Three of the last four Republican presidents campaigned for tax cuts that Congress passed and the presidents signed into law. These go primarily to businesses and wealthy individuals, which widens the gap between the wealthy and middle class.
Corporations buy back large portions of stock to enhance stockholder wealth rather than investing in plants and people. In each case the cuts led to major expansions of the deficit.
What are the consequences? Bill White in America’s Fiscal Constitution argues that reducing deficits remains part of our fiscal DNA. It follows that tax increases should occur in periods of prosperity. Before President Ronald Reagan, this strategy regularly produced budget surpluses.
Recent Republican presidents persuaded Congress to enact tax cuts in periods of prosperity. The theory, based on the “Laffer Curve,” was that a cut would stimulate additional growth leading to long-term gains in revenue. In each case the loss of revenue only led to an increase in debt.
President George W. Bush inherited a budget surplus that could’ve reduced the deficit or improved infrastructure. He opted for a prosperity tax cut that grew the debt and widened the gap between the wealthy and the middle class. The 9/11 attack delivered a shock that led to greatly expanded defense spending. This spending without taxation ballooned the deficit. The bubble burst in 2008 with the collapse of several financial institutions.
The subsequent response and “bailouts” began to mitigate the Great Recession. President Barack Obama maintained the recovery with a gradual easing of stimulus packages that led to sustainable growth in the economy, a rise in employment and a gradual reduction in the deficit.
President Donald J. Trump persuaded Congress that new tax cuts in the period of emerging prosperity would accelerate the expansion. The Congress responded and also spent money on defense rather than infrastructure. Again, a major redistribution of income from the middle class to corporations and the wealthy occurred. No mechanism to react to economic shocks was enacted.
Two shocks hit almost simultaneously. First, Saudi Arabia and Russia engaged in a series of oil price cuts to break the competitiveness of U.S. oil and gas development. This threatened the highly leveraged oil companies of West Texas and the Gulf of Mexico. Several fell into bankruptcy.
Then came the COVID-19 respiratory illness outbreak. U.S. intelligence agencies for decades had forecast the dangers of a pandemic but were routinely ignored. By 2020, policy had shifted to a trade rapprochement with China.
In spite of widely reported news of the pandemic in Europe and Asia, our focus remained on improving China trade policy. President Trump on Feb. 29 said: “We’re starting on another trade deal with China — a very big one.” Subsequently, the U.S. economy experienced a crash much worse than in 2008.
The prosperity tax cuts have again led to a collapse in the face of an oil price war and a pandemic. As predicted, our economy lacks the resilience that used to be part of our fiscal DNA.