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Military strength and tax relief: Trump and Reagan

10/26/2017

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Posted October 24, 2017
​
​     Donald Trump believes in a strong military.  His administration recently attained passage of historic increases in defense spending, which, he maintains, will bring the annual budget for military and defense spending to $700 billion.  And he suggests that the military chiefs will have greater autonomy:  “From now on, our security interests will dictate the length and scope of military operations, not arbitrary benchmarks and timetables set up by politicians.” 

      In spite of the greater government spending involved in the military budget increase, Trump announced a massive tax cut at his Heritage Foundation speech on October 17.  Maintaining that the tax cuts of the Reagan administration unleashed the “economic miracle” of the 1980s, he argues that tax cuts result in higher salaries, more employment, and greater economic growth.  He proposes that the first $12,000 earned by a single individual, $24,000 for a married couple, be tax-free.  He proposes a reduction of the corporate tax rate from 35% to no more than 20%, maintaining that U.S. corporate taxes are 60% higher than major U.S. competitors, placing U.S. corporations at a disadvantage.  He also proposes a cap on the tax for small businesses at twenty-five percent, which he maintains represents the biggest tax reduction for small business in the history of the nation.  In addition, by proposing a low one-time tax on profits deposited in offshore accounts, his tax plan will bring back to the country more than 2.5 trillion dollars that are parked oversees, making it more feasible for American companies to stay and hire in America.  Moreover, he proposes an elimination of the estate tax and an increase in child tax credit for working families.  He maintains that the tax proposals will renew industry and unleash a new middle class America, and they will increase the annual income of American families by four thousand dollars.

     Although Trump has fond memories of the Reagan years, when the Reagan administration slashed taxes while increasing military expenditures, U.S. corporations did not become more competitive, and the government deficit grew significantly.  By 1988, the USA became the world’s most indebted country (LaFeber, 1994, 645, 711-12).  Faustino Cobarrubia, of the Center for the Study of the World Economy in Cuba, observes: 
​Japan supplanted the United States as the dominant creditor nation and financial power.  While the Japanese economy became the principal exporter of capital in the world, the U.S. economy became in 1985 a net debtor for the first time since 1914.  Never before in the history of international finances has there been such a decisive change in a so short a period of time.  In less than five years, the richest country in the world had reversed a tendency of a century, becoming the most indebted nation in the world (2006, 191). 
And as LaFeber writes, “The world’s great moneybags between 1914 and 1970, the United States, after 1971, lost much of its ability to compete in the world marketplace and then, between 1981 and 1987, shockingly turned into the world’s greatest debtor” (1994, 737).  Similarly, as expressed by Paul Kennedy in his study of The Rise and Fall of the Great Powers:
The uncompetitiveness of U.S. industrial products abroad and the declining sales of agricultural exports have together produced staggering deficits in visible trade—$160 billion dollars in the twelve months to May 1986. . ..  The only way the United States can pay its way in the world is by importing ever-larger sums of capital, which has transformed it from being the world’s largest creditor to the world’s largest debtor nation in the space of a few years (1989, 526).
      In addition, the Reagan administration launched the era of neoliberal policies, which facilitated the free flow of capital into and out of countries, thus making possible enormous profits through financial speculation.  Investments in productive and commercial enterprises in recent decades have been lower than what they previously had been, and they have been lower than investments in financial speculation.  In search of profits, capital has moved to financial speculation, further eroding production and commerce.  This has given rise to a continuous expansion in financial speculation, which has resulted in the transformation of historic high-low cycles of financial speculation into an ongoing trend of increasing financial speculation.  Neoliberal deregulation of financial transactions was in the interests of the corporations, banks, and finance agencies, because it facilitated the fast and easy money that comes from financial speculation.  However, elevated levels of financial speculation direct capital away from investment in the real economy, which creates the goods and services that satisfy human need and stimulate real economic growth (Martínez 1999, 2010).

      Given the trend in recent decades toward financial speculation, what assurance is there that additional capital in the hands of U.S. corporations would be directed to invention in the production of goods and services?  A tax cut per se does not ensure investment in national production; a reform of the tax code must include incentives and regulations that are designed to stimulate investment in the nation and in sustainable forms of production.

      At the same time, the Trump administration is eliminating what it proclaims to be unnecessary environmental regulations that restrict the growth of the economy.  It is true that ecologists sometimes display an unconcern for the economy, and Trump exploits this for political purposes.  But the steps that Trump is taking in weakening the Environmental Protection Agency implies destroying necessary mechanisms for environmental protection, in defense of corporate interests.  The corporations, however, have demonstrated in recent decades an orientation to short-term profits and an unconcern for protecting the environment.

     The reduction in environmental regulations, combined with tax cuts without regulation, imply a program that responds to corporate interests, notwithstanding Trump’s rhetoric that, with his election, the people now rule.  In spite of these contradictions, however, Trump has an effective populist discourse, which we will explore in the next post.

​
​References
 
Cobarrubia, Gómez, Faustino.  2006. “Economía de los Estados Unidos: Una retrospectiva de las últimas cuatro décadas” in Libre Comercio y subdesarrollo.  La Habana: Editorial de Ciencias Sociales.
 
Kennedy, Paul.  1989.  The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000.  New York: Vintage Books
 
LaFeber, Walter.  1994.  The American Age: USA Foreign Policy at Home and Abroad, 1750 to the present, Second Edition.  New York: W. W. Norton.
 
Martínez Martínez, Osvaldo.  1999.  Neoliberalismo en Crisis.  La Habana: Editorial de Ciencias Sociales.
 
__________.  2010. “La larga marcha de la crisis económica capitalista.”  Unpublished paper.
 
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