Democrats at the state level are making it harder for Biden to roll back “trickle-down economics.”
The Wall Street Journal reports that 20 states set up measures to bypass a Trump-era tax on wealthy.
Since the 1980s Reagan era, trickle down has held that “job creators” at the top should pay less in taxes.
President Joe Biden keeps saying he’s “tired of trickle-down” economics, but his party is making it harder to roll back a legacy of tax cuts for rich people stretching back many years.
Congressional Democrats are in the midst of sketching out a proposal to provide relief from the $10,000 limit on the state and local taxes taxpayers are able to deduct from their federal bill (SALT). Republicans put the cap in place as a way to help finance their 2017 tax law, and the measure hit wealthier taxpayers in high-tax states particularly hard — just the kind of highly educated and high-earning urban and suburban demographic that often votes Democratic.
Perhaps for this reason, lawmakers at the state level have been busy designing paths for business owners to bypass the $10,000 cap. The Wall Street Journal reported on Monday that 20 states, including the deep-blue California, New York, New Jersey and Illinois, have approved some alternatives.
There is no record of President Ronald Reagan ever using the term “trickle down,” per Investopedia, which also notes that he embodied it in practice by reducing taxes on the wealthy, in the hopes that the benefits would “trickle down” in the form of increased business activity.
The Journal’s reporting shows that at the state level, trickle down is alive and well.
“This is becoming the thing the cool kids are doing, if you’re a state,” Howard Gleckman, a senior Tax Policy Center fellow, told the Journal. “With state assistance, this is a classic case of business self-help in figuring out a way around this.”
Some law firms and private equity firms are taking advantage of the workaround, such as Simpson Thacher & Bartlett and Cerberus Capital Management, the Journal reported, citing people familiar with the matter. Neither firm immediately responded to Insider’s request for comment.
The provision varies across states, but typically, taxes are levied on certain businesses equivalent to that of their owners. They’re deducted and the rest of the income goes to owners, the Journal reported. State laws then provide relief to income tax obligations that’s separate from business income, so it’s not subject to the SALT cap.
Meanwhile, Senate Democrats are struggling to achieve a compromise on SALT, which could hobble their goal of approving Biden’s $2 trillion social spending plan by Christmas. Any rollback is bound to disproportionately benefit wealthier Americans who are better positioned to take advantage of the deduction.
Federal unemployment benefits doled out for more than a year are on the verge of lapsing for millions of Americans, but the reason why isn’t new.
As soon as April’s disappointing jobs report was released, critics – largely in the Republican Party – began blaming the boosted support measure for disincentivizing Americans from seeking work.
This disincentive theory dates back decades, and largely comes from a Reagan-era book that argued government-support programs were the reason the US economy was falling behind.
In his 1984 book “Losing Ground,” political scientist Charles Murray posited that social welfare leaves society worse off, as it leads participants to rely on handouts instead of encouraging them to climb the socioeconomic ladder.
That thesis has informed Republicans’ economic policy for nearly half a century and is rearing its head once again as GOP governors prematurely terminate federal unemployment benefits for millions. But analysis of Murray’s book shows such policy rests on morally suspect arguments and possibly does the US more harm than good.
The origins of the welfare queen
So far, 20 states are set to end the $300-per-week federal boost to unemployment insurance in the summer, months ahead of its scheduled expiration in September. That stands to cut roughly 3.4 million Americans off from some form of federal UI benefit while the pandemic still lingers.
But while the circumstances of the coronavirus recession and the 2021 reopening of the American economy are unique, the argument that the social safety net provides a “disincentive” to work is an old idea.
The viewpoint originated in 1976 when, during his first presidential campaign, President Ronald Reagan highlighted “welfare queens” as a new kind of fraudster plaguing the country. Reagan claimed that by slashing spending on programs like food stamps and welfare, he could run the government more efficiently and put poorer Americans to work.
“Losing Ground” was published the same month Reagan was elected to a second term in a landslide 1984 victory. America clearly liked Reaganomics and wanted more. It didn’t take long for Murray’s book to power even stricter anti-welfare policies.
The political scientist was, indirectly, at the helm of a new economic-policy framework. The New York Times soon deemed Murray’s work a “budget-cutters’ bible” that was used as a “philosophical base” throughout government agencies. Reductions to housing assistance, education, and programs like the Jobs Corps reflected Murray’s push to eradicate welfare spending.
The uneven reopening of the American economy shows the book’s ideas are paraded just as loudly today.
Following this month’s jobs report for April, Gov. Kim Reynolds of Iowa said the payments were “discouraging people from returning to work,” while Gov. Mark Gordon of Wyoming said that “incentivizing people not to work is just plain un-American.” Gov. Brad Little of Idaho said cutting the benefit was “based on a fundamental conservative principle.”
And in 36 states, policymakers are bulking up work-search requirements for UI recipients. President Joe Biden even implicitly accepted some of Murray’s ideology in comments following the jobs report, saying Americans receiving unemployment benefits “must take the job” if offered one.
Yet Murray’s argument – and its decades-long influence – rest in part on shaky and ethically questionable foundations.
Iowa Gov. Kim Reynolds.
AP Photo/Charlie Neibergall
Murray used Black men as a proxy for all poor Americans
Some of Murray’s observations hold water. The number of Americans below the poverty line has gradually increased since the late 1960s, and, around the 1980s, poor Americans were starting to drop out of the workforce.
Other arguments from Murray are less compelling. Murray noted that, as spending on social services ramped up in the 1970s, poor Americans stopped working as a result of the support programs. This, he said, is why the federal safety net should be abolished.
Murray’s argument leans heavily on the “latent poverty” statistic – individuals who are only above the poverty line due to government benefits – but ignores one of its critical drivers, according to a 1984 article in the Yale Law and Policy Review.
Additionally, the political scientist focused only on Black men aged 16 to 24 to gauge poor Americans’ attachment to employment over time. Murray ignores labor force participation among Black women, and also fails to address the structural forces that hinder economic development for racial minorities.
Using young Black men as a proxy for all poor Americans likely skewed rates of labor-force dropouts for reasons not acknowledged in Murray’s book, author and Yale Law School graduate Edward Mattison said.
To be sure, neither Murray nor Mattison could have predicted the coronavirus crisis and its economic fallout. Both would likely be shocked to discover Congress allocated some $5 trillion to fiscal stimulus, much of it passed on a bipartisan basis, while the Federal Reserve embarked on an unprecedented level of monetary easing.
As a post-pandemic economy emerges, Democrats have proposed overhauling UI programs to match the new attitude toward stimulus, with a larger benefit and minimum 26-week payment period. Such proposals would mark a major shift in the government’s welfare policy and a huge step away from Reaganomics.
Republicans, meanwhile, seem to want to revert to the stripped-down UI programs seen in 2019. It’s a sign that Murray and Reagan’s ideas still hold significant sway, even with roughly 10 million Americans still jobless. The old debate is set to continue for some time still.
