Congressman Bill Foster Explains Why Middle Class Tax Cuts Lead to Economic Growth

[Bill Foster (IL-11) says it better than I could myself—Polly]

Washington, DC, Friday, April 4, 2014 – Today, Congressman Bill Foster (IL-11) spoke on the House floor against H.R. 1874, which would direct the Congressional Budget Office to selectively use dynamic scoring in its analyses of tax and budget legislation.  The selective use of so-called dynamic scoring is a misleading attempt by House Republicans to justify tax breaks for the wealthy.

Foster also spoke about the return-on-investment from to tax cuts for middle class families compared to tax cuts for the wealthy.  If you give a dollar to a middle class family, they will spend it in the local economy and spur growth, or they will use it to make a high return investment, such as paying for their children’s college. If you give that same dollar to a very wealthy individual, that individual will not change their spending habits.  Instead of circulating it in the local economy, it will be placed in lower-return investments, often offshore. The historical data is clear: tax cuts for the middle class have promoted economic growth, while Republican tax cuts for the wealthy have not.

Video of Foster’s speech is available here. Full text is below:

Mr. Chairman, I rise today in opposition to HR 1874, and to explain to my Republican colleagues why their tax policies have not worked, and will not work, to produce economic growth and jobs.

I am a scientist who spent over 20 years at Fermi National Lab conducting research, and a successful businessman before that.

A scientist proceeds on the basis of facts, and the historical facts on Republican tax policies are clear. Tax policies during the Clinton years, predicted by the Republicans to restrict economic growth, in fact generated the strongest uninterrupted period of job growth in our lifetimes: over 22 million new American jobs in 8 years.

Then, the Bush tax cuts enacted in 2001 reversed those policies, and in the following 8 years, the net number of new jobs was essentially zero, actually slightly negative.

Twenty million Americans entered the workforce during the Bush years and the Republican policies produced zero net jobs for them, opening up a jobs gap of over 20 million jobs, a jobs gap that we are still closing today.

So to the extent that there is a causal link between tax policies and job creation, the data is clear:  Republican policies have destroyed jobs, and Democratic policies have created them.

I will now attempt to explain why this is, and why the simplified macroeconomic modeling promoted by this legislation will fail to match the real world.

Generally speaking, Democratic tax breaks deliver benefits to the middle class, while Republican tax breaks deliver benefits to the very wealthy.  And, as it turns out, the very wealthy spend and invest their money very differently than the middle class.

Mr. Chairman, the macroeconomic models promoted in this legislation typically model our economy with a single aggregated consumer.  Like the Republicans, they pretend that giving an extra dollar to a billionaire is no different than giving an extra dollar to a working class family.

However, if you give an extra dollar to a middle class family, they will spend it in the local economy, increasing local economic growth; or they will invest it in some of the highest return investments available to anyone – investing in their children’s college education or perhaps buying a second car so that their spouse can get a job.

Now, if you give that same dollar to a very wealthy individual, they will not change their spending habits, because they are already spending as much as they feel like spending and this will not change. So there will be no local economic growth.

The investments of the very wealthy are also very different since they no longer have available to themselves the high-return investments available to the middle class.  The very wealthy have already spent everything they can to send their children to the finest schools. They already have seven Cadillacs in their garages.

So the marginal investments of the wealthy are intrinsically less productive, due to a basic principle of economics known as the Law of Diminishing Returns.

And since economic growth is equal to investment times return-on-investment, (sorry about the equation!), the economic growth from channeling money to the wealthy is far less than if that same relief had been given to the middle class.

Democratic, middle class policies are pro-growth policies, and Republican policies are not.

Mr. Chairman, there is also another important effect not captured by the single consumer macroeconomic models in this legislation, which is the increasing propensity for wealthy people to move their money offshore.

If you give an extra dollar to wealthy person, they will turn it over to their money manager, who looks around for high yields, and increasingly, invests that dollar overseas — perhaps increasing the net worth of the wealthy investor, but competing with and destroying American jobs.

Had that same dollar been given in tax relief to the middle class families, it would have been much more likely to stay in America.

So in the real world, Republican policies trickle down, but they trickle down to jobs in China.

And that is why the Bush tax cuts generated zero jobs in the eight years after they were enacted.

Thank you, and I yield back.

G. William (Bill) Foster
Rep. U.S. Congress – (IL-11)

How a Progressive Tax System Made Detroit a Powerhouse (and Could Again)

In 1995, we encountered a group of economic advisors to Governor John Engler of Michigan, intent on cutting property taxes. We reminded them of California’s 1979 Proposition 13. After Prop. 13 rolled back and froze property taxes, sales taxes reached crushing levels, budget crises became routine, local services collapsed, and public schools fell from the best in the nation to among the worst. But Engler was determined.

