It also led to the emergence of a new asset-owning middle class ‘which tied people closer to a particular form of capitalism, one driven by rising asset values rather than incomes as well as the interest returns on those assets’, as Kean Birch writes. The expansion of public debt, in turn, also created a kind of (self-imposed) external constraint on the government, since it amplified the pressure exerted on the monetary and political authorities by the government’s creditors to avoid resorting to inflation and/or monetisation to reduce the real value of the debt, effectively ‘locking in’ Reagan’s anti-inflationary and pro-rich policies. The view that Reagan used deficits early in his administration to precipitate a perceived crisis, which he could then use to introduce deeper cuts to public spending than would have been possible had he started down that track immediately, doesn’t fit the facts. The reality of the Reagan administration is that it simply altered who benefited from state intervention rather than reducing state intervention per se.

  9. Nelson Cruikshank

    By almost every single definition from almost 20 years in academia in politics, political philosophy and international relations – the United States is the most perfect example of a fascist state.

    The only people doubting that are those with a limited or cursory understanding of the academic definitions as opposed to the laypersons assumptions – there is no doubt on this issue.

    I remember reading with shock when Chomskys book “Hegemony or Survival” very first came out and the definition he supplied therein of the United States.

    A nation whose economy is 2/3 thirds military all things considered (has changed now), where almost all decisions and laws are made and written by corporations with almost no regard for the populace for whom they represent, where divine right is frequently invoked in wars, where religious devotion is almost mandatory and atheism of any form is entire shunned, they are a Fascist Military Theocracy.

    Any honest interpretation of their domestic and foreign policy, almost total lack of democracy, and extreme religious piety can leave one with little other opinion.

    The choice between China and the USA is as clear as mud. There is literally no choice.

    The US is but years away from being a failed state.

    .

  10. I don’t think it is mathematically possible to have 60% of households with two thirds more income than the median?

    • It’s a range: 2/3s of median is the lower bound of the range. 2 x median is the upper bound of the range.

  11. I’ve always been astounded by the American people’s ability to be convinced to agree to things against their own self-interest. The delusion that it is the land of opportunity and that everyone can become a millionaire through hard work. The Orwellian conditioning by the elites of the populace to words such as socialism and welfare is extraordinary.

  12. Wow cant handle the other side MB have to delete my comment. Terrible. This bill has good and bad points. Its good and the US will prosper with more jobs and growth.

    • You posted links from breitbart.

      And no, this bill won’t create jobs, for the same reason that really cheap debt for a decade didn’t create jobs. Large companies hoard cash and then use it on stock buy-backs and extra dividends and bonuses. None of these do anything for job creation, wage increases for the working class or bridging wealth inequality.

      They have not used the availability of super cheap debt to invest in productive capacity for the last 10 years; they are not going to use the higher profits from the tax cuts to invest in extra productive capacity.

    • Consider that people here are much, much less supporters of the Democrats, and more just think Trump and his administration are a bad idea….

      Being against Trump doesn’t necessarily being for the Democrats, particularly here on an AU/NZ website…

      • Reading the comments on hear and coming to OZ to visit this year and having people tell me how great Obozo was for the US…… Trust me your Democrat Supporters. People in OZ tell me that Obozocare Act was great and then I explain it to them and they go wow that wasnt that great of a healthcare policy (Stop believing the CNN the Clinton New Network)…… trust me your Democrat supporters. Trump is great for the US economy he just sucks as a politician and needs to learn how to shut up at times. I would have rather had him over Hillary any f#$king day.