The “Laffer Curve” states that cutting taxes increases economic activity. This increases revenues by generating more tax receipts due to more economic activity. Supporters of the recent 2017 tax reform often cite the eighties and the “Laffer Curve” in support of it. The fact is that the 2017 tax reform AND the one in the eighties represent enormous giveaways to corporations and the rich.
Reagan’s cutting of the tax rates in the United States has entered into American mythology. To the unobservant, it appeared that Reagan’s budget and tax code rework was a tax break. Historically, this tax break has been trumpeted as massive. However, when one looks more closely at what the Reagan administration did in the eighties, the tax break is far less impressive.
The eighties are pointed to as proof of the economic idea that tax cuts will increase revenues to the central government through greater economic activity. However, the increase in tax revenue under Reagan was due to a straightforward increase in taxes on closer inspection. None of Social Security’s extra revenue was actually protected from use. The revenue went into the general fund though and was then summarily spent.
I was a young man faced with having to do my own taxes for one of the first times. I did not understand why the news was full of tax-cutting noise. I looked at my taxes from the previous year and there was almost NO tax cut. I figured I was just too inexperienced to understand at the time. After all, there was only a shift from one box to another box, so I must be missing something.
I was not wrong though. Income taxes went down but Social Security taxes went way up. The Reagan tax changes specifically brought in more revenues on the backs of workers. Those workers have been paying ever since. The revenue increase was not due to the “Laffer Curve” as was claimed at the time, but rather to the shifting of the tax burden to the lower-income brackets.
The stealthy shifting of the tax burden into a trust fund to pay for future benefits allowed the government to have a much greater day-to-day cash inflow. The excess tax revenues could now be spent by looting the Social Security Trust Fund and replacing dollars with IOUs. Reagan’s alleged tax cuts actually confirmed Keynesian economic ideas. There was a huge increase in revenue to the Federal government and it was spent in the defense industry mostly. Regardless, the government juiced the economy with spending not tax cuts.
All throughout the eighties, the government ran huge deficits even with the extra cash the new Social Security revenues brought. There were huge increases in defense department spending with no cuts elsewhere to pay for these increases in revenue outflow. The greater government spending led to an economic boom in the eighties just as the great socialist economist John Maynard Keynes predicts.
The tax-cutting folklore that has grown out of the Reagan presidency is illustrative of the lack of attention citizens have paid to the American tax code. The American people chose to look the other way as Reagan’s tax cuts caused enormous budget deficits. Citizens not paying attention and not being honest leads directly to poor governance. Right in front of the people Reagan hired none other than Alan Greenspan to rework the Social Security program. Reagan and the Congressional Democrats made a deal to “save” Social Security. This huge rework of Social Security is directly responsible for much of today’s debt.
Normal income tax brackets were standardized and overall income taxes were lower, that is true. Largely unreported was that Social Security taxes were expanded to affect more Americans. This is actually a shifting of tax burdens to the lower income brackets because Social Security is only applied up to a certain income level. Most Americans never see their income exceed the amount that is subject to the tax.
The rich and well-off not only enjoyed an income tax cut but had a large portion of their incomes exempt from Social Security tax. By expanding the number of workers subject to the tax, increasing the retirement age and instituting a tax on Social Security benefits, tax revenues increased. However, that revenue increase for the social program’s support was shifted to the lower-income brackets.
An engaged citizen should understand what happened to the tax code in the eighties. Social Security had been a “pay as you go” program, but under the Greenspan rework of the tax code, Social Security began collecting more taxes than it needed to meet its obligations. The standard income taxes did go down under Reagan. There is no doubt of this fact. This served as a massive tax cut for the rich, yes. It was a pittance for the middle class and poor due to the large increase in Social Security taxes, however.
This tax system has clearly benefited the very wealthy far more than it does average Americans. After more than thirty years, Americans see enormous income and wealth inequality compared to the situation before the Reagan/O’Neill tax deal putting Greenspan’s work into law. The 2017 tax reform is even more lopsided in favor of the wealthy, so we can expect only more and greater inequality.
This is the true legacy of the Reagan/O’Neill tax reform to save Social Security. A disproportionate amount of the tax burden was shifted to the wage earners with the promise that the extra tax dollars being collected would be saved in a Social Security Trust Fund. Americans are just starting to learn about the state of the Social Security Trust Fund. It is not good since it only holds IOUs.
Clearly, the Laffer Curve is a fantasy. Its basic premise has NEVER been proven in the real world. We should recognize that the Speaker of the House during the Reagan years, Tip O’Neill, a Democrat, was instrumental in getting these changes through the Congress. That recognition should serve as a confirmation of the political duopoly. Only a break from the Democrats and the Republicans can save America and return to us the country we once had.