Friday, August 10, 2018

GOP Tax-Cut Mythology, from the Great Depression to Trump

For decades, the Republican Party has pursued corporate tax cuts and the elimination of regulations that governed banks and corporations.

No one thing brought about the Great Depression, but many of the elements that caused the catastrophic economic downfall exist in every financial setback…income inequality and massive tax cuts.

In 1929, multi-millionaire banker and oilman Andrew Mellon, U.S. Treasury Secretary dramatically reduced taxes on the wealthy to the point where many paid no tax at all. Mellon was the original “trickle-down” theorist.  

The Great Depression started after a major fall in stock prices and became worldwide news with the stock market crash of October 29, 1929 (known as Black Tuesday).  Personal income, tax revenue, profits and prices dropped, while international trade plunged by more than 50%. Approximately one out of every four American workers was unemployed.

An inquiry uncovered a wide range of abusive practices, including a variety of conflicts of interest and the underwriting of unsound securities in order to pay off bad bank loans.

No one seems ever to mention that when Reagan took office, we were in the midst of a deep recession. Reagan advocated reduced business regulations, controlling inflation, reducing growth in government spending, and spurring economic growth through tax cuts.  Soon after Reagan took office, Congress deregulated the thrift industry, expanded their lending authority, and reduced regulatory oversight.

The Republicans boast that the economy grew, but the GOP leaves out other factors that also contributed to growth in the 1980s: the sharp reduction (10 points) in interest rates and increased government expenditures through a defense buildup and highway construction programs combined to stimulate the economy pulled us out of the recession. Much to Republican chagrin, that’s textbook Keynesian economics.

But in 1986, Ronald Reagan cut  corporate taxes  from 48% to 35%,  business investment plunged and growth slumped.

On October 19, 1987, stock markets around the world crashed and 747 Savings and Loans failed. More than 1600 banks were closed or received financial assistance from the FDIC; the number of savings and loans declined from 3,234 to 1,645 and hundreds of institutions were forced to merge.  Deregulation and imprudent real estate lending contributed to a Savings and Loan crisis, massive bank failures and swindles that cost the livelihood of tens of thousands of retirees. Foreclosures blanketed the country from one coast to the other, and unemployment reached 10.8%. 

Just after Reagan left office, the collapse of Lincoln Savings of California cost taxpayers $3.4 billion. Nearly 23,000 bondholders were defrauded and many elderly investors lost their life savings.  The federal deficit ballooned to the largest peacetime deficit in history. Thanks to Reagan, the United States lost its status as a creditor nation, and became a debtor nation.  A bailout cost Americans over $200 billion.

President Clinton balanced the budget, giving the government a surplus.  Not one single Republican in either house voted for the balanced budget. 

President George W. Bush cut taxes in two packages, in 2001 and in 2003. On aggregate, they cut the top tax rate to 35%. Republicans passed the tax package through budget reconciliation, without a single Democratic vote. Shortly after the full tax rate cuts went into effect, the economy began to slowly decline, finally crashing in 2008.

To be fair, Bush simply followed a deregulatory pattern set by Clinton. The most significant was the deregulation of the banking industry - the act that allowed commercial banks to expand into investment banking and insurance.

Regulation was left to Alan Greenspan of the Federal Reserve and he had little appetite for regulation. By the time an overhaul of regulations governing the financial sector was proposed, it was too late.

The Great Recession began with the bursting of an 8 trillion dollar housing bubble.  In 2008 and 2009, the U.S. labor market lost 8.4 million jobs, or 6.1% of all payroll employment.  By comparison, in the deep recession that began in 1981, job loss was 3.1%, or only about half as severe.

Enron Corporation, an American energy, commodities, and services company based in Houston, Texas represented the biggest corporate scandal in history, while MCI WorldCom, an American telecommunication corporation, currently a subsidiary of Verizon Communications filed the largest bankruptcy in history.  

Once again in 2017, Republicans passed a bill to cut taxes without a hearing or a single Democratic vote. 

The bill was a permanent reduction in the corporate tax rate from 35 percent to 21 percent and blew a $1.5 trillion hole in the federal budget.  A hole, Republicans intend to fill with spending cuts to domestic programs that help America’s poorest citizens.

As always, corporations win and workers lose. 

The Great Depression, Reagan’s recession and the Great Recession all had three things in common: tax cuts, deregulation and Republicans.  Something to think about as Republicans celebrate the latest tax cut and the Trump administration deregulates everything from coal mining to clean water.

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