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May 1, 2012
Reaganomics: A Report Card

Full Text Published by Tax Analysts®

By H. Nelson Yu


H. Nelson Yu has operated an investment advisory business, Yu Investment Management, since 2000. He worked for Paine Webber and Smith Barney from 1991 to 2000. He is in his third year at the University of Oregon School of Law. Yu wishes to thank professor Nancy Shurtz for her assistance with this report.

This report analyzes the economic effects of the significant changes in tax and regulatory policy that have occurred since the election of Ronald Reagan in 1980. Reagan's conservative policies, which have mostly been followed since, contrasted sharply with those that were in place for nearly five decades following the election of Franklin Roosevelt in 1932. The report looks at empirical results to see which party's political philosophy may be best for America. The economic results demonstrate that Reaganomics works poorly as an economic or regulatory philosophy if the country's goal is general and sustainable economic prosperity.


Copyright 2012 H. Nelson Yu.
All rights reserved.




Table of Contents

I. Roadmap

II. An Important Debate

III. Time Periods

IV. Part 1: Policy Objectives


    A. Reduce the Growth of Government Spending

    B. Reduce Tax Rates on Labor & Capital Income

    C. Reduce Regulation


V. Part 2: Promised Results

    A. Balance the Budget

    B. Increase Economic Growth

    C. Create Healthy Financial Markets


VI. Part 3: The Promise of Trickle-Down

VII. Part 4: The Growing Inequality Problem

VIII. Part 5: Policy Prescriptions


    A. Regulatory Policy

    B. Tax Policy


IX. Policy Proposals

    A. Bowles-Simpson

    B. Doing Nothing


X. Spending

XI. Conclusion

In 1980, America elected Ronald Reagan president, and with Reagan came Reaganomics, the conservative economic philosophy that has dominated government policy for over 30 years.1 William Niskanen,2 one of the chief architects of Reaganomics, described the major policy objectives: to reduce the growth of government spending; to reduce the marginal tax rates on income from both labor and capital; and to reduce regulation.3 These policy changes were supposed to balance the budget, increase economic growth, and create healthy financial markets.4 The primary means by which conservative politicians and economists sold the American public on Reaganomics was through the idea of supply-side tax theory or trickle-down economics, which promised that tax cuts for the wealthy and big business would boost investment and economic growth. That would in turn create greater economic opportunity and prosperity for all.


I. Roadmap

In this report, I will examine the economic record under Reaganomics and consider policy changes based on my findings. Part 1 will explore whether the policy objectives of Reaganomics were achieved. Part 2 will discuss whether Reaganomics delivered on its promises -- increased economic growth, a balanced budget, and healthy financial markets -- and compare the results under Reaganomics with those during the previous Progressive Era.5 Part 3 will consider whether the conservative politicians and economists who sold the American public on supply-side tax theory and trickle-down economics were right about economic benefits trickling down. Judging Reaganomics under its own standards by looking at objective economic criteria allows for a fair analysis. That said, part 4 will address the normative, rather than the economic, concern of growing income inequality. Finally, part 5 will consider current options for policy change, specifically changes in tax policy.

II. An Important Debate

America is facing a daunting set of economic challenges, perhaps the most challenging since the Great Depression. Nearly 9 percent of the workforce is unemployed, with approximately 16 percent of the workforce underemployed.6 American households have seen their home values decline by more than $6 trillion since 2006, from more than $22 trillion to approximately $16 trillion.7 The percentage decline in housing values during the current recession is greater than the decline that occurred during the Depression.8 The federal budget deficit is running at an annual rate of 10 percent of GDP, or more than $1.4 trillion a year.9 The national debt just topped $15 trillion,10 and with ballooning obligations of Social Security and Medicare, the country must address its fiscal issues or face financial ruin.11 Federal tax receipts as a percentage of GDP are running at 15 percent,12 well below average,13 while federal spending is near 25 percent of GDP,14 well above average.15 Given these circumstances, the country is engaged in an important political debate about what government policy should look like: Should we stick with the same conservative economic policies that led us to where we are today, or should we shift toward a more progressive set of policies, specifically more regulation and a more progressive tax policy?

III. Time Periods

For reference, this report will compare policy and data during two major time periods: Reaganomics, which stretches from Ronald Reagan's presidency through the presidency of George W. Bush (1981-2008), and the previous Progressive Era, which lasted from the presidency of Franklin Roosevelt through the presidency of Jimmy Carter (1933-1980). Part 2 will also look at government policy from 1921 to the 1929 stock market crash -- policy that led to the crash and the Great Depression.

IV. Part 1: Policy Objectives

A. Reduce the Growth of Government Spending

Conservatives claim to be the party of smaller government, and they often criticize progressive policies as "big government," so we should examine whose policies, those of progressives or conservatives, produce big government. A related claim of supply-side economics is that lower tax rates will result in greater economic growth and thus produce larger tax receipts, which will reduce government deficits and debt. Ironically, it was Vice President Dick Cheney who in late 2002 told then-Treasury Secretary Paul O'Neill, "Reagan proved that deficits don't matter."16 O'Neill was warning about the deficit implications of another round of Bush tax cuts at the time, and a month later he was asked to resign.17 Cheney's comments suggest that conservatives use the small-government argument as a talking point rather than a real policy objective.

So did Reaganomics achieve its objective of a smaller government, and did supply-side tax cuts reduce budget deficits, as conservative economists promised? At the start of President Carter's first fiscal year, fiscal 1977,18 the national debt stood at $699 billion, equal to 35.8 percent of GDP.19 By the end of fiscal 1981, the debt had increased to $998 billion, but the economy grew more, so debt fell to 32.5 percent of GDP.20 The compound annual growth rate (CAGR)21 of the debt under Carter was 9.31 percent. During the entire Progressive Era, from fiscal 1933 to fiscal 1981, which included three major wars22 and major public infrastructure spending,23 the national debt grew from $23 billion to $998 billion (no inflation adjustment), a CAGR of 8.17 percent.24

During Reagan's two terms, fiscal 1981 to fiscal 1989, the national debt grew from $998 billion to nearly $2.86 trillion, a CAGR of 14.05 percent.25 The debt as a percentage of GDP increased from 32.5 to 53.1 percent.26 While George H.W. Bush (Bush I) was president, the debt grew from $2.86 trillion to $4.41 trillion, a CAGR of 11.47 percent.27 Bush I was saddled with a recession and with spending to clean up the 1990 savings and loan crisis, costs properly attributable to Reagan's policies.28 During the 12 years of Reagan and Bush I, the debt grew at a CAGR of 13.18 percent. By the end of Bush I's term, the debt had grown to 66.1 percent of GDP.29

In President Bill Clinton's eight years, the debt grew from $4.41 trillion to $5.8 trillion, a CAGR of 3.5 percent.30 The debt as a percentage of GDP fell from 66.1 percent to 56.4 percent during his two terms.31 Clinton's lower deficits were the result of higher marginal income tax rates and the capital gains tax receipts produced by the tech boom in the late 1990s, but more than any other president in modern times, Clinton actually slowed the rate of growth in government spending. Under Reagan and Bush I, government spending averaged 22.2 percent of GDP,32 while under Clinton, government spending fell from 22.1 percent of GDP to 18.2 percent, and averaged 19.8 percent of GDP.33 Supply-siders like to argue that it was Clinton's CGT cut in 199734 that produced all his superior budget results, but this argument falls short on three counts: (1) it ignores the reduction in spending growth; (2) the tech bubble started before the tax cut, in 1995, with the initial public offering of Netscape35; and (3) tech executives and employees who were handed huge amounts of overpriced stock during the tech bubble were not going to hold onto their stock because the capital gains rate was a mere 8 percent higher. It is much more likely that Clinton's CGT cut cost the Treasury money and that his surpluses would have been even greater had the capital gains rate been left at 28 percent.

During the two terms of President George W. Bush (Bush II), the debt grew from $5.807 trillion to $11.91 trillion, a CAGR of 9.39 percent.36 Because the economy grew far slower during Bush II's presidency, the national debt under his administration rose from 56.4 percent of GDP to 84.2 percent of GDP.37 Overall, during the 28 years between Reagan and Bush II, the debt grew at a CAGR of 9.26 percent, a faster rate than during the progressive movement. If the Clinton presidency is not included, the CAGR of debt under Reagan, Bush I, and Bush II was 11.65 percent, substantially greater than the 8.17 percent CAGR during the Progressive Era. To illustrate the comparison, over a 20-year period, if you were to start with $1 trillion of debt, a CAGR of 8.17 percent would produce final debt of $4.81 trillion, while a CAGR of 11.65 percent would produce final debt of $9.06 trillion -- a significant difference.

