The Reagan Theology in the Modern Age

By John Gilluly
November 5, 2011

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This past week, Bloomberg reported on a study that identified thirty top companies, including General Electric, that profited without paying taxes between 2008 and 2010.

The Bloomberg piece reminded me of a memorable quote I saw earlier this year in a CNN article on GE's approach to tax policy: The Truth About GE's Tax Bill.


It's been 25 years since the last big tax reform legislation, which cut the corporate rate to 34% from 46% and eliminated a lot of deductions and tax breaks. But a quarter-century of pushing by businesses -- of which GE has been among the most aggressive -- has left us with both the lower tax rate (now 35%) and lots more deductions and shelters and other tax-reducing tactics than the 1986 legislation envisioned. GE's current idea of "reform" as expounded by John Samuels, the head of its tax department, is to cut the rate, but to allow some of GE's major tax-minimizing maneuvers to remain in place.

Thus we have two trends since 1986: Ballooning debt as a percentage of GDP and ballooning corporate after-tax profits (first two charts below). The charts for personal consumption debt, household debt, all look similar too. The conclusion: Americans, both corporations and private individuals, have used outsized-leverage (debt) to grow profits for 30 years (a great time to be a shareholder or a homeowner!).

 

 

According to this recent article in CNN on Corporate Taxes, the average tax rate for the biggest companies in the US is closer to 17.5%, or about one-third of what it was before the Reagan Tax reform of 1986. The IRS tax policy for corporations has been to lower the tax rate while closing the loopholes, then gradually re-inserting tax loopholes into the code, and in times of recession, cutting the tax rate further, which is why real corporate taxes are so low today and profits and cash reserves are at record highs.

And average, everyday Americans followed suit too -- borrowing to enhance their lifestyles, homes, etc. The difference comes in disposition of debt. In the financial crisis of 2008, the Bush Secretary of the Treasury bailed out the corporate sector by covering the "mistakes" of over-leverage through TARP, and through tax-breaks to corporations for hiring employees. Also, the Federal Reserve flooded the markets with money (QE1).

From a stock market perspective, the relatively small part of our population that owns stocks (20%, the upper class) were able to "double-down" at the market bottom and ride the market up, thus negating their losses. In essence, the Feds covered Corporate America's margin calls. This is clearly shown in the US Corporate profits after tax.

But unlike the first years of FDR's depression era economics -- when GDP rebounded in enormous leaps in the early 30s -- there has been practically no recovery in the Main Street economy of 2011, where the other 99% live. It's been a rebound for corporations but not for Main Street. The reason? The Federal Reserve engineered two massive stock market rallies (QE1 and QE2) for publicly-traded companies and their shareholders. They gave away cash in the trillions to banks, broker-dealers, and tax-breaks to corporations in the billions. Where did that cash come from? The American tax payer. So yeah ... the market responded to that.

But as soon as the Fed stops pumping the corporate balloon, the effect on the economy quickly fades, because the structural underpinnings are so tenuous. Which leads me to two additional charts (US retail sales and US Labor participation rate. The charts cover different overlapping time periods, but if you take just the 1992-2011 data, you can see that retail sales have more than doubled (about a 140% increase) while the labor participation rate has been steadily falling for 11 years. In fact, it's at a 26 year low! Spending more and earning less has become the American way.

Congress now has a negative approval rating somewhere in the low teens, the lowest in recorded history. The president is ditherer-in-chief, a nice guy who wants everyone to see the truth, do the right thing, and say Kumbaya, but they refuse to do so. It's become clear to Main Street that their government doesn't represent them or advocate for them. It does so for shareholders, but if you are not a shareholder, you are out in the cold. The irony is that the American tax payer -- through our government -- bailed out the corporations, but there has been no quid pro quo for Main Street's economic conditions. The government hasn't done much for its own people. They never get at the root cause of the demise, which is personal indebtedness and low wages.

One thing that has remained a mystery to so many of us is why something effective hasn't been done for the foreclosure crisis, because an effective solution would be so salutary for the economy. But if the legislative body has no interest in the everyday affairs of Americans and is solely devoted to lobbyists and corporate interests, that inactivity becomes clear.

The effective economic solutions for our economy are a gradual improvement in wages and salaries, a return to higher tax rates for corporations, massive refinancing of mortgage debt for all Americans at lower rates, and realistic spending cuts in social services. The idea that lowering taxes for corporations is the solution is ludicrous. The solution that will work for 80% of Americans means that corporate profits should go down, not up, because more of their profits will go into the US treasury and into Main Street instead of corporate coffers. But given the effect of money on elections, it seems hopeless that an effective common-sense solution would ever improve fiscal policy.

I could never understand why Ronald Reagan was regarded with such adulation. He basically told Americans they could have their cake and eat it too. He turned the largest creditor nation in the world into the largest debtor nation in just eight years.

With Ronald Reagan also began the idea of trickle-down economics -- that the rich would get richer, but they would look out for the economy in a patriarchal way, and everyone's life would get better. What the charts show is that in 28 years of bull-markets, the rich simply got richer, the economy fell further and further into debt; wages went nowhere, and personal debt skyrocketed (as Americans borrowed to make up the difference); that playing "the tough guy" like Reagan did with Russia (and ballooning military expenditures in the process) only leads to unfunded wars costing trillions (Iraq 1 & 2, Afghanistan) and busting the US Treasury.

If there ever was a time for America to return to its 19th century "Isolationist ways" and take care of its own problems, it's now.

 

 

 

 

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