Steven Strauss

Opinion columnist

Since the Reagan administration, Republicans have fervently claimed lower taxes will unleash the "makers" — incentivizing them to work harder and invest more, thereby trickling down to benefit ordinary Americans. Moreover, they have consistently claimed that their tax cuts would create such dramatic economic growth that they’d literally pay for themselves. A rising tide lifts all boats! No hard choices to make — just cut taxes!

Instead, the national debt is at a record high, and the gap between the richest and the poorest U.S. households is now the largest it has been in the 52 years the Census Bureau has been tracking it. And that inequality gap started to expand dramatically about the same time the Republican Party started cutting taxes.

More growth during higher-tax eras

The American economy since 1950 offers a chance to consider the impact of these tax cuts. From 1950 to 1980, the top federal marginal tax rates (the rates on income above certain levels) were as high as 92% and never below 70%. Republicans have been slashing the top tax bracket for annual earned income since the early 1980s, and it is now 37% on income above $612,350.

Further, in 2003 the GOP shrank the tax rate on unearned income (such as dividends) to 15%, resulting (for example) in the billionaire Warren Buffett having a lower tax rate than his secretary. With such dramatic tax cuts, GOP dogma predicted a booming U.S. economy.

But it turns out U.S. economic growth was substantially higher during the period of high taxes. From 1950 to 1980, average annual growth in real (inflation-adjusted gross domestic product) was 3.9%, while from 1981 to 2018 the comparable number was 2.7%.

Similarly, during the high tax period, median household incomes increased on average (in real terms) by a bit over 2.5% per year. During the low income tax period, average real growth in household income declined to 0.7% per year.

Disciples of the Cult of the Magic Tax Cuts will generally respond to these facts by noting that economic growth stems from a number of factors besides tax policy (such as external markets, investment in education and government funding of basic research). These cultists claim that America’s results from 1980 to the present would have been much worse without the GOP’s obsessive reliance on tax cuts.

But roughly 40 years of GOP tax cuts have provided opportunities for controlled studies of the American economy, and they don't show that.

No impact on paychecks or investment

For example, Republican President George W. Bush’s 2003 tax act reduced the top tax rate on dividend income from 38.6% to 15% — a massive reduction that was supposed to trigger an investment boom and a trickle-down of benefits, such as higher compensation, to ordinary Americans. However, in a 2015 study of IRS data from 1996 to 2008, published in the American Economic Review, Berkeley economist Danny Yagan found that "the tax cut had no detectable impact on investment or employee compensation."

Another study, “Do Tax Cuts Produce More Einsteins?”, looked at how government tax incentives influenced individuals’ decisions to pursue careers in innovation (using a dataset of 1.2 million inventors, including their tax information). The study found that “financial incentives, such as top income tax reductions, have limited potential to increase aggregate innovation because they … have no impact on the decisions of star inventors, who matter most for aggregate innovation.”

Tax cuts cost money we don't have

More intuitively, the idea that Mark Zuckerberg was thinking about his tax rate while working in his college dorm room on what became Facebook is ridiculous.

Another (though related) argument the GOP keeps making is that its tax cuts will pay for themselves. The available data, however, show that the 2003 tax cut and an earlier cut in 2001 benefited the richest Americans, and did not pay for themselves (indeed, by some calculations the two tax cuts added $5.6 trillion to the national debt).

More recently, Republican Treasury Secretary Steven Mnuchin claimed that the GOP’s 2017 tax cut would not only pay for itself, but would actually reduce the federal deficit by $1 trillion. So far (according to the nonpartisan Congressional Budget Office), the 2017 tax cut isn’t paying for itself with higher tax revenue, and it’s projected to add $1.5 trillion to our national debt over the next 10 years.

GOP must stop believing in magic

I’m not making a plea for larger government — just a plea for economic sanity. If Congress in its all-seeing wisdom wants to spend $700 billion on the military, billions of dollars on farm subsidies and so on, it must either raise enough money in taxes to pay for the programs it authorizes or reduce the size of government.

Instead, although Republicans controlled the White House, the Senate and the House from 2017 to 2019, they chose not to make (or even seriously debate) any substantial cuts to government programs that would balance the revenue lost by their series of massive unfunded tax cuts.

Unquestioning and unsubstantiated belief in the magical power of tax cuts isn’t a viable economic policy. The GOP is putting America on an unsustainable path that is disastrous both for its fiscal future and for the hopes of people trying to get ahead.

Steven Strauss is a lecturer and visiting professor at Princeton University's Woodrow Wilson School of Public and International Affairs, an economic development specialist and a member of USA TODAY’s Board of Contributors. Follow him Twitter: @Steven_Strauss