The American Economy: Trump's Stock Market Miracle

How well is America doing? Pres. Trump raises that question by pointing to the DJIA (Dow Jones Industrial Average).

Looks good, huh? No wonder Trump is crowing. ...... But, let me show some other things that may clarify what's really happening.

How about this one showing the DJIA ?

https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

Obama took office in 21 Jan 2009 with the Dow tanking badly. But, from mid-2009 it turned up and, as you can see, it has only turned down once because of the virus in 2020. Seems Obama should get some credit.

Here is U.S. GDP per capita from 1960 - 2019 (the last date for which the numbers are available).

It's been growing consistently regardless of who is president or which party is pushing its ideology. Primary seems to be the relative freedom for our people to do business. This reflects all wealth and that is skewed toward the wealthier members of society. One billionaire and I add up to $500,000,000 per capita, but I'm personally not that rich.

Corporate tax rates aren't stopping great national GDP growth. Following are some graphics showing it.

Lower tax rates and taxes paid means corporations get to keep more of their revenues.

We even collect less business taxes than the Europeans.

How are the typical individuals doing?

"FRED" is the Federal Reserve Bank of Dallas.

GDP (blue line above) is growing. Corporate tax rates have been going down and federal tax revenues from corporations are down. But, the red line shows individuals aren't doing so well.

Individual tax rates seem to be within the 15% - 20% range forever, so why are individuals failing to do better? 

Let's look at the big picture on U.S. tax structure for some clues. Here are two graphics to explain what is taxed and who is taxed.

It appears the Payroll Tax is huge until the "Top Quintile", when the Individual Income Tax becomes the largest factor. Most workers are paying payroll taxes, but the rich are paying income taxes.

 

Who pays taxes and how much of the total?

There is some progressivity (where higher incomes pay a higher rate).

 

Despite a progressive tax system, the rich are getting much richer and the poor are not. Despite a reduction of corporate tax rates and a growing economy (see GDP) the workers of America are not getting a lot more benefit. The rich are taking the benefits of the growing economy and available tax deductions to make and keep the lion's share of the new wealth.

Clearly this has to do less with the political party in charge or the tax structure and more with who controls the wealth and decides how to use it.

For example, how is it possible the rich are getting richer while the poor aren't?

It appears wealth is simply being earned differently for the rich, producing more income.

 

Does this mean individuals are earning more because their corporate stock is producing tremendous dividends and that the corporations are producing tremendous profits because sales are up and new products are being produced? In some cases that is all true. But there are other factors at work. Why is the "Top 1 Percent" doing so much better than the "99th percentile"? Why aren't the workers at these corporations also benefiting?

 

Maybe they earn more capital gains because the tax rates decreased and they shifted their income to capital gains to get the lower tax rates?

 

The maximum capital gains rate is lower than the maximum ordinary income rate. Thus, if a Top 1 Percent income earner simply earns capital gains income rather than earned income, they pay the lower rate. That's an easy way to lower your tax burden, but it hasn't dramatically shifted over the decades.

 "Most transactions subject to the capital gains tax consist of investments such as stocks and mutual funds. In 2012, the latest year for which data is available, 75 percent of taxable transactions were from stocks and mutual funds." --  Peter G. Peterson Foundation

Let's also look at "tax expenditures" (deductions and exemptions).

It seems the federal tax code offers wealthier individuals more opportunities to shield income and assets from taxation and they use it extensively. It bears the title of that graphic: "The top 20 percent of income earners receive over half the value of major tax expenditures". Is it a good thing?

The biggest ones (in dollar value) are: a lower tax rate on capital gains and dividends, charitable contributions deduction, state & local taxes deduction, mortgage interest deduction, exclusion of net pension contributions, capital gains tax break on assets at death, and exclusion of health insurance.

 So, the top 1% of income earners are earning much more of their income on capital gains and  the tax code allows lower tax rates for "capital gains/dividends". Yet revenues from capital gains fluctuates and aren't (probably) greater than 12% of revenues.

It isn't likely this one thing has gradually shifted the nation's economic landscape so dramatically? But it could be a significant element, along with higher CEO pay, lower corporate taxes, more job off-shoring, higher cost of living, of education, and healthcare.

Conclusion: We see American corporations are doing very well and the Top 1 Percent income earners are doing very well too. So, why aren't everyone else doing well? Why aren't their incomes going up more and what expenses may be dragging them down?

 

Why?

 

Why has it decreased until about 2006 and then began to rise again?

 

As our population is enabled by medicine to live longer, the costs are rising. Why so fast?

 

Similarly, all kinds of healthcare costs have been rising. The slight leveling-off in 2009 might be attributable to the Affordable Care Act (aka ObamaCare). It needs to remain strong to restrain costs.

 

 

 Student debt and automobile loans are killing people's budgets.  How can that be restrained?

The Cost-of-Living and slow income growth from corporate jobs is destroying the median income earner.

Tax deductions and lower tax rates are helping the Top 1 Percent of income earners.

I haven't even touched on federal government debt due to spending being higher than revenues. One key to the recovery when Obama was president was to reduce the deficit year after year to give everyone confidence in the economy. The same occurred in the 1990s when Bill Clinton was president and he reduced the deficit to zero and had a booming economy.

And I haven't discussed the effort to destroy unions or other changes in the economy which require workers to produce more work at lower wages.

If there is a proper conclusion, it is that the problems we face are varied and will require a multi-faceted response. Slightly higher tax rates on corporations may help. A financial transactions taxes could help. Tighter rules on corporate executive use of stock options and benefits from capital gains transactions might be good over the longer-term. Less incentive in the tax code for off-shoring of jobs combined with a higher minimum wage and an elimination of efforts to harm unions could help many workers.