The idea of lowering taxes while creating a better society has deep roots in western politics, but its appeal is illusory
When Boris Johnson stood outside No 10 Downing Street and promised to rebuild Britain and lower taxes, he was doing something that has been tried over and over again — and failed. He was pledging to make something out of nothing. Despite lower government revenue, he would put 20,000 extra police officers on Britain’s streets, fund 20 hospital upgrades and schools up and down the country, as well as other high-spending projects.
It was reminiscent of a transatlantic political campaign from nearly a century ago. Herbert Hoover’s 1928 bid for the United States presidency was based on the concept of “a chicken in every pot and a car in every garage”.
A Republican Party circular claimed a Hoover victory would result in abundant good fortune for every American, extending from sumptuous dining to unfettered mobility. And lower taxes.
Hoover won, but just seven months after he took the oath of office, a colossal stock market crash happened, which plunged the US into the Great Depression. Unsurprisingly, Americans lost confidence in Hoover and he failed in his bid for re-election.
The rich don’t generally use their personal wealth for the public good or to create jobs
However, these events did not dent their enthusiasm for voodoo economics, the phrase that George HW Bush memorably coined for Ronald Reagan’s policies, which were similar to those of Hoover. With Reagan, Americans once again elected a president who promised economic growth and prosperity, along with lower taxes.
Supply-side economics, which favours lowering tax rates on income and capital gains, did not work out quite as planned for Reagan, but that did not stop George W Bush from adopting the same strategy. Then Donald Trump did the same with a $1.9 trillion deficit-financed, federal tax cut for the wealthiest Americans. So far, he hasn’t had great success with it. Mr Trump’s supposed feat of three per cent growth last year was recently undone by data revisions. Indeed, US quarter-four GDP growth was revised down to 1.1 per cent from 2.2 per cent.
So why do voters repeatedly fall for this line? Do they really buy it?
It seems so. The rich have their own, fairly obvious reasons for championing voodoo economics. They are pleased to assist in the fiction that cutting their taxes will encourage them to invest more. This, despite the fact the rich don’t generally use their personal wealth for the public good or to create jobs.
The gap between rhetoric and reality became painfully apparent in Reagan’s America when the top marginal tax rate was reduced from 70 per cent to 28 per cent, and corporate and capital gains taxes were slashed. Instead of higher growth, public debt skyrocketed.
The same thing happened with George W Bush’s tax cuts. The voodoo element of his economic policy was cheered on by Republicans, with the conservative Heritage Foundation even predicting that the cuts would eliminate the national debt within a decade. Instead, $1.5 trillion was added to America’s deficits.
And yet there continues to be a deep and abiding belief in a theory known as the “Laffer curve”. That’s the name for a diagram sketched by the economist Arthur Laffer, so the apocryphal story goes, on the back of a napkin in a Washington restaurant in 1974, to show that tax cuts are healthy, desirable, and could pay for themselves and a great deal more besides.
It was a more sophisticated rendering of the idea of “a magic money tree”, the dismissive phrase employed years later by former British prime minister Theresa May. The only difference is that the Conservatives used the magic money tree to ridicule the Labour Party’s policies, while those on the political right tend to endorse Laffer’s ideas without question.
Laffer, incidentally, served as an economic advisor to Mr Trump’s presidential campaign and received America’s highest civilian award earlier this year.
Never mind the rich — why do middle-class and poor people consistently fail to challenge the seductive appeal of the Laffer curve or the hallucinatory quality of voodoo economics? It may revolve around the way the idea of paying taxes is framed.
The American linguist George Lakoff once pointed out that “tax relief”, a phrase used from the very start of George W Bush’s presidency, suggests that a tax is an affliction, rather than a duty to pay one’s dues “to live in a civilised society that is democratic and offers opportunity, and where there’s an infrastructure”.
Lakoff argued that politicians opposed to voodoo economics should work to rectify the way taxes are described. Rather than a burden, taxes should be categorised as an investment; in education, health, roads, the power grid, law enforcement, libraries, training for scientists, teachers, doctors.
Indeed, one of the most powerful illustrations of the fallacy of voodoo economics is the American state of Kansas. Just as President Trump cut federal taxes for the rich, in pursuit of Laffer’s dream, Kansas was reversing a similar five-year policy that had left its schools, roads, police force, and other public services virtually unfunded and in acute distress.
The experience of this Midwestern state should serve as a lesson.
Originally published at https://www.thenational.ae