The U.S. economy is running at its full potential for the first time in a decade, a new milestone for an expansion now in its ninth year.
Total economic output in the third quarter was slightly above the maximum sustainable level of output as estimated by the nonpartisan Congressional Budget Office.
This is a measure of the economy’s potential to produce goods and services based on the supply of people working and how productive they are. In downturns actual output drops below potential and slows inflation. In advanced stages of expansions output can exceed potential and cause the economy to overheat. …Wednesday’s report from the Commerce Department showed GDP, a broad measure of the goods and services produced in the U.S., expanded at a 3.3% annual rate in the third quarter, adjusted for inflation and seasonality. It was the strongest quarter in three years, and an upward revision from the government’s initial estimate of 3.0% growth.
Given that one has to come back to the underlying problem with the tax bill — it is totally unnecessary and counterproductive.
The central argument for a massive cut in taxes for the rich and for corporations — which will produce trillions in new debt — is that it’s necessary to get the economy going and create jobs. When we are already at maximum capacity, such action is unwarranted, especially when one considers the downsides of the bill (e.g. new debt, further income stratification, pressure on spending for worthwhile endeavors).
Taking a step back, one can make the case that historically tax bills of this type don’t change the trajectory of the economy. William Gale of Brookings writes:
From 1913 to 1950, taxes averaged almost 11 percent of GDP, reflecting the introduction of income, estate, and payroll taxes and expansion of corporate levies. The economy went through two World Wars, the Great Depression, and a post-war recession.
By 1950, the economy had entered a new period