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Starving the Beast

What Republicans Talk About When They Talk About Taxes

by ROBERT HUNZIKER

With the onset of a reinvigorated U.S. economy, suddenly riding high on an unprecedented sea of liquidity, thanks to the Federal Reserve Bank, and punctuated by a renaissance of employment, up 243,000 jobs in January, it is probable Republican campaign tacticians will be forced to switch gears. The trillions of dollars pumped into the U.S. financial system over the past three years are suddenly tracking in employment numbers. New jobs are on fire! AND, the U. S. Bureau of Labor Statistics revised upwards the numbers of newly employed for the prior two months as well, adding 60,000 to the revised Nov./Dec. employment rolls for a revised total of +360,000 for the two months. At this rate, and well before this coming November, the unemployment issue will evaporate.

The Mitt Romney presidential campaign machine, i.e., Super PACs with tens of millions readily available for TV ads, will be forced to find an issue other than the “Unemployment, and Food Stamp, President.” Here’s betting they latch onto record deficits and soaring national debt as the new cross-to-bear by President Obama, but what’s really behind these annual trillion dollar deficits and the $15 trillion national debt and how does job creation fit into this picture?

One of the culprits is “Starving the Beast,” a phrase coined behind closed doors by Republicans nearly three decades ago. The idea is to cut taxes in order to deprive the government of revenue to engineer fiscal crises. Thus, forcing the hand of the federal government to cut spending. Mission accomplished!

In all fairness, it should be noted there are economists today who propose “Feeding the Beast” by increasing taxes to balance the budget, and there is clear evidence that tax increases in the early 90s contributed to a more balanced budget in the late 90s, and one might add, a good economy with lower unemployment.

What is at issue, first and foremost, are federal tax receipts as a barometer of what the country has to work with. Today federal tax receipts as a percentage of GDP are 14%, a post WWII low. Throughout the 1960s to 2000 federal tax receipts ran 18-19% of GDP. Returning to this level would add ¾ of a trillion dollars to federal coffers by Feeding the Beast, and it would put a huge dent in the annual federal deficit.

Why are current federal tax receipts 14% of GDP rather than at the historic norm of 18-19% over the past four decades?

The answer is found in Bush tax cuts; the top marginal tax rate was cut from 40% to 35% by ‘W’ and all tax rates below the top marginal rate were cut as well, a prime example of Starving the Beast (his dad did this too with Reagan, who took the U.S. to the woodshed by making the nation the world’s largest international debtor during his administration) and the results speak volumes; ipso facto, the U.S. Treasury is short ¾ of a trillion dollars annually vis a vis historic tax receipts. Following W’s tax cuts, federal tax receipts fell off to the 16-18% range and have been under 15% the past few years. The side benefit to W’s tax cuts is the rich pay less, keeping much more, getting richer still, at the expense of all taxpayers who carry the burden of the national debt. It is little wonder the 99% percent discovered the 1%. This has been going on for over a decade now. The passage of time has a way of bringing to surface reality.

AND the Republicans are calling for lower tax rates to stir more jobs. However, the brutal facts regarding job creation are: LBJ created more jobs with tax rates (70%) double today’s rate, +21% new jobs during his tenure, than any president since WWII. George W. Bush holds the lowest record since WWII, creating a measly 1% rate of job growth. Imagine this: Jimmy Carter beat W’s job creation rate by a hefty 13-to-1, clocking in at a 13% job rate, when the top marginal tax rate (70%) was double W’s (35%.)  What are the Republicans talking about?

This begs the question: What happens with jobs and the deficit when the top marginal tax rate is increased rather than decreased, i.e., Feeding the Beast. This occurred under Clinton, who raised George H.W.’s top marginal tax rates from a range of 28-31% up to 39.6%. The results are:  George H.W.’s rate of job increase was 2%, second lowest of all presidents since WWII whereas under Clinton the rate of job increase was 21%, tied with LBJ for the best rate of job creation since WWII.

Meanwhile, annual deficits nearly evaporated by the time Clinton left office. He inherited, from George H.W., the highest ever deficits, running at a $300 billion annualized rate, but he whittled it down by Feeding the Beast, and he beat Bush’s job creation rate 10-to1. Talk about the ‘Come Back Kid’!

One has to wonder how the Republicans can continue to hammer away at tax cuts as the wonder-all solution to jobs and American prosperity when the evidence is so crystal clear that their platform (1) stinks for job creation and (2) inexorably increases annual deficits.

Score Board:                  Starving the Beast vs. Feeding the Beast 

President

Top Marginal Tax Rate

Jobs Created Jobs% Increase Annual Deficit at End of Term
Bush 1 28%-to-31%   2,592,000   2% $300 Billion
Clinton 31% upped to 39.6% 22,744,000 21% $ 32   Billion
Bush 2 39 cut to 35%   1,080,000   1% $641 Billion

In fact, the Republicans may find themselves stuck in a horrendously mucky quandary and Obama may knock the ball out of the park if his administration continues with bustling job creation whilst federal tax receipts hover around Starving the Beast levels. Thus, Obama, by default, becomes the ideal candidate for both Democrats and Republicans. AND the first president in decades who adds jobs at an energetic rate in spite of retrograde post WWII federal tax receipts. Imagine what will happen if Obama increases taxes!

It is very difficult to image where Romney’s forces will turn next, unless they continue fabricating more stories about how cutting taxes reinvigorates American prosperity. The question will then become: Will the American public ‘buy into’ the multi-millions spent on TV advertising by Super PACs that have no conscience and no counterbalancing influence now that the U.S. Supreme Court is in their back pocket. The jury is still out, but, and unfortunately, people have a tendency to believe what they see on television where they spend much more time than reading articles like this.

Makes you wonder what might happen if Obama campaigns on an absolute pledge to return to Clintonista tax policies, increasing the top marginal rate back to 39.6%… he might awaken a sleeping giant… the 99%.

Robert Hunziker earned an MA in economic history at DePaul University. He lives in Los Angeles.

*As an aside- The top-bracket marginal tax rate under Hoover was 25% versus 60%-to-90% under FDR.  The unemployment rate was 4.4% when Hoover took office; it was 23.6% when he left office. The unemployment rate fell steadily during FDR’s first five years in office.

** Reagan/Bush took top-bracket marginal tax rate from 70% down to 28%.