A previous version of this post appeared in The Oklahoma Gazette.
In 2006, Governor Brad Henry signed what may have been the largest tax cut in state history. In some ways, it mirrored the tax cut approved this year under Gov. Fallin. The top income tax rate was ratcheted down over several years, with a final reduction depending on a revenue trigger. Yet the 2006 tax cut did something else – it increased the standard deduction to match federal levels, which eliminated income taxes for some 45,000 low to moderate-income families and lowered taxes for Oklahomans at all income levels.
In other words, lawmakers saw it as important to make sure that tax reduction was both bottom-up and top-down. By contrast, the current Governor and Legislature have pushed tax cuts that are entirely top-down. The tax cut as finally approved provides no tax reduction for 43 percent of Oklahomans, and middle-income families will see an average cut of just $39. At the same time, 72 percent of the total tax cut will go to the wealthiest 20 percent of Oklahoma households.
When confronted with this data, lawmakers retreated to the theory of “trickle-down economics,” also known as “supply-side economics.” The idea is that boosting incentives for wealthy business people (“job creators”) is the best way to grow the economy for all. The trickle-down theory is still popular with politicians, even as it has been repeatedly contradicted by empirical evidence and the historical record.
One reason for trickle-down’s longevity may be the absence of a simple alternative. A recent symposium in Democracy Journal seeks to fill this gap. In a series of articles, the authors outline a platform of “middle-out” economics, based on the fact that middle-class consumer demand is a much greater driver of business expansion than wealth at the top. The basic reasoning is simple — any successful business person who wants to stay successful will only hire more workers and increase production when people are able to buy what the business wants to sell. That demand won’t continue if the average American can’t obtain the skills, opportunities, and ultimately, high wages to keep up this “virtuous cycle.”
Middle-out economics also recognizes that the most important “capital” for capitalism is the human kind. As Eric Liu and Nick Hanauer write in their essay, “The True Origins of Prosperity”:
We need more Americans to have the wherewithal—purchasing power, education, health security, access to capital—to participate in economic life, whether as consumers or as idea creators (that is, small businesspeople). The more that happens, the better America does. Middle-out economics, in short, allows capitalism to operate at full capacity and full potential with our talent maximally deployed.
The symposium goes on to present several policies for a middle-out agenda, including:
- Expand access to paid time-off and family leave to support the next generation. We need to counteract the rising inequality not just in wealth, but also in access to the workplace flexibility needed for parents to be present in their children’s lives.
- Restore the balance between labor and capital. The share of national income going to employee compensation has plummeted in recent years, as the share going to corporate profits has increased. Tax reforms can help restore the balance to what it was at the height of the United States’ prosperity.
- Increase the minimum wage to match productivity gains. Average worker productivity has almost doubled since the 1970s, even as the real value of the minimum wage fell by 21 percent. A minimum wage increase will both boost the economy and help make wages better match what workers are contributing.
- Reinvigorate job-training to create a “middle-skill” workforce. The higher education system needs to do better at training for the numerous jobs that require more than a high-school diploma but less than a bachelor’s degree.
Altogether, middle-out economics combines a simple message with a coherent policy agenda that matches American values, and economic reality, much better than the trickle-down alternative.