When, during the Republican primary debates on January 19, 2012, Newt Gingrich stated that the prosperity of the 1950s was due to the lowering of taxes—and Ron Paul later parroted the comment when he addressed the issue of taxation—it seemed like a “gotcha” moment. It was no surprise that the other candidates or moderator made no comment. The candidates did not, as Gingrich does, claim to be historians, and it was not the moderator’s job to call candidates on factual errors in their statements if they were even aware of the former Speaker of the House’s error.
Whether due to ineptitude or media bias, the surprise came in the post-debate media coverage. As always, the Washington Post reported on the lies the candidates told during the debate, but failed to so much as mention Gingrich’s whopper. For that matter, not a single report on the debate brought up the statement on taxes, let alone challenged the underlying mythology of trickle-down economics.
The US certainly experienced phenomenal economic growth in the 1950s. The growth was however not due to low tax rates. Instead, it was largely due to completion of several infrastructure projects begun before WW II, and others begun during the 1950s, which facilitated commerce. Principal among these were the significant completion of rural electrification, begun under the Franklin D. Roosevelt administration, and the building of the Interstate highway system, which was begun during the last term of the Dwight D. Eisenhower administration. But the economic boom of the ’50s was due as well to the real growth in income and expansion of credit, which allowed the shift in production to transition into production of consumer goods to meet the growing demand of a nation no longer suffering the effects of the Great Depression.
The two phenomena actually worked in conjunction with one another, and with certain technological advances. Rural electrification had the twofold effect of reducing costs of production in the previously labor intensive agricultural industry through labor saving electrical devices, and by opening the consumer potential of the 36 percent of Americans who still lived outside urban centers in 1950. Advances in television and durable goods, like refrigerators, electric ranges, washers and dryers placed such items in high demand, and American manufacturers rushed into production with plant facilities that had been the infrastructural backbone of wartime production, which would otherwise have gone to waste.
As time passed, advances in high fidelity sound reproduction and transistors further added to consumer demand. To take advantage of the profit potential in the demand, financial institutions loosened and expanded credit, and ultimately invented the ultimate consumer tool, the credit card. What might now be termed the “Madmen” phenomenon created by media expansion into televised broadcasting launched explosive growth on Madison Avenue.
Returning war veterans and a public that had sacrificed consumption throughout the war years was primed to live the “good life,” and trade union membership, which had been growing rapidly since the mid 1930s, and reached its highest level in 1954, was able to win significant concessions that moved unskilled workers from poverty’s fringe into the ranks middle income consumers.
Even the theory that underlies low taxation resulting in prosperity, based on the Laffer curve, is both flawed and unproven. It’s greatest flaw is that it assumes that people will change their behavior if the tax rate is lowered. Investors, in example, will invest more, and consumers will consume more. In regard to the myth of job creation, investors who have invested have not invested in job creation over the past four years since the economic collapse. On the consumer side, the first time home buyer tax credit provides an additional tax incentive to the current Bush tax cuts that illustrates the unpredictability of consumers. Intended as an inducement to stimulate activity in the depressed housing sector, home buyers took advantage of only about 30 percent of the revenue projected for the cost of the program—despite the increased incentive of two separate programs. After the miserable lack of effectiveness of the first tax credit, a second, more generous tax credit was offered to make up for the meager benefits of the first—and was subsequently extended when it too failed to produce the desired result.
Moreover, Republicans seem to focus their attention on the rhetoric of only half of the theory that underlies the Laffer curve—the tax reduction half. But the half of the theory they focus on has a down side that they seem to ignore: Productivity is also theorized to decline when taxes are too low. If anything, the facts of Gingrich’s misstatement of the cause of the prosperity actually prove that the Bush era tax cuts fell into the down-slope of the curve, thus contributing to an economic decline. This assertion is however not made here. Rather, the assertion is that the evidence for the validity of the theory hinges primarily on rhetorical fallacies and anecdotal evidence of minutia from the most scurrilous sources that do not stand up to macroeconomic scrutiny.
Any analysis of the economic boom of the 1950s would have to conclude that it was due entirely to the growth in consumerism [PDF]. As for the tax reductions to which Gingrich credited the prosperity, anyone aware of the facts would have to ask, “what tax reductions?”
