The economic recovery is a sham. The frequently repeated phrase that “tax cuts stimulate the economy” is a hoax. One thing we need is a truly progressive national tax policy and there is only one presidential candidate proposing this: Bernie Sanders. Here’s why.
First off, I’m not going to include Hillary Clinton in this analysis because the tax plan she is proposing is virtually identical to what we have now. Just think, if you want things to stay exactly the same, vote for her. One other note: for simplicity I’ll only include the tax rates for married couple filing jointly.
For those who don’t know much about taxes, there are a couple of terms I should explain: progressive tax policy, tax brackets, and marginal rates (if you know what these are, you can skip ahead). A progressive tax policy basically means, that if you make more money, each dollar made above a certain amount will be taxed at a higher rate. Basically, if you make, say $10,000,000/year, you have more disposable income than someone who makes $10K/year. So the money someone makes makes above $10,000,000 should be taxed a little more than the first $10K someone makes.
Your total income is used to determine your tax bracket (i.e. how you determine how much tax to pay). The tax bracket you are in determines your marginal rates, or how much discreet portions of your income are taxed. According to the 2016 numbers, if you make $18,550, your income tax bracket is 10%, so you would owe $1,855 in taxes before deductions. The next bracket is 15%. However that doesn’t mean that all of your income is taxed at 15%, just the $1 (or more) you made above $18,550. If you made one dollar above $18,550, you would owe $1,855 plus 15% of $1.00, or $1,885.15 total. Just for reference, here are the 2016 tax rates.
Now, the tax plans proposed by Ted Cruz and Donald Trump are both characterized by significant tax cuts. Donald Trump’s plan reduces the progressiveness of the current system a couple of ways: first there are fewer tax brackets, and the top marginal rate (or the rate paid by those making the most money) is reduced from 39.6% to 25%. Ted Cruz has called for a 10% flat tax. Since we already have a progressive tax system in place, and both plans change how tax revenue is collected, they will both disproportionately benefit people who make a lot of money. I’ll show you exactly how much a little later.
Bernie Sanders plan on the other hand, calls for increasing tax rates on everyone making more than $250,000. That means the vast majority of people will pay the same income taxes. Sander’s plan also calls for a top marginal rate of 52% on any annual income above $10,000,000. That means only money made above and beyond $10,000,000 is taxed at a 52% rate. Currently, the top marginal rate stops at $466,951. To most, this would seem fair since those making more than $10,000,000 in a single year can afford to pay more in taxes.
Here’s how much tax bills would change under Cruz, Trump, and Sanders (assume change under Hillary is zero) up to an annual income of $1,000,000.
As you can see the tax plans of Trump and Cruz are massive in scale compared to Sanders’ plan, and they disproportionately benefit the wealthiest people in America. Again, Sanders’ tax increases don’t come into play unless someone makes more than $250K. At that same income level, earners would have received a rebate of $22,913 or $36,513 under Trump or Cruz, respectively: more than some people make in a year! For those earners making a million bucks a year, they’d get over $120K back from Trump, and nearly $250K from Cruz! Those same million dollar earners would pay about $24K extra (about a 7% total increase) under Sanders’ Plan.
So who cares? Tax cuts stimulate the economy, right? Well, yes and no. A progressive tax system makes sense because spending patterns as a percent of income are regressive (i.e. they go down) as income goes up. As you might imagine, rich people spend more money overall, but they spend a smaller percentage of their money.
As the rich get richer, fewer and fewer of their dollars make it into the economy. So their tax rebates and increasing wealth have diminishing economic returns. The money these people do spend tends to inflate prices of assets that wealthy people tend to purchase (like stocks and real estate), and inflate the luxury markets (luxury condos, private jets, jewelry, designer clothing, etc.).
As you might imagine, people who make less money spend a higher proportion of their income. Just ask Gordon Gekko. I know if I had a few extra dollars I’d probably buy a new mountain bike, some new riding gear, more workout supplements, cooler outfits to wear to the gym, some new sneakers etc. I’m sure you’ve plenty of things on your wish list too.
But What About The Economy?
What are the two things most often connected to the health of the American economy in the mainstream media? The stock market and unemployment. And while it’s true, that unemployment is down since the Recession, most people are being paid less, so we’re actually less well off. Usually economic mobility (i.e. the ability to move into those higher tax brackets) and a large middle class are the signs of a healthy economy.
Check out the following chart. It shows the velocity of money (M2) and the value (market capitalization) of the S&P 500 adjusted for inflation. I should note, the velocity of money just tells us how many times each dollar is spent in the economy. Basically, once you pay for a good or service, how long does it take the next person to spend it? And the next person, etc.
There are a few things happening in this chart, but I want you to focus on the area from about 2007 onward. You can see the velocity of money has been cratering since 2007. The Federal government and the Federal Reserve stepped in to “stimulate” the economy through things like extending the Bush tax cuts, “stimulus” spending, bailouts, and quantitative easing (subjects for future posts), but the problem is that only the wealthiest people are the richest corporations (e.g. Goldman Sachs) can take direct advantage of this type of stimulus form the Federal Reserve and the government.
I never got a check in the mail, did you? So despite the fact that real money isn’t being spent (low velocity of money), the stock market is at record highs! This goes back to what I was discussing earlier. When rich people get richer, they end up inflating the prices of things rich people buy: stocks, property, luxury goods. The evidence is all around the economy. The home prices in many areas are now higher than they were before the real estate crash (e.g., San Franciso and New York).
On the other hand, real wages (adjusted for inflation) for the vast majority of people have gone down since the Great Recession (and have actually been going down steadily since the 1980’s). See below.
The highest income in this chart is $87.36, or about $175K a year. But as you can see, the further down the ladder you are, the harder you got hit in real wages. So we’re not just talking about the dollar amount, but how much each dollar can buy.
Basically, the rich are getting richer, and they work with establishment politicians to get their way and suppress the powerless in our society. And the more powerless you are, the more oppressed you get.
What can the government do to reverse this tide? First off we need someone not beholden to big money interests (money in politics is a whole series of articles). A more progressive tax system will help. It will bring in more cash to allow the government to engage in public works projects to rebuild our national infrastructure. They can use the resources they have to nation build here in the U.S. instead of in the Middle East. Stop closing military bases here at home, and close them abroad. Raise the minimum wage above subsistence level.
The real goal here is to increase consumer spending, thus leading to the real economic recovery most of us have been waiting for. There is only one politician that is promising to do these things, and only one free from the corrupting influence of big money campaign contributions: Bernie Sanders.