The facts seem to contradict both the idea that Reaganomics has anything to do with smaller government or that supply-side tax cuts can work to reduce the debt. The opposite is in fact true: Progressive policies produced substantially smaller deficits over decades, through war, recession, and boom. Perhaps conservative voters believe in the idea of smaller government, but it seems conservative policymakers, from Ronald Reagan to George W. Bush, use the idea of smaller government as a political talking point, not a policy.

B. Reduce Tax Rates on Labor & Capital Income

The two largest categories of federal tax receipts are income taxes38 and payroll taxes.39 Taxes on income break down further into taxes on ordinary income and taxes on investment income,40 or capital. Taxes on ordinary income and payroll taxes are taxes on labor, and taxes on investment income (dividends and capital gains) are taxes on capital. Under Reaganomics, the tax rates on investment income and the top marginal tax rates on ordinary income were reduced significantly, lowering the tax burden on owners of capital assets, the wealthy, and on the highest-earning Americans. By contrast, payroll taxes rose significantly, increasing the tax burden on labor, specifically workers earning income near the level of the Social Security cap.41

To illustrate, in 1980, income taxes were 52.1 percent of federal tax receipts and payroll taxes were 27.4 percent.42 By 1988, Reagan's last year, income taxes were 47.3 percent of federal tax receipts and payroll taxes had increased to 37.6 percent.43 In today's dollars, if tax receipts were 18 percent of GDP today (the average level over the last 30 years44), the approximately 10 percent increase in receipts coming from payroll taxes would be about $270 billion. Collecting $270 billion more every year from the payroll tax instead of the income tax amounts to a massive shift in the tax burden, off the shoulders of the richest Americans making investment income and ordinary income well above the cap, and onto the shoulders of working Americans making income up to the cap.

1. Income tax rates. Under Reagan, the top marginal income tax rate for individuals was lowered from 70 to 50 percent in 1981, to 38.5 percent in 1987, and to 28 percent in 1988.45 Bush I raised the top marginal rate to 31 percent in 1991 to deal with the ballooning deficit,46 and many conservatives point to this act as the cause of Bush I's defeat in the 1992 presidential election. Clinton raised the top rate in his first year (1993) to 39.6 percent,47 and that rate prevailed during his presidency. Bush II cut the top marginal tax rate in both 2001 and 2003 to the current rate of 35 percent.48 By contrast, during the Progressive Era, the top marginal rate was raised to 63 percent in 1932, increased again to 79 percent in 1936, reached a high of 94 percent in 1944-1945, and stayed between 82 and 91 percent until two cuts under Presidents Kennedy and Johnson to 77 and 70 percent.49 At the end of the Progressive Era, the top marginal tax rate was 70 percent.50

2. Payroll taxes. While the top income tax rates were cut dramatically under Reaganomics, both the payroll tax rate and the cap on income subject to Social Security tax rose.51 The payroll tax rate for employees rose from 6.13 percent in 1980 to the current rate of 7.65 percent, and for the self-employed, from 8.1 percent in 1980 to the current 15.3 percent.52 The cap on income subject to Social Security tax expanded fourfold, from $25,900 in 1980 to $102,000 in 2008, Bush II's final year.53 If the cap had been adjusted only for inflation, it would have risen to $67,674,54 so the cap was raised 50.7 percent in real terms, raising taxes on working Americans.

3. Taxes on capital. During most of the history of the income tax, under both progressives and conservatives, capital gains have been taxed at favorable rates compared with taxes on ordinary income.55 Because the rich own most of the capital assets in the country,56 they benefit disproportionately from the preferential CGT rates. Under Reagan, capital gains rates were cut in 1981 to a blended rate of approximately 24 percent, then to 20 percent between 1982 and 1986. They were raised to 28 percent in the Tax Reform Act of 1986.57 Clinton then cut the capital gains to 20 percent in 1997, and Bush II cut the rate on both capital gains and dividends to 15 percent in 2003,58 the lowest rate on dividend income ever, and the lowest rate on capital gains since before the Progressive Era. Before Bush II, dividend income had generally been taxed at ordinary income rates, except without payroll tax imposed. Because the top marginal tax rate on ordinary income was cut dramatically under Reagan, and dividend income was taxed at ordinary income rates, wealthy owners of dividend-paying stocks got a big tax cut on their dividend income under Reagan.

The effect of the investment-income tax cuts, particularly Clinton's CGT cut and the Bush II tax cuts, shows up clearly in an IRS report detailing the history of earnings and taxes for the 400 highest-income Americans since 1992.59 In 1992 the top 400 income households earned $16.9 billion collectively ($42.25 million average) and paid tax at a rate of 26.4 percent.60 By 2008 the top 400 earned $90.9 billion collectively ($227.25 million average) and paid tax at a rate of only 18.11 percent.61 In sum, Reaganomics achieved enormous success in its goal of lowering marginal tax rates on high-income earners and capital income, but it did little to lower the tax burden on those working Americans whose income was fully subject to payroll taxes.

C. Reduce Regulation

The most successfully implemented policy objective under Reaganomics was deregulation, specifically for the financial services industry. Conservatives may be the true believers in deregulation, but Democrats, including Clinton and his Treasury secretaries Robert Rubin and Lawrence Summers,62 were active enablers in pushing for and signing onto financial deregulation in the late 1990s. Democratic participation in deregulation is one reason the entire 1981-2008 period can properly be labeled the era of Reaganomics.

Early in his first term, Reagan deregulated the savings and loan industry63; eight years later the country suffered the savings and loan crisis, the first major nationwide banking crisis since the Depression. Clinton then deregulated the banks and Wall Street in 1999,64 repealing Glass-Steagall65 and allowing commercial banks and investment banks to dive into each other's business. Clinton then deregulated commodity and futures trading in 2000,66 which created the so-called Enron loophole and unregulated credit default swaps (CDSs).67 The financial industry collapsed less than a decade later in 2008.

Although Clinton signed two major pieces of financial deregulation in his last two years, it was left to Bush II to preside over a deregulated financial industry. Perhaps the starkest example of Bush II's attitude toward government regulation, consistent with Reaganomics, was his handling of the SEC. In late 2002 Bush II tapped family friend, long-time Republican, and former Wall Street banker William Donaldson68 to be SEC chair. Bush likely thought he was appointing a compliant, nonregulating regulator, but Donaldson proved to be something different. According to an article in Business Week, Donaldson pushed for reforms of disclosure practices relating to corporate compensation.69 He sought to force public companies to disclose all forms of executive pay and incentives, including supplemental retirement packages, perks, and other forms of stealth compensation.70 This scrutiny of CEO compensation was clearly antithetical to conservative economic philosophy, and in June 2005 Donaldson was forced to resign. He was replaced by Chris Cox, a former 17-year Republican congressman and member of Reagan's White House staff. According to a later article in Business Week, before his resignation, Donaldson had consistently voted with the two Democratic members of the five-member SEC to implement Sarbanes-Oxley,71 outvoting the two other Republicans on the commission.72 According to a study by the Economic Policy Institute, the ratio of CEO-to-worker pay near the end of the Progressive Era was 35 to 1.73 By 2005 the ratio had reached 262 to 1.74 Donaldson's concerns about executive compensation had merit.

