The dramatic decline of the once great US economy has important lessons for Australia and the world, reports Alan Austin.
AMERICANS SEARCHING WISDOM about the state of their economy will get little insight from mainstream economic writers. They’re like detectives called in to investigate an attack. They notice bootprints in the garden, the broken living room window, and the smell of gunpowder. But they overlook the three dead.
These are the corpses:
one. America’s budget deficit last year was a staggering US$2,723.8 billion (AUD4.157 billion). That’s almost three trillion dollars. This corresponds to 16.7% of gross domestic product (GDP). That was the worst result in recorded American history and by far the worst deficit of any of the 36 developed member countries of the OECD that reported results for 2021. (The next largest deficit among major economies was Australia’s at 7.8% of GDP.)
This is the first time the US has bottomed out in this global table.
Two. From 2016 to 2022, the US recorded the largest increase in public debt of all OECD countries, falling from 105.2% to 137.2% of GDP. See green diagram below.
Three. The US economy is the only one among all 38 OECD members to be in a technical recession. GDP fell by 1.6% in the first quarter of this year and by 0.6% in the second quarter. No other developed economy has posted two negative quarters in a row this year. This is also a first since records have been kept.
The cause of the sinking
All clues point to a perpetrator. Tax revenues plummeted in 2018 and thereafter after the bizarre decision in December 2017 to cut the corporate tax rate from 35% to 21% and cut the top tax rate from 39.6% to 37%.
Trumpist Republicans claimed it would boost revenue and improve the economy. You were wrong. Total revenue fell well below spending, the budget deficit skyrocketed, and debt skyrocketed.
Corporate tax revenues fell an impressive 31% from US$297.0 billion (AUD453 billion) in 2017 to just US$204.7 billion (AUD311 billion) in 2018. These recovered slightly in 2019 but fell again to $211.8 billion (AU$323 billion) during the pandemic. ) in 2020. (This is according to historical tables released by the Office of Management and Budget (OMB) at the White House.)
These tax cuts have done lasting damage to the economy, as a look at recent history shows. The dollar value of corporate taxes in 2007, prior to the global financial crisis (GFC), was US$370.2 billion (AU$565 billion). But corporate tax revenue in 2021 was just US$371.8 billion (AUD567.5 billion), with this year’s forecast coming in at just US$382.6 billion (AUD584 billion). Both are below the 2007 level in real terms.
With corporate profits now more than double what they were in 2007, profitable companies are now contributing about half the share of profits they paid before the global financial crisis.
Pressure from right-wing lobbyists
The conservative American business lobbyist Cato Institute constantly advocates tax cuts. In March, she tried to claim that Donald Trump’s 2017 tax cuts were good for the economy with this chart:
The red line shows actual corporate tax receipts as recorded by the OMB. The blue line shows OMB forecasts from May last year and the black line shows Congressional Budget Office (CBO) forecasts from July last year.
The article claimed so “Strength in corporate tax receipts is impressive, reflected in baseline shift upwards.” It argued that the tax cuts must have been effective because the real red line was higher than the imaginary blue and black lines.
That was pure nonsense. Yes, the red line showing corporate tax revenue finally climbed above the level of 2017, pre-tax cuts. But the Cato chart doesn’t tell us what corporate tax revenues would have been without the tax cuts.
So IA can. See the green line in the graphic below. This is the best estimate of the revenue that would have accrued had tax rates not changed in 2017. The yellow shaded area is the total revenue lost to the US budget – and the American people – since the tax cuts. Quantum is at least US$430 billion (AUD655 billion) in 2018-2022. This is increasing every year.
The cost for ordinary Americans
Much of this loss of revenue from corporate profits in 2018 was offset by increases in taxes on individuals, as well as hefty increases in excise taxes and Social Security revenue. But total revenue grew just 0.41% this year. That was nowhere near enough to cover the 3.2% rise in government spending.
Of course, the shareholders of profitable companies are happy about this regulation. Maybe that’s why the media groups are reluctant to expose it. But the current cost to the individual taxpayer is significant.
The interest bill on the national debt this year is projected at US$681.0 billion (AUD1.037 trillion). With 151.2 million taxpayers, that’s an average tax revenue of $4,504 (AU$6,859) each just to pay the interest.
The cure
Trumpist Republicans and their allies are calling for spending cuts to balance the federal budget. They haven’t done their calculations.
The budget deficit this year is forecast at -US$1,414.9 billion (AU$2,156 billion). That won’t be eliminated even if Congress cuts the budgets of the Departments of Defense, Education, Energy, Government, and Housing and Urban Development—completely.
The only way to balance the budget is through significant corporate and high-end tax hikes. This requires restoring the corporate interest rate to at least 35% and preferably higher.
Lessons for the observing world
Independently Australia has long argued that fair contributions from corporate profits are essential to a healthy economy. The results of this coronal examination confirm this.
Other countries that have benefited from raising their corporate tax rates in recent years include Taiwan, South Korea, Latvia, Germany, Slovenia, Ecuador, Chile and Colombia.
In America, meanwhile, those three bodies are still lying on the living room floor.
Alan Austin is a columnist at Independent Australia and a freelance journalist. You can follow him on Twitter @alaaustin001.
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