From 1890-1930, Detroit’s population boomed from 205,000 to 1,569,000, the fastest growth of any US city. The auto industry did it, but why Detroit? Detroit had produced horse-drawn carriages from hardwood lumber, but so had other places. It was not low wages; Detroit paid better than most—that’s why so many people rushed in. It was not business-dominated politics; Michigan was a Progressive, Bull Moose Teddy Roosevelt state. It was not low taxes on wealthy “job-creators”; Michigan relied on high state and local property taxes. As most people recognized in those days, (and as we have documented here and here), property taxes are wealth taxes, dramatically more progressive than income taxes.

Detroit Mayor Hazen Pingree, 1889-1897, was an early Georgist Progressive. He supported the idea of American economist and reformer Henry George (1839-1897) that all taxes should be shifted onto land and other natural resources. Today, Nobel-Prize-winner Joseph Stiglitz advocates this as the “Henry George principle.” Applied to cities, it means raising property tax rates on land and lowering them on buildings. In cities, poor renters own no land, heavily-mortgaged middle classes own very little. So shifting taxes to land turns property taxes into wealth taxes on steroids. Better yet, taxing land discourages rich speculators from holding valuable property out of use. Mayor Pingree was a mentor to and model for the Georgist soon-to-be Mayors Tom Johnson and Newton Baker of Cleveland, and Samuel Jones and Brand Whitlock of Toledo.

The crash of 1893 hit Detroit soon after Pingree’s election. The city was riddled with vacant lots held by land speculators; Pingree arranged for the unemployed to plant vegetables. “Pingree’s Potato Patches” inspired other cities to follow. Meanwhile, he had campaigned for “higher taxes on the vast landed estates of the city”; when big industries threatened to leave town, he responded by raising just the land assessments. This won the support of small business.

The Georgist Progressive movement supported cheap mass transit on trolley cars. With fixed costs funded by property taxes, fares stayed low. Property taxes also paid for public education, public health, public parks, water, sanitation, welfare—all the public services that make a big city livable, and its small industries viable. Property tax rates of 2.5% of market value were normal; there were no sales taxes, business taxes, or income taxes. Detroit’s private sector was a big collection of small machine shops, little businesses and services. That’s what attracted Henry Ford, the Dodge brothers and other young tinkerers to Detroit. In one of history’s ironies, trolley cars nursed the auto industry that later rose up to slay them.

In 1897 Pingree became Governor. He centralized the assessment of property taxes, and had the State Board of Tax Commissioners revalue all property. They found so much untaxed land, especially railroad holdings, that they actually lowered tax rates even as they raised more taxes.

During the “Dirty Thirties,” Detroit grew while many cities shrank. Walter Reuther’s UAW pioneered the sit-down strike at the GM plant in Flint. Former Detroit Mayor and now Governor Frank Murphy negotiated a settlement that legitimized the UAW, using the new national Wagner Act. It was “The strike heard round the world.” UAW membership exploded from 30,000 to 500,000.

After Pearl Harbor, FDR naturally turned to Detroit to convert its assembly lines to war production. This was the age of Rosie the Riveter, and Rosie loved Detroit. From 1930 to 1950, Detroit’s population grew 18%, to 1,850,000.

Yet after 1950, Detroit began to shrink, the first break in its sensational upward trajectory. What happened? Some blamed the end of the war, but America was pouring billions into the Interstate Highway System. The world wanted American cars and trucks. The causes of decline must have been internal.

Governor G. Mennen “Soapy” Williams, 1949-1960, introduced the Business Activities Tax (BAT), a kind of sales tax. The BAT was replaced by a corporate income tax in 1967 and by the Single Business Tax (SBT) in 1975. The SBT allowed the deduction of inputs—including real estate purchases!—but not labor. Easy for big corporations to evade, the SBT fitted concrete boots on small unincorporated businesses.

Governor George Romney, 1962-68, introduced a personal income tax to provide “property tax relief,” a new catchword. Meantime in Michigan and nationwide, the property tax itself was degenerating; effective rates were falling, especially on land. Its Georgist heritage forgotten, Detroit was valuing land at next to nil, using assessments dating from the Great Depression. In 1967, a police raid on an unlicensed late-night drinking club in a black neighborhood triggered Detroit’s notorious 12th Street riots, which destroyed over 2000 buildings. Detroit never recovered.

While Detroit hollowed out, its suburb Southfield boomed. From 1950-70 it grew from 19,000 to 69,000 people. It had a Georgist Mayor, James Clarkson, who aggressively raised land assessments and lowered building assessments. Southfield’s tax base actually rose by 20% per year under Clarkson, funding good utilities and public services. The lesson went unnoticed.

In 1995, despite our warnings to his staff, Governor John Engler took Michigan’s public schools off local property taxes and onto a state sales tax. That sealed Detroit’s fate. Out-migration of people and industry accelerated into the 2008 crash. Detroit’s current population of some 700,000 is the lowest since 1914. In another of history’s ironies, Detroiters today grow food in vacant lots—“Pingree’s Potato Patches” again, 105 years later. Bankruptcy seems inevitable.

And yet… Detroit’s property tax base remains. Though diminished and badly-assessed,it could still fund a renewal if Michigan reads its history and finds the political will.

For the full story, see Mason Gaffney’s New Life in Old Cities (2006) and What’s the Matter with Michigan? (2008)