Bush got his nonregulating regulator when he appointed Cox, according to a 2009 audit by the Government Accountability Office.75 According to an article by Bloomberg, the GAO report said Cox's policies contributed to an adversarial relationship between the SEC's Division of Enforcement and the commission headed by Cox.76 Penalties fell 84 percent during the fiscal years roughly coinciding with Cox's tenure, from $1.59 billion in fiscal 2005 to $256 million in fiscal 2008.77 Disgorgements fell 68 percent, from a fiscal 2006 peak of $2.4 billion to $774 million in fiscal 2008.78 According to the GAO report, SEC attorneys told the GAO that "a company confessed and was willing to pay the penalty sought, but it still took more than six months to complete the settlement because the commissioners lacked consensus." In another case, "a company agreed to a settlement, announced it publicly, and escrowed the money for payment, but the matter took a year to win Commission approval."79

Another background figure in the conservative movement played a central role in the deregulation push under Reaganomics. Phil Gramm, an economist, was a Democratic congressman in Texas when Reagan was elected. In 1981 he cosponsored Reagan's economic program and tax cuts, and two years later changed parties, becoming a Republican. The Financial Services Modernization Act of 1999, which repealed Glass-Steagall, is also known as the Gramm-Leach-Bliley Act. He was also one of five cosponsors of the legislation that created the Enron loophole and the unregulated CDS -- and this was while his wife, Wendy Gramm, was on Enron's board.80 Wendy Gramm was actually appointed chair of the Commodity Futures Trading Commission in 1988 by Reagan.81 The CFTC was responsible for regulating Enron's trading activity, and in 1993, Wendy Gramm, as chair, helped Enron obtain an exemption from regulation in trading energy derivatives. After granting Enron an exemption, she left her post at the CFTC and joined Enron's board. She was a member of its audit committee when Enron collapsed.82 Phil Gramm left Congress in 2001 and joined Union Bank of Switzerland in 2002 as its vice chair, a position he continues to hold despite significant setbacks for the company since he has been there.83 Gramm remains a respected thinker in conservative circles and was a senior economic adviser to Sen. John McCain, R-Ariz., during his 2008 presidential run.84

Reaganomics was wildly successful in its push to deregulate, particularly the financial services industry. This push to deregulate can be contrasted with the comprehensive regulatory regime passed in the early part of the Progressive Era. The Securities Act of 1933 and the Securities and Exchange Act of 1934 were designed to regulate public offerings of securities, secondary market trading, and reporting requirements for public companies. The Banking Act of 1933 (Glass-Steagall) separated traditional banking from investment banking and created the FDIC.


V. Part 2: Promised Results

A. Balance the Budget

As discussed above, the GOP under Reaganomics has not been the party of balanced budgets. Reagan took a manageable national debt, 32.5 percent of GDP, from Carter and 48 years of progressive policies, and Reagan and Bush I exploded the debt to 66.1 percent of GDP. Bush II took over a budget in surplus from Clinton, and a national debt at 56.4 percent of GDP, and exploded the debt again to 84.2 percent of GDP. Conservatives like to take credit for the balanced budget in the late 1990s when Republicans controlled the House while Clinton was in the White House, but that argument suggests that the only way Republicans can be trusted with spending is if a Democrat is in the White House. The Republicans failed miserably with fiscal discipline during the rest of the last 30 years, and they controlled both houses of Congress and the White House in Bush II's first six years. If conservative voters genuinely feel deficit reduction is the top economic priority for the country, the record suggests they should vote for progressives.

B. Increase Economic Growth

Despite the bigger budget deficits and the financial crises under Reaganomics, it could conceivably make sense to pursue conservative economic policy if the long-term economic results were substantially better than under progressive policy. To address the issue of economic growth, we have two distinct periods to compare: the Progressive Era from 1933-1980 and the Reaganomics period from 1981-2008.

There are different ways to measure economic progress, but I have chosen to look at the objective measures of GDP, per capita GDP, and how that GDP is distributed in terms of income. One might also consider standard of living, availability of goods and services, technological advancement, or other more subjective measures. Conservatives make a legitimate argument that it is better being poor in America today than it was in the past,85 particularly with the advent of safety nets such as Social Security, Medicare, and other social welfare programs, such as food stamps. But these programs were created by progressives, so it seems ironic that conservatives would claim credit for programs they opposed and are generally in favor of curtailing or dismantling.86

                                    Table 1
 _____________________________________________________________________________

 Low 20   Second 20  Third 20  Fourth 20  Top 20   Top 10    Top 5     Top 1
 Percent  Percent    Percent   Percent    Percent  Percent   Percent   Percent
 _____________________________________________________________________________

  5.7%      11%       15.7%      22.1%     45.8%    30.6%     20.7%     9.1%

                                    Table 2
 _____________________________________________________________________________

 Low 20   Second 20  Third 20  Fourth 20  Top 20   Top 10    Top 5     Top 1
 Percent  Percent    Percent   Percent    Percent  Percent   Percent   Percent
 _____________________________________________________________________________

    4%      8.4%      13.1%      19.3%     55.9%     42%      32.3%     19.4%

So, has the economy fared better under progressive or conservative economic policy? During the progressive period from 1932 through 1980, GDP grew from $725 billion to $5.83 trillion (GDP: 2005 chain-weighted dollars/inflation adjusted),87 a CAGR of 4.44 percent, and per capita GDP grew from $5,800 to $25,700,88 a CAGR of 3.15 percent. In 1980 the breakdown of income was as shown in Table 1.89

Before the Progressive Era, in 1928, the top 1 percent in the country earned 23.9 percent of all income,90 and in 1929, before the stock market crash, the top 1 percent controlled 44.2 percent of the nation's wealth,91 both levels that have not been surpassed. So during the Progressive Era, along with growth in GDP and per capita GDP, there was a substantial broadening of economic prosperity in terms of income distribution. The rich as a group did not become poor between 1933 and 1980, but other Americans were able to share in the growing prosperity. Some conservatives will point out that Republicans were in the White House during the Progressive Era, but if one examines the policies under the Republican presidents -- Dwight Eisenhower, Richard Nixon, and Gerald Ford -- one sees that none of those Republicans was particularly conservative in terms of policy,92 certainly not a Reaganomics-type conservative.

But was the economy even better under Reaganomics? Although the Reaganomics period is generally thought to include the entire 1981 through 2008 period because of Clinton's capital gains tax cut in 1997 and deregulation of the financial industry in 1999 and 2000, the Clinton presidency should be separated out for this analysis because Clinton's income tax increase in 1993 created significantly more progressive effects through his two terms. The economic record under Reaganomics benefited substantially by including the Clinton presidency.

During the 28-year period of Reaganomics, the GDP grew from $5.83 billion to $13.16 billion,93 a CAGR of 2.95 percent, less than two-thirds of the growth rate during the Progressive Era. Per capita GDP grew from $25,700 to $43,296, a CAGR of 1.88 percent,94 about 60 percent of the growth rate during the Progressive Era. At the same time, the share of income going to the richest Americans exploded back near the levels last seen in the late 1920s (see Table 2).95

Without the Clinton presidency, the CAGR of GDP under Reagan, Bush I, and Bush II was 2.59 percent, 58 percent of the growth rate during the Progressive Era. The CAGR of per capita GDP was 1.59 percent, 50 percent of the growth rate under the Progressive Era.

The economy grew almost twice as fast, both in total and per capita, under more progressive policies. At the same time, the share of income for the bottom 20, 40, 60, and 80 percent of the country contracted under Reaganomics. The share of income for the top 20, 10, 5, and 1 percent expanded, and most of the growth in these top brackets was because of the inclusion of the top 1 percent. The U.S. economy still grew under Reaganomics, but that speaks more to the resilience of the U.S. economy than to any demonstrated economic success produced by Reaganomics. Reaganomics did not deliver on its promise of increased rates of economic growth, except for a narrow slice of very rich Americans.

C. Create Healthy Financial Markets

Whether Reaganomics delivered on its promise of producing healthy financial markets depends on one's definition of healthy. If healthy means larger, then yes, Reaganomics produced healthier financial markets. But for financial markets, larger is more often akin to risky than healthy. The legendary economist John Maynard Keynes had it right when he said:


    Speculators may do no harm on a steady stream of enterprise, but the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes the byproduct of the activities of casino, the job is likely to be ill done.96

During the Progressive Era, 1933-1980, the Dow Jones Industrial Average (DJIA)97 advanced from 59.93 to 963.99,98 a CAGR of 5.96 percent. The return does not include dividends. During the 28 years of Reaganomics, 1981-2008, the DJIA rose from 963.99 to 8497.31,99 a CAGR of 8.08 percent, also without dividends. So stock prices, as measured by the DJIA, did better under Reaganomics. But financial market return does not necessarily equate with health, particularly when financial bubbles are created.

Reaganomics produced the two worst financial crises since the Great Depression: the 1990 savings and loan crisis and the 2008 financial crisis. If Reagan had studied the conditions in the 1920s that led to the Great Depression, perhaps he would have rethought Reaganomics, but then again, maybe not, considering how well the top 1 percent -- a core Republican constituency -- have done the last three decades.

