After 38 years, it's time to junk the bedrock idea undergirding conservative economic philosophy of low taxes because IT'S NOT TRUE

 AXIOS today, here:

A bedrock idea of conservative economic philosophy is [the] idea that low taxes fuel economic growth. 

This idea is simply false, and history proves it.

We've had 38 years since the Reagan Tax Reform Act of 1986 to prove it correct and it's not.

Real GDP 1986-2024 has grown at a compound annual rate of 2.586%, a rate 29% worse than for the same length of time before that when taxes were much higher.

Real GDP 1948-1986 grew at a compound annual rate of 3.635%.

Tax reform is a complicated topic, the political subject of the AXIOS article.

I can simplify it for you: Tax like we used to in the immediate post-war.

Nominal marginal rates in 1957 (dollars are NOT adjusted for inflation in the tables), the height of the Baby Boom, went from 20% to 91%.

The set up didn't stop people from marrying, having children, and buying houses, and it didn't stop economic growth, because it forced rich people to avoid these confiscatory marginal rates by investing their money domestically to earn income at lower rates of capital taxation.

Ronald Reagan's tax reform was a license to invest elsewhere, and we're all poorer for it. 

If Democrats had any brains they would propose richly rewarding domestic investment using the tax code and severely punishing foreign investment. They could start by raising top marginal tax rates on ordinary income and offering much lower long term capital gains tax rates de-linked from ordinary income but only for domestic investment.

The country desperately needs much better economic growth, and the libertarian-Republican consensus is not providing it.

 

 

Investment abroad eclipsed investment at home for the first time in 1993 and is 200% of domestic today

J. D. Vance is fixated on cheaper foreign labor as the cause of American industrial decline when it was the tax preference given to ordinary income over long term capital investment which made it attractive

Vance: The Two Conceits Of Globalization That Squeezed American Manufacturing From Both Ends

 

". . . cheap labor is fundamentally a crutch, and it’s a crutch that inhibits innovation. I might even say that it’s a drug that too many American firms got addicted to . . ."

The indispensable contribution driving investment back home to the United States will have to be penalizing foreign investment's income and rewarding long term domestic investment's income through the tax code, which also means dramatically raising ordinary income tax rates. In other words, returning to the status quo ante-Reagan.

The reason is we have learned that rich people don't know what's best to do with their own money any more than the rest of us do. The rich have not done what's best for the country. Ronald Reagan was completely wrong about that. They took one look at the quick and easy money and immediately started looking to maximize it elsewhere. The tax code used to force them to do the right thing, which was keep it here and invest at home if they wanted to get richer. And that is what made all of us richer, with jobs with which we could afford to marry, buy houses and cars, raise children and send them to college.

People who got rich through Reagan's low ordinary income tax rates fell for the cheap labor abroad to get even richer, but now here they and we sit together beholden to countries abroad who are hostile toward us.

The chart below shows how domestic investment dominated foreign throughout the post-war until the Reagan tax reform of 1986. Investment abroad did not overtake domestic until 1993, at 105% of private fixed investment, after the Reagan tax cuts had taken full effect. Foreign as a percentage of domestic investment is double that and more today. For every four dollars invested at home in 2024, eight were invested abroad.

It took decades to screw this up, and it will take decades to fix it. But as sure as I'm sitting here neither J. D. Vance nor Donald Trump nor any other politician out there has any clue about this.