In 1945, the marginal tax rate was still at its war-time high, and ranged from 23.0 percent to 94.0 percent. It was reduced to 20.0 percent to 91.0 percent in 46, and remained at that level until 1951, when the bottom rate was increased to 20.4 percent to meet the revenue demands of the Korean War. Then, in 1952, taxes were again raised to 22.2 percent to 92.0 percent and remained at that level until the armistice that ended the Korean War in 1954, when they were reduced again to the 20.0 percent to 91.0 range. The next reduction did not come until 1964, when the rates were set to 16.0 percent to 77.0 percent, then lowered again to 14.0 percent to 70.0 percent in 1965.
The next effective reduction in the tax rate did not come until 1977, when the bottom tier of income earners, those living in poverty, was reduced to 0.0 percent. The rates for the rest remained at 14.0 percent to 70.0 percent until the first Reagan tax cuts in 1982, when the rates were reduced to 12.0 percent to 50.0 percent while, at the same time, inflation was reducing the real buying power of income earners.
The bottom rate was again reduced to 11.0 percent in 1983, and rates remained unchanged until 1987, when the rate for top income earners was reduced to 38.5 percent, while the “reform” of the tax code thrust many middle income earners into the 28.0 percent tax bracket from the 25.0 percent bracket. Unemployment reached 10.8 percent at this time, as the economy plummeted into a recession, and taxes were again lowered to 28.0 percent for the entire top quintile of income earners.
The economy again began to recover after taxes were raised again in 1991 to 31.0 percent for the top tier of income earners, during the George H. W. Bush administration. The improvement came too slowly to save Bush’s hopes for a second term, because the issue was, as James Carville stated, “the economy, stupid.” Tax rates remained unchanged during the Clinton administration, as the economy began again to improve, and reap the benefits of the technology explosion.
By comparison to today, in 1940, lower income earners of up to $4,000 paid a nominal rate of 4.0 percent to a top rate of 79.0 percent for the top bracket—those earning over $5 million per year. After going to war, the effective rate paid by top earners increased initially only to 81.0 percent, while those who earned up to $2,000 saw their taxes more than double to 10.0 percent, and those earning up to $4,000 saw their taxes more than triple to 13.0 percent.
By further contrast, the George W. Bush tax cuts were instituted just prior to the United States launching into its war on terror in Afghanistan, and on the cusp of getting involved in another war in Iraq. More interestingly, it is worth noting that Bush and the Republican Congress had ignored the Congressional Budget Office projections, and cut taxes to an unsustainably low level. The subsequent effect was to drive the national debt up, and, in combination with lax regulation and deregulation of the financial markets, to send the entire World’s economy into the deepest crash since the Great Depression.
Now, Republicans in Congress and each of their presidential candidates wants to further reduce taxes—but only for the wealthy—and justify it in the name of failed policy which even the economic advisers to the Republican presidents who promoted the policies believed to be workable. Economist and Nobel laureate Paul Krugman later summarized supply-side economics by stating, “the supply-siders got a chance to try out their ideas. Unfortunately, they failed,” and went on to say that the results fell “so far short of what it promised,” that it amounted to no more than “free lunches.” Andrew Samwick, the Chief Economist on Bush’s Council of Economic Advisers from 2003-2004 stated:
You are smart people. You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one.
Several economists of supply-side have argued that it was a smokescreen for “starving” the government of revenues, in the hope that the tax cuts would lead to a commensurate drop in government spending. Nobel laureate economist, and economic adviser to Ronald Reagan, Milton Friedman confirmed this suspicion when he agreed the tax cuts would reduce tax revenues and result in intolerable deficits, though he supported them as a means to restrain federal spending. Despite this, and even under all the weight of evidence that lowering taxes and deregulation does not help create jobs or benefit the economy, reactionary Republican politicians are still pushing their tried and failed agenda.
At bottom, only one thing explains the politicians. They have some ulterior motive for pushing an agenda of further tax reductions and deregulation. The tax reductions are pretty obviously what they are banking on to win over their voters. The combination of tax reductions that principally favor the wealthy with deregulation invoke the speculation that they are in service to their principal source of funding used to continue getting elected and reelected, and perhaps to move into cushy lobbying and speaking gigs after the voters get smart enough to dump them. They likely don’t care about the societal safety nets, like Social Security, Medicaid, food stamps and others—but their voters do.
Ask any Republican voter, and they will tell you that they resent their taxes being used to prop up the welfare state. Additionally, many also want to bring an end to Social Security and Medicare in favor of privatizing them. Despite having lived to see their 401Ks decimated by the same policies their politicians are still pushing as the solution that will revive the economy, they cheer loudly and will likely vote to put what they still have at risk.