In any event, the economic policies that preceded the 1929 stock market crash are eerily similar to the policies of Reaganomics. In 1920 the country elected Republican Warren Harding president and Calvin Coolidge vice president. Harding died in 1923, making Coolidge president. Before Harding's death, in 1922, the top marginal income tax rate was lowered from 73 to 58 percent.100 Coolidge lowered the top rate further, from 58 to 25 percent.101 The capital gains tax rate was lowered in 1922 from ordinary income rates to 12.5 percent, the lowest rate in the history of the capital gains tax, and a rate that was maintained beyond the 1929 crash.102 On the regulatory front, Coolidge, like Reagan, was not a believer in regulation. Coolidge biographer Robert Ferrell described the regulatory state under Coolidge as "thin to the point of invisibility."103 Tax cuts for the rich and on capital, plus no regulation, equaled the stock market crash and the start of the Great Depression. Past is often prologue, particularly in financial markets.

At best, the results are mixed on whether Reaganomics delivered on its promise of healthier financial markets. Moreover, it would take willful blindness to ignore that the 1929 stock market crash and the Great Depression, the 1990 savings and loan crisis, and the 2008 financial crisis all occurred while markets were unregulated or deregulated and while tax rates for the rich and on capital gains were slashed. Just as notable, not a single nationwide banking crisis occurred between 1933 and 1980 after major financial regulation was enacted and tax rates were increased.


VI. Part 3: The Promise of Trickle-Down

Conservative politicians since Reagan's presidency have been telling the American public that if the rich do better, everyone will do better, so we must keep tax rates low on the rich and on capital. The record under Reaganomics does not support this assertion. The Economic Policy Institute, using Census Bureau data, studied the growth rates of real income by quintile from 1947 to 2010.104 The data were broken down as 1947-1979 (pre-Reaganomics) and 1979-2010. The numbers reflect the CAGRs of real income by quintile. As you can see in Table 3, all groups, including the top quintile, experienced income growth before Reaganomics.

                                Table 3
 _____________________________________________________________________

 1947-1979:

  Low          Second         Third         Fourth          Top
  20 Percent   20 Percent     20 Percent    20 Percent      20 Percent
 _____________________________________________________________________

    2.6%         2.3%           2.4%          2.5%            2.2%
 _____________________________________________________________________

 1979-2010:

  Low          Second         Third         Fourth          Top
  20 Percent   20 Percent     20 Percent    20 Percent      20 Percent
 _____________________________________________________________________

    -0.4%       0.1%            0.3%          0.6%            1.2%

According to a Congressional Budget Office study of the growth in after-tax income for the top 20 percent between 1979-2007 (during Reaganomics), most of that growth went to the top 1 percent, whose real after-tax income grew at a CAGR of 4.83 percent (275 percent total), whereas the bottom 19 percent of the top 20 percent saw their real incomes grow at a CAGR of 1.8 percent (65 percent total) over the same period.105 So even the bottom 19 percent of the top 20 percent saw their incomes grow at a slower rate under Reaganomics than before Reaganomics. The empirical data indicate that everyone except the rich did better economically while progressive policies were in place. Most Americans are likely unaware of the economic data describing their deteriorating condition, but there is little doubt that they feel it in their daily lives. One wonders how much longer conservative politicians can get away with the false trickle-down message.


VII. Part 4: The Growing Inequality Problem

It is difficult to read or watch the news these days without seeing a story about wealth and income inequality. That is not surprising considering we are approaching levels of inequality last seen in the late 1920s. But in any economic system, even under socialism or communism, there is going to be some amount of inequality. The question should not be how to eliminate inequality, but whether government policy should actively promote greater inequality. If Reaganomics had produced more economic growth, smaller deficits, no financial crises, and significant real income growth up and down the income scale, the fact that the rich did relatively better than everyone else should be acceptable, maybe even desirable. But Reaganomics produced no such commensurate benefits while the rich got richer -- we got bigger deficits, slower economic growth, massive financial crises, and no shared benefits. Given the results, it should not be surprising that more Americans are waking up to the problem of growing inequality.

To this point, a fascinating study on wealth inequality, which is the close cousin of income inequality, was recently published by Michael Norton and Dan Ariely.106 In 2005 the two polled a broad cross-section of Americans randomly drawn from a panel of more than 1 million Americans from 47 states.107 The respondents were shown three unlabeled pie graphs of wealth distribution (each separated into quintiles), one of which showed five even slices of 20 percent. The second graph showed the income distribution in Sweden:

                                Table 4
 _____________________________________________________________________

  Low          Second         Third         Fourth          Top
  20 Percent   20 Percent     20 Percent    20 Percent      20 Percent
 _____________________________________________________________________

    11%          15%            18%           21%              36%

The third graph reflected the wealth distribution in America:

                                Table 5
 _____________________________________________________________________

  Low          Second         Third         Fourth          Top
  20 Percent   20 Percent     20 Percent    20 Percent      20 Percent
 _____________________________________________________________________

    0.1%         0.2%           4%            11%             84%

To minimize definitional confusion, the study required all respondents to read the following definition of wealth before responding:


    Wealth, also known as net worth, is defined as the total value of everything someone owns minus any debt that he or she owes. A person's net worth includes his or her bank account savings plus the value of other things such as property, stocks, bonds, art, collections, etc., minus the value of things like loans and mortgages.108

The study then asked respondents which country's distribution was most "just" based on the following constraint:

    In considering the question, imagine that if you joined this nation, you would be randomly assigned to a place in the distribution, so you could end up anywhere in the distribution, from the very richest to the very poorest.109

Ninety-two percent preferred Sweden's distribution over the U.S. distribution (again, both graphs unlabeled). Those who chose Sweden represented 92.7 percent of the female respondents, 90.6 percent of the male respondents, 90.2 percent of the Bush II voters, 93.5 percent Kerry voters, 92.1 percent of respondents with incomes less than $50,000, 91.7 percent with incomes between $50,000 and $100,000, and 89.1 percent with incomes exceeding $100,000.110

Respondents were next asked what they thought the actual wealth distribution was in the United States by quintile, and what it should be ideally. Men guessed the top quintile held 60 percent of the wealth and said that ideally it should be 36 percent. Women guessed that it was 57 percent and ideally should be 30 percent. Bush II voters guessed a top quintile of 57 percent, with an ideal of 35 percent. Those who voted for presidential candidate Sen. John F. Kerry, D-Mass., guessed 61 percent, with an ideal of 30 percent. The under-$50,000 group guessed 58 percent, with an ideal of 30 percent. The above-$100,000 group guessed 61 percent, with an ideal of 30 percent.111 Every demographic group significantly underestimated America's wealth inequality.

It appears from these results that a reasonably representative sample of Americans, not knowing which country they were choosing, overwhelmingly felt Sweden's wealth distribution was fairer than America's. It also appears that every demographic group in the sample significantly underestimated the concentration of wealth in America and that every demographic group's ideal distribution was vastly more equal than the America's distribution. The study seems to suggest that the greater inequality in wealth and income that has resulted from Reaganomics runs counter to our norms and ideals, at least for an overwhelming majority of Americans. The result of many recent opinion polls also suggests that most Americans, even Republicans, are in favor of taxing the rich more.112

Some believe there is a natural struggle between normative values and economic concerns, as expressed by professor Sharon Nantell:


    A society's choice of a system of taxation speaks volumes about what that society values and believes. In societal groups, humans share. . . . There is both a cost and a benefit to this sharing. The societal objective is to make the benefit outweigh the cost, as perceived by the values and beliefs of that particular society.113

Nantell's article suggested that in conducting a cost-benefit analysis of a system of taxation, more qualitative (necessarily more subjective) measures should be given equal or greater weight than purely economic considerations. But what Nantell seems to be acknowledging is that more sharing means less growth, while suggesting that the trade-off is worth it. Interestingly, Reaganomics has shown her dilemma not to exist. That is, there was far less sharing of economic benefit under Reaganomics, but for the supposed economic imperative of taxing the rich less, we actually got less economic growth and no general economic benefit at all. The fruit tree of the economy bore less fruit, and the rich ate most of it. The history of the Progressive Era and Reaganomics suggests that making the tax code more progressive will both satisfy the normative goal of reducing inequality and produce more economic growth.

VIII. Part 5: Policy Prescriptions

A. Regulatory Policy

In response to the worst financial crisis in the nation's history, President Roosevelt passed sweeping financial regulation in 1933 and 1934, and throughout the rest of the 48-year Progressive Era, the country did not experience a single nationwide banking crisis. Reaganomics produced major banking and financial deregulation twice, in the early 1980s and late 1990s, and both times we had a nationwide financial crisis within a decade.

What should have been clear from the experience of the 1920s, and should by now be pounded into the heads of policymakers, is that financial market wizards should not be allowed to regulate themselves. There is nothing inherently wrong or evil about speculation, as long as people are risking only their own money. But if banks or other financial companies are considered too big to fail,114 they are not risking just their own money. Three of the four largest U.S. banks -- J.P. Morgan Chase, Bank of America, and Wells Fargo -- are actually bigger in terms of assets than they were before the 2008 financial crisis, and the fourth, Citigroup, is essentially the same size.115 Despite assurances by politicians, those banks, along with a few other financial institutions, are still too big to fail. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Volcker rule, which limits Wall Street banks' ability to speculate for their own accounts, are a step in the right direction. Reaganomics, instead of demonstrating that deregulation would boost the economy, proved that the financial industry must be regulated.

B. Tax Policy

Whatever changes should be made to our current tax policy, the goal should be to promote the greater good, not to benefit one group at the expense of another. But to the extent that the tax code favored the rich disproportionately over the last 30 years -- and we have strong empirical evidence to suggest that was the case -- policy should be changed to minimize or eliminate that preferential treatment, particularly when there has been no corresponding economic benefit.

To this end, there is the tax policy principle of vertical equity, which is closely related to the notion of fairness. In the first landmark article on tax policy,116 Judge Joseph Sneed equated vertical equity with "reduced income inequality," which he recognized as a legitimate goal of tax policy:


    The check on economic inequality is desirable in order to provide the young with more equality of opportunity, to achieve a dispersion of private economic power that will tend to advance freedom, to moderate the covetousness of the poor and the arrogance of the rich, and to minimize the tension between the political theory of democracy and the economic imperatives of capitalism. The use of taxation to serve this check cannot be seriously disputed at this date.117

Sneed's article was written in the mid-1960s, more than 30 years into the Progressive Era, and many advancements had been made in reducing income inequality. Sneed suggested that was the case, and he reasoned that the need for the policy goal of vertical equity had diminished.118 But this suggests that vertical equity works in only one direction -- that is, to reduce income inequality -- and this seems too narrow a reading of equity. To the extent that equity is closely related to the concept of fairness, it would seem that a tax policy that completely stripped high-income earners of any advantage they had worked hard to achieve would be just as inequitable as a system that showered wealth on a narrow group (such as our current system). A broader notion of vertical equity would not be limited to reducing income inequality but would seek a fair, but not necessarily equal, balance between higher- and lower-income earners, based both on our norms of hard work and achievement balanced against our understanding that some people are more talented, get lucky, or are given a big head start by their position in society.119

It is clear from studying the empirical results from the Progressive Era and Reaganomics that both systems pushed the distribution of income in one direction and presumably would continue to do so if left in place. Progressives were ushered in amid high levels of income inequality and steadily reduced them. Conservatives took over when levels of income inequality were lower and inequality expanded. Looking at the effects of these two policies, while both systems could take an income distribution and shift the distribution, if left in place long enough, both systems would likely overshoot any level of a fair distribution, so both systems would ultimately fail to provide vertical equity.

Assuming there is a level of income inequality that correlates with a highly efficient economy -- that is, an economy that produces the greatest benefits with the least resources and disperses those benefits widely -- having a policy that moves us toward that level, but not unreasonably beyond, seems a worthwhile goal. If starting from scratch, it would be difficult to create an optimal tax system, because one would not know what that income distribution equilibrium would be or how one tax policy would alter income distribution from a standing start. But we are not starting from scratch; rather, we have the experience of the last 80-plus years, and we know that one tax system pushed income one way and the other pushed income the other way. From that, we can infer that if an optimal system exists, it would lie somewhere between the two systems. We have two reference points between which to construct tax policy that at a minimum should be more equitable than either of those two systems. A fair or vertically equitable tax policy should not take all advantage away from high-income earners nor bestow all the fruits of the economy on such a narrow group.

Along with vertical equity, there is the tax policy principle of neutrality.120 The neutrality principle seeks to create tax policy in such a way as to not incentivize or deter parties from making economic decisions that would be made absent the policy. Needless to say, it is difficult, if not impossible, to create a neutral tax provision. Someone is going to spend less or more, or invest less or more, in one area or another. But to the extent that taxes exist to fund the cost of government121 (and in that vein, government funding is falling short), we should ask ourselves, how can we collect more taxes without creating massive economic distortion?

Wealth and income inequality are near record levels, and the economy has not benefited measurably from the expansion of inequality. Lawmakers should bear that in mind when designing tax policy with the goals of neutrality and vertical equity. The principle of neutrality suggests taxes should be levied in a way that minimizes economic distortion. The rich are the only income group today that could withstand a sizable tax increase without significantly altering its behavior. From our modified notion of vertical equity, we also know that the present policy is tipped too far in favor of the rich, and so taxes should be more progressive. At the same time, we know that tax policy during the Progressive Era produced a sizable shift in income distribution down the income scale, so perhaps tax policy should not be as progressive as during the Progressive Era. In sum, tax policy changes should be less progressive than during the Progressive Era but more progressive than what has been in place over the last 30 years.


IX. Policy Proposals

A. Bowles-Simpson

In 2010, President Obama convened the National Commission on Fiscal Responsibility and Reform (the Bowles-Simpson Commission), which included seven Republicans and seven Democrats. The Bowles-Simpson report,122 recommended by 11 of the 14 members, is fairly representative of most current proposals to reform the tax code. The stated view behind the commission's proposal on tax reform aligns with the view of this report: We need more revenue, and most of it should come from the rich. The commission said:

    Maintain or increase progressivity of the tax code. Though reducing the deficit will require shared sacrifice, those of us who are best off will need to contribute the most. Tax reform must continue to protect those who are most vulnerable, and eliminate tax loopholes favoring those who need help least.123

The Bowles-Simpson report lists as major policy goals reducing the deficit by $4 trillion over 10 years; reducing tax rates by eliminating deductions, exclusions, preferences, and credits from the tax code; repealing the alternative minimum tax, and capping federal revenue at 21 percent of GDP.124 Some of the finer points that would either maintain or increase progressivity include retaining both the child credit125 and the earned income tax credit,126 allowing only standard deductions and no itemized deductions,127 taxing capital gains and dividends at ordinary income rates,128 and making interest on newly issued municipal bonds taxable.129 Of the other major tax expenditures, only a limited mortgage interest credit, a capped exclusion on employer-provided healthcare, a limited charitable contribution credit, and limited provision for retirement savings would be preserved.130 In the end, there would be only three tax brackets: 12, 22, and 28 percent.

From a tax policy standpoint, the Bowles-Simpson report does some good but maybe not enough. None of the provisions looks particularly regressive on its face, but the changes may not be progressive enough to shift the income distribution away from the current record levels of inequality that developed under Reaganomics. Taxing investment income at ordinary income rates and taxing municipal bond interest evens out the tax burden between those making ordinary income and those making investment income. But a top marginal tax rate of 28 percent is actually lower than the current effective tax rate of approximately 31 percent131 paid by the top 1 percent, so cutting the top tax rate to 28 percent cancels out most or all of the added progressivity from raising rates on investment income. Equalizing the tax rate on earned and investment income for the top 1 percent does help to satisfy the tax policy principle of horizontal equity (similarly situated taxpayers should be taxed similarly132), but it does nothing to satisfy the principle of vertical equity, which is the bigger problem today. On the plus side, if the CBO scoring of the proposal is close to accurate, increasing revenues to 21 percent of GDP would go a long way toward closing the budget deficit,133 satisfying the basic policy goal of adequacy.134 Also, the tax code would be greatly simplified, eliminating many loopholes to reduce tax avoidance, so the proposal would satisfy the important policy goal of practicality.135 That the proposal was also approved by a bipartisan commission indicates that it could move through the political process, a legitimate policy consideration.136 Yet, in the end, despite its praise from many circles, the Bowles-Simpson report does not go far enough. By including a proposed cut in the top marginal rate, it seems as if the commission was either afraid or unwilling to take on the rich. And while Obama has been criticized for not throwing his full political weight behind the Bowles-Simpson report, I think he made the right economic decision.

B. Doing Nothing

If Obama is reelected in 2012, his best tax policy strategy may be to do nothing. In any process to address the budget deficit, he will have a big head start with the looming expiration of the Bush tax cuts. Even if Congress were to pass an extension of the Bush tax cuts, Obama could veto the bill, and it would take a two-thirds vote by each house to override the veto, which is unlikely. If the Bush tax cuts expire, rates revert to the rates in Clinton's second term. The CBO has scored the expiration of the Bush tax cuts as producing more than $4 trillion in deficit reduction (over 10 years) when counting the interest savings.137 This raises substantially more additional revenue than the Bowles-Simpson proposal, which gets much of its $4 trillion in deficit reduction from spending cuts.

Also, if the Supreme Court decides the Patient Protection and Affordable Care Act (PPACA) is constitutional, as a conservative panel of the D.C. Circuit did in a recent decision,138 a new Medicare tax that is part of the legislation will be imposed on individuals with adjusted gross incomes exceeding $200,000 ($250,000 for joint filers). Instead of the current Medicare tax rate of 2.9 percent on all earned income above the threshold levels, the employee half of 1.45 percent will rise to 2.35 percent, for a combined rate of 3.8 percent.139 Also, for investment income that is part of AGI over the threshold levels, a 3.8 percent Medicare tax will be applied.140 So, for the rich investor, the capital gains rate will revert to the 20 percent rate at the end of the Clinton presidency, and above the threshold levels, a 3.8 percent Medicare tax will be applied, for an effective rate on capital gains of 23.8 percent. Dividends will be taxed at ordinary income rates again, but they will also be subject to the 3.8 percent Medicare tax above the threshold income levels. These additions to the Medicare tax will mean collecting more from payroll taxes, but in a progressive manner. Obama may have his own plan for taxes, but the expiring Bush tax cuts and the new Medicare taxes (which will go into effect if the PPACA is ruled constitutional) give Obama some giant bargaining chips to work with.

Doing nothing means an increase in tax revenue well north of $4 trillion when counting both the Bush tax cuts and new Medicare taxes, and most of that would come from high-income taxpayers. Moreover, no new legislation would have to make its way through Congress -- a huge plus in today's political environment. The "doing nothing" option satisfies the important tax policy goals of adequacy, vertical equity, and political order.141

However, if a Republican wins the White House in 2012, it should be quite a spectacle watching Mitt Romney or Rick Santorum grapple with the deficit while being constrained by a "no new taxes" pledge142 and a Republican House stocked with Tea Party members.143 I hope they put it on C-SPAN.


X. Spending

The White House budget for fiscal 2012 predicts outlays of nearly $3.8 trillion,144 which would still be close to 25 percent of GDP. Under Reagan and Bush I, spending averaged 22.2 percent of GDP and still produced large deficits. It took Clinton cutting spending down to 18 percent of GDP to balance the budget. Policy wonks tell us that you cannot reduce spending unless you are willing to look at the "big three": defense, Social Security, and Medicare/Medicaid. It is true that ultimately either the cost of healthcare or the structure of Medicare/Medicaid should be addressed,145 but the big three together make up 62 percent of the budget.146 Net interest on the debt in is another 6.3 percent.147 That leaves more than 31 percent of the budget to work with, and spending need only get down a few percent for tax receipts to return to normal levels. Whatever the needs of government, it certainly seems as if there should be a few percent that could be squeezed out of the budget, if only from efficiency measures.

XI. Conclusion

Reaganomics, judged by the standards set forth by its ideological proponents, has been an economic failure -- except for the very richest Americans. The policies have left the country with huge debt and near-record levels of income inequality. The financial system nearly collapsed two separate times within two decades. Yet, listening to the voices of leading conservatives these days, it seems the overwhelming opinion is in favor of more deregulation and preserving or even expanding on the Bush tax cuts. The generous explanation is that these conservatives are unaware of the economic data. A slightly less generous reading is that for many conservatives, ideology trumps reason. The more cynical view is that Reaganomics achieved exactly what was intended -- to concentrate wealth and political power in the hands of the very few -- and the talking points were just well-crafted propaganda to bring along enough voters to win elections. Perhaps Abraham Lincoln had it right when he said, "You can fool some of the people all of the time."

FOOTNOTES

1 Bill Clinton, the one Democratic president during Reaganomics, increased marginal income tax rates in 1993 but also delivered a massive capital gains tax cut for the rich in 1997. He also aggressively deregulated Wall Street.

2 Niskanen was a graduate student in economics at the University of Chicago while Milton Friedman was teaching. Niskanen was a member of Reagan's first Council of Economic Advisers.

3 Reaganomics, Library of Economics and Liberty, The Concise Encyclopedia of Economics (1988). See http://www.econlib.org/library/Enc1/Reaganomics.html. Niskanen noted a fourth policy objective -- controlling the money supply to reduce inflation -- but this is monetary policy guided by the Federal Reserve, not a policy of the executive branch.

4 Niskanen also said Reaganomics would increase savings and investment and reduce inflation and interest rates. The savings rate collapsed under Reaganomics, from 10 percent in 1980 to 1 percent by 2005, before climbing back near 5 percent by 2008. Personal savings rate data from the Commerce Department, Bureau of Economic Analysis (BEA), available at http://research.stlouisfed.org/fred2/data/PSAVERT.txt. Inflation and interest rates declined, but this was the result of monetary policy from the Federal Reserve.

5 The "Progressive Era" here refers to the New Deal Era that began with the presidency of Franklin Roosevelt in 1933 and lasted through the presidency of Jimmy Carter, ending in 1980, rather than the traditional notion of the Progressive Era, which began in the late 1800s and included Theodore Roosevelt. The period between Franklin Roosevelt and Jimmy Carter included a much more progressive income tax schedule and generally more regulation.

6 These numbers refer to the "U-3" and "U-6" unemployment statistics used by the Bureau of Labor Statistics (BLS). See http://www.bls.gov/news.release/empsit.t15.htm.

7 Federal Reserve, "Flow of Funds Accounts of the United States," Table B.100, Balance Sheet of Households and Nonprofit Organizations, line 4 (Dec. 8, 2011), available at http://www.federalreserve.gov/releases/z1/current/z1.pdf.

8 According to the real estate website Zillow.com, the recent percentage decline in housing values exceeds the decline that occurred between 1928 and 1933. See http://www.zillow.com/blog/2011-01-11/home-value-declines-surpass-those-of-great-depression/.

9 Office of Management and Budget, Historical Tables, Table 1.3, available at http://www.whitehouse.gov/omb/budget/Historicals.

10 Treasury, "The Debt to the Penny and Who Owes It," TreasuryDirect, available at http://www.treasurydirect.gov/NP/BPDLogin?application=np.

11 Peter G. Peterson Foundation, The Financial Condition of Medicare (Sept. 17, 2010). For the 2010 Medicare Trustees Report, see https://www.cms.gov/reportstrustfunds/downloads/tr2010.pdf.

12 OMB, supra note 9.

13 19.4 percent average 1980-2001, before the Bush tax cuts took effect. Id.

14 Id.

15 22.1 percent average 1980-2001. Id.

16 Ron Suskind, The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill 241 (2004).

17 Id. at 316.

18 Measuring from fiscal 1977 is the appropriate reference point instead of 1976 because a president does not take office until the year after his election, and regardless of whatever policies are enacted in a president's first year, it is not until the following year, in Carter's case 1978, that tax receipts from any changes are due.

19 OMB, Historical Tables, Table 7.1, available at http://www.whitehouse.gov/omb/budget/Historicals.

20 Id.

21 Compounded annual growth rate: X = beginning amount, Y = ending amount, n = number of years, r = compound annual rate to solve for. CAGR = X * (1+r)n = Y.

22 World War II, the Korean War, and the Vietnam War.

23 That infrastructure spending included building much of the national electric grid and huge projects such as the Grand Coulee Dam and the Tennessee Valley Authority, and under President Eisenhower, a Republican, the building of the Interstate Highway System.

24 Treasury, "Historical Debt Outstanding," TreasuryDirect, available at http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm.

25 OMB, supra note 19.

26 Id.

27 Id.

28 The savings and loan cleanup costs were approximately $150 billion. Barrons, The Lessons of the Savings-and-Loan Crisis (Apr. 13, 2009), available at http://online.barrons.com/article/SB123940701204709985.html#articleTabs_panel_article%3D1.

29 OMB, supra note 19.

30 Id.

31 Id.

32 OMB, supra note 9.

33 Id.

34 The Taxpayer Relief Act of 1997.

35 It was Netscape that produced the first commercially successful Internet browser. The initial public offering was on August 9, 1995, with the offering originally priced at $14 per share, then raised to $28 per share because of the large number of preorders. The first day, the stock traded at a high of $75 per share and closed at $58.25. Dow Jones.

36 OMB, supra note 19.

37 Id.

38 Reference here is to individual income taxes and not corporate income taxes, which the IRS categorizes separately.

39 Payroll taxes consist mostly of Social Security and Medicare insurance taxes. Social Security Administration (SSA), "Social Security & Medicare Tax Data," available at http://www.socialsecurity.gov/OACT/ProgData/taxquery.html.

40 Taxes on dividend income and capital gains have historically been taxed at different rates, with tax rates lower on capital gains. Since 2003 the top tax rate on both capital gains and dividends has been 15 percent.

41 The current cap on income subject to Social Security tax is $106,800, and it was $102,000 in Bush II's last year. There is a cap on income subject to Social Security tax, but no cap on earned income subject to the 2.9 percent Medicare tax (1.45 percent each for the employer and employee). Payroll tax is not imposed on investment income. SSA, "Contribution and Benefit Base," available at http://www.socialsecurity.gov/OACT/COLA/cbb.html.

42 IRS Annual Report 1980, at 10, available at http://www.irs.gov/pub/irs-soi/80dbfullar.pdf.

43 IRS Annual Report 1988, at 8, available at http://www.irs.gov/pub/irs-soi/88dbfullar.pdf. For tax year 2009, payroll tax receipts were 36.6 percent of total receipts. They would have been higher if not for a 2 percent temporary cut in payroll tax rates.

44 OMB, Historical Tables, Table 1.2, available at http://www.whitehouse.gov/omb/budget/Historicals.

45 Tax Policy Center (TPC), "Historical Top Tax Rate," available at http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213.

46 Id.

47 Id. See the Omnibus Budget Reconciliation Act of 1993.

48 TPC, supra note 45. See the Economic Growth and Tax Relief Reconciliation Act of 2001; the Jobs and Growth Tax Relief Reconciliation Act of 2003.

49 TPC, supra note 45.

50 Id.

51 SSA, supra note 39.

52 Id.

53 Id.

54 This is based on use of the Consumer Price Index calculator on the BLS website.

55 Before 1986, capital gains were often taxed with a blended schedule that allowed for a large exclusion of gain. The capital gains rate started off at 15 percent in 1916, was raised to ordinary income rates near 70 percent to fund World War I, and then was lowered to 12.5 percent in 1922 during the administration of President Harding. It stayed at 12.5 percent until 1934 and then shifted between 1934 and 1941 with an effective rate in the 30s. In 1942 the capital gains rate was lowered to an effective rate of 25 percent, where it stayed through 1967. It was gradually increased to the high 30s and then was lowered in 1979-1980 to 28 percent. Under Reagan, Bush I, and Clinton, the top effective rate was either 20 percent or 28 percent. TPC, "Historical Capital Gains and Taxes," available at http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=161.

56 The top 10 percent own approximately 75 percent of the nation's wealth, and the top 1 percent own nearly half of that 75 percent. Edward N. Wolff, "Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze -- an Update to 2007," Levy Economics Institute of Bard College, Working Paper 589 (June 2007). The Forbes 400 own approximately $1.53 trillion worth of assets, or almost $4 billion average. Louisa Kroll and Kerry A. Dolan, "Inside the List: Facts and Figures," Forbes, Sept. 21, 2011, available at http://www.forbes.com/sites/luisakroll/2011/09/21/inside-the-list-facts-and-figures/.

57 The rate before 1986 involved a percentage exclusion of gain. Leonard Burman and Deborah Kobes, TPC, "Preferential Capital Gains Tax Rates," Tax Notes, Jan. 19, 2004, p. 411, Doc 2004-756 .

58 The Jobs and Growth Tax Relief Reconciliation Act of 2003.

59 See http://www.irs.gov/pub/irs-soi/08intop400.pdf.

60 Id.

61 Id.

62 Before serving as Treasury secretary, Rubin headed Clinton's Council of Economic Advisers. Rubin was co-CEO of Goldman Sachs before joining the Clinton White House and was vice chair at Citigroup after leaving the White House. Summers is an economist and was the president of Harvard after leaving the White House. He lost his job at Harvard after commenting that women are not innately suited to do math and science. To the surprise of many, Obama put Summers back on the White House economic team for the first two years of his presidency.

63 Depository Institutions Act of 1982.

64 Financial Services Modernization Act of 1999.

65 Banking Act of 1933, commonly referred to as Glass-Steagall, which separated traditional banking from investment banking and created the FDIC, which insured deposits, restoring confidence in the banking system.

66 Commodities Futures Modernization Act of 2000, which created the Enron loophole and the unregulated CDS.

67 The Enron loophole exempted over-the-counter energy trades, electronic energy commodity trading, and over-the-counter CDS trades from government regulation.

This unregulated energy trading made its way into the news when rolling blackouts occurred in California in 2001, as unregulated energy traders drove electricity prices to astronomical levels relative to historical price levels. Jason Leopold, "Enron Linked to California Blackouts," MarketWatch (May 16, 2002), available at http://www.marketwatch.com/story/enron-caused-california-blackouts-traders-say.

The CDS is an insurance policy on a bond. The buyer of a CDS is betting that the party obligated to make the bond payments will default. Without regulation, anybody can buy a CDS in any amount that a counterparty will sell. For example, a bond might have a face value of $10 million, but CDS buyers could conceivably buy $1 billion worth of insurance on the bond -- that is 100 insurance policies on the same bond. If the bond defaults, payments are owed on the CDS. There is no requirement to own the bond to buy the CDS; it is instead an insurable interest. Imagine 100 people buying insurance on your car and then following you around to try to push you into crashing your car so they can collect on the insurance policy. And this isn't against the law. Market players may be able to create pressures in leveraged companies that would precipitate a default, such as a Wall Street firm like Lehman Brothers -- this is something like triggering a bank run with rumors. Also, when an insurance company sells a policy, it has to take a reserve on the policy based on the probability of loss. There is no such requirement when selling a CDS. The insurance company AIG sold enormous amounts of CDSs on mortgage bonds during the housing bubble without reserving any money for potential losses. When those losses showed up, AIG had no money to pay them, and that's why the government had to bail out AIG. Adam Davidson, "How AIG Fell Apart," Reuters (Sept. 18, 2008), available at http://www.reuters.com/article/2008/09/18/us-how-aig-fell-apart-idUSMAR85972720080918.

68 Donaldson is a former founding partner of investment firm Donaldson, Lufkin & Jenrette.

69 Amy Borrus, "Donaldson's Balancing Act," Business Week, Feb. 28, 2005.

70 Id.

71 The Public Company Accounting Reform and Investor Protection Act of 2002, enacted following the Enron and WorldCom accounting scandals.

72 Robert Kuttner, "Cox's SEC: Investors Beware," Business Week, June 27, 2005.

73 Lawrence Mishel, "CEO-to-Worker Pay Imbalance Grows," Economic Policy Institute, June 21, 2006.

74 Id.

75 GAO, "Securities and Exchange Commission: Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement," GAO-09-358 (Mar. 2009).

76 Jesse Westbrook and David Scheer, "Cox's SEC Hindered Probes, Slowed Cases, Shrank Fines, GAO Says," Bloomberg, May 6, 2009.

77 Tim Reason, "GAO: Cox's SEC Discourage Corporate Punishment," CFO.com, May 6, 2009.

78 Id.

79 Id.

80 Eric Lipton, "Gramm and the 'Enron Loophole,'" The New York Times, Nov. 17, 2008, available at http://www.nytimes.com/2008/11/17/business/17grammside.html?pagewanted=print.

81 Frontline, "So You Want to Buy a President," available at http://www.pbs.org/wgbh/pages/frontline/president/players/gramm.html.

82 Id.

83 MarketWatch, "The Problems for UBS Keep Mounting" (Apr. 15, 2009), available at http://www.marketwatch.com/story/the-problems-ubs-keep-mounting; James Stewart, "At UBS, It's the Culture That's Rogue," The New York Times, Sept. 23, 2011, available at http://www.nytimes.com/2011/09/24/business/global/at-ubs-its-the-culture-thats-rogue.html?pagewanted=all.

84 Shawn Tully, "McCain's Econ Brain," CNN Money, Feb. 19, 2008, available at http://money.cnn.com/2008/02/18/news/newsmakers/tully_gramm.fortune/index.htm.

85 Robert Rector and Rachel Sheffield, "Air Conditioning, Cable TV, and an Xbox: What is Poverty in the United States Today," The Heritage Foundation (July 19, 2011).

86 "A Congressional Budget Office analysis of the Ryan plan suggested that a voucher system would shift costs from the taxpayers to seniors over time, as the rising cost of health care outstrips the value of the voucher." Jonathan Weisman and Patrick O'Connor, "Romney Proposes Voucher Option for Medicare Plan," The Wall Street Journal, Nov. 5, 2011.

87 BEA, National Economic Accounts, available at http://www.bea.gov/national/index.htm#gdp. See Charles Steindel, "Chain-Weighting: The New Approach to Measuring GDP," Federal Reserve Bank of New York, Current Issues in Economics and Finance (Dec. 1995).

88 Population figures from U.S. Census Bureau: 125 million in 1932, 227 million in 1980.

89 CBO, "Historical Effective Federal Tax Rates: 1979 To 2005, Appendix: Detailed Tables For 1979 To 2005," available at http://www.cbo.gov/publication/41654.

90 Avi Feller and Chad Stone, "Top 1 Percent of Americans Reaped Two-Thirds of Income Gains in Last Economic Expansion," Center on Budget and Policy Priorities (Sept. 9, 2009), available at http://www.cbpp.org/cms/index.cfm?fa=view&id=2908.

91 Edward N. Wolff, Top Heavy (2001).

92 Under Eisenhower, the top marginal income tax rate was 92 percent in 1953 and 91 percent through 1960; under Nixon and Ford, the top marginal tax rate was 70 percent. Eisenhower built the Interstate Highway System. Nixon was fairly progressive with legislation, creating the Occupational Health and Safety Administration and the Environmental Protection Agency in 1970. He signed amendments to the Clean Air Act, and in 1974 enacted the Safe Water Drinking Act. Miller Center, University of Virginia, available at http://millercenter.org/president/nixon/essays/biography/4.

93 BEA, supra note 87.

94 Population of 227 million in 1980, 304 million in 2008. Figures from U.S. Census Bureau.

95 CBO, supra note 89.

96 R.F. Harrod, The Life of John Maynard Keynes (1951).

97 The DJIA is a reasonable proxy for the overall stock market.

98 Dow Jones.

99 Id.

100 Tax Policy Center, "Historical Top Tax Rate," available at http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213.

101 Id.

102 Id.

103 Robert Ferrell, The Presidency of Calvin Coolidge (1998).

104 See Economic Policy Institute, "Family Income Growth in Two Eras," available at http://stateofworkingamerica.org/charts/real-annual-family-income-growth-by-quintile-1947-79-and-1979-2010/.

105 CBO, "Trends in the Distribution of Household Income Between 1979 and 2007" (Oct. 2011), Doc 2011-22528, 2011 TNT 208-24.

106 Michael Norton and Dan Ariely, "Building a Better American -- One Wealth Quintile at a Time," 6 Persp. Psychol. Sci. 9 (2011).

107 Fifty-one percent of the 5,552 respondents were female, and the mean age was 44.1. The respondents' median household income was $45,000 (the U.S. median was $48,000). In 2004, 50.6 percent of the respondents voted for Bush II and 46 percent voted for Sen. John F. Kerry, D-Mass. Id. at 9.

108 Id.

109 Id. at 10.

110 Id.

111 Id.

112 See Mike Dorning, "Poll: Americans Back Taxing the Rich," Bloomberg (Oct. 11, 2011) (reporting the results of an October 2011 Bloomberg-Washington Post poll, showing that than two-thirds of Americans and 53 percent of Republicans support increased taxes on the rich); McClatchy-Marist Poll: National Survey (Apr. 18, 2011), at 16 (64 percent of Americans favored increasing taxes on those making more than $250,000; 33 percent opposed); Frank Newport, "Americans Favor Jobs Plan Proposals, Including Taxing Rich," Gallup Politics (Sept. 20, 2011) (reporting results of September 2011 Gallup poll showing that 66 percent of Americans favor increasing taxes on individuals making more than $200,000 and on couples making more than $250,000; 32 percent opposed); Jennifer De Pinto, "Polls Show Most Americans Support Raising Taxes on Wealthy," CBS News Political Hotsheet (reporting results of September 2011 CBS News-New York Times poll showing that 56 percent favor increasing taxes on those making more than $250,000).

113 Sharon Nantell, "A Cultural Perspective on American Tax Policy," 2 Chap. L. Rev. 33, 35 (1999).

114 The largest financial institutions are counterparties in millions of financial contracts, and if one institution were to fail, others could be severely affected through counterparty risk. At some point, the government could be forced to intervene with taxpayer money to save the system, as it did in 2008 and 1990.

115 Assets as of September 30, 2011 (figures have been rounded up to two decimal places): J.P. Morgan -- about $2.29 trillion; Bank of America -- $2.22 trillion; Citigroup -- $1.94 trillion; Wells Fargo -- $1.31 trillion. Federal Financial Institutions Examination Council, Assets at year-end 2007: J.P. Morgan -- $701 billion (J.P. Morgan 2007 SEC Form 10K); Bank of America -- $1.60 trillion (Bank of America 2007 SEC Form 10K); Citigroup -- $2.19 trillion (Citigroup 2007 SEC Form 10K); Wells Fargo -- $575 billion (Wells Fargo 2007 Annual Report).

116 Joseph Sneed, "The Criteria of Federal Income Tax Policy," 17 Stan. L. Rev. 567, 581-586 (1965).

117 Id. at 583.

118 Id.

119 Warren Buffett refers to these built-in head starts as "winning the ovarian lottery."

120 Jason Furman, "The Concept of Neutrality in Tax Policy," Brookings (Dec. 1, 2011), available at http://www.brookings.edu/testimony/2008/0415_tax_neutrality_furman.aspx.

121 It was Justice Oliver Wendell Holmes who said, "Taxes are what we pay for civilized society." Compania General de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927) (Holmes, J., dissenting).

122 The National Commission on Fiscal Responsibility and Reform, "The Moment of Truth" (Dec. 3, 2010), Doc 2010-25486, 2010 TNT 231-35 (hereinafter the Fiscal Commission report).

123 Id. at 29.

124 Id. at 15.

125 Section 21.

126 Section 32.

127 Sections 63(c) and 67.

128 Section 1(h).

129 Section 103.

130 Fiscal Commission report, supra note 122, at 32.

131 CBO, "Updated Estimates of Effective Federal Tax Rates" (Apr. 6, 2009), available at http://www.cbo.gov/publication/24881.

132 Horizontal equity was one of the basic tax policy principles outlined by Sneed. Sneed, supra note 116, at 579.

133 Revenues in 2010 were 15 percent of GDP, so an increase to 21 percent would mean $900 billion of additional revenue in today's dollars. Frankly, the 21 percent looks a little high as a projection.

134 Adequacy is the most basic of tax policy goals and was noted in Sneed's landmark paper. Sneed, supra note 116, at 569-572.

135 Id. at 572-574.

136 Sneed referred to a policy goal of "political order." Id. at 594-597.

137 Ezra Klein, "Wonkblog: The GOP's Dual Trigger Nightmare," The Washington Post, Wonkblog (Nov. 23, 2011).

138 Seven-Sky v. Holder, 661 F.3d 1 (D.C. Cir. 2011), Doc 2011-23522, 2011 TNT 217-19.

139 Kaiser Family Foundation, "Summary of Patient Protection and Affordable Care Act," available at http://www.kff.org/healthreform/upload/8061.pdf, at 3.

140 Id.

141 See Sneed, supra note 116, at 572-574.

142 Americans for Tax Reform, "What Is the Taxpayer Protection Pledge?" available at http://www.atr.org/taxpayer-protection-pledge.

143 "Debt Crisis: The Tea Party vs. John Boehner," The Week (July 27, 2011), available at http://theweek.com/article/index/217664/debt-crisis-the-tea-party-vs-john-boehner.

144 OMB, Historical Tables, Table 1.1, available at http://www.whitehouse.gov/omb/budget/Historicals.

145 Peterson Foundation, supra note 11.

146 OMB, The Budget, Summary Tables, available at http://www.whitehouse.gov/omb/budget/Overview.

147 Id.


END OF FOOTNOTES

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