President Trump apparently intends to follow his foray into the health care morass with a lunge into the tax policy quagmire. Prediction: it will be another fiasco. Sure, Trump has been right before and all the pundits wrong-repeatedly. But there’s a simple chart that shows why tax cuts are just not the magic bullet they were for Ronald Reagan in his 1980 upset victory. Trump should go back to the issues that elected him: trade and, above all, immigration.
The chart tracks the marginal federal income tax rate faced by the median (half above, half below) income earner. The marginal tax rate is the rate you pay on the next dollar you earn-i.e. it’s on “the margin” of your current income. Arguably, it’s what motivates you to work that extra hour, rather than opening a beer and watching the game. For average Americans, the tax rate is currently 22.65 cents on that next dollar. And it has been at about that level for an amazing thirty years.
But that was emphatically not the case in the run-up to Reagan’s victory. Marginal tax rates were soaring even for average Americans, from 19% in 1970 to a high of 31.7% in 1982 before Reagan’s tax cuts took effect.
Why? Not because Big Government liberals were increasing taxes directly — although they were very happy to benefit from the results indirectly. Instead, it was the result of that era’s inflation, which was driving taxpayers into higher tax brackets even though their actual purchasing power was falling — a nasty effect that was called “bracket creep.”
The American middle class was being pushed into a buzz saw. And it reacted violently.
But that is simply not happening today. Inflation is low. And one of Reagan’s tax reforms was that tax brackets were indexed to inflation, ending bracket creep.
Needless to say, this does not mean that the current federal tax system is perfect. For example, it’s quite probable that the overall federal tax burden of Americans has been cunningly increased through flat-rate taxes, like fees or Social Security taxes, that do not impact the marginal income tax rate.
And indeed federal tax receipts as a share of the economy (known to economists as Gross Domestic Product or GDP) have recently shot up, to 18.3% in 2015. But that’s partly because receipts always do shoot up after a recession, during which more people are out of work and not paying income tax. And federal tax receipts are still lower than they were at several points in the last 60 years.
Which does not mean that the Obama Administration was a model of financial restraint. Federal governments borrow money, rather than raising it through taxation. And, if necessary, they can risk inflation and print it.
So why is Trump lunging into the tax policy quagmire? Perhaps surprisingly, and as with health care, he seems to be trying to appease the GOP Establishment. Since Reagan, an entire industry of think-tank wonks has grown up inside the Beltway that spends its time tinkering with the tax code. Speaker Paul Ryan emerged from it. Some of their ideas may actually be good. And, of course, tax code revision offers opportunities to benefit donors.
Note, however, that this Republican tax fixation wasn’t always the case. Well into the 1970s (I was there!), the GOP was actually afraid to talk about tax cuts because it had been so comprehensively routed by the New Deal formula attributed to Roosevelt aide Harry Hopkins: “Tax and tax-spend and spend-elect and elect!”
Today, the buzz saw that Americans are being pushed into is not tax rates but globalization — trade and immigration. If wonks like Ryan are mouthing about this issue in 40 years’ time, we will be lucky.
Peter Brimelow is the editor of VDARE.com and author of Alien Nation: Common Sense About America’s Immigration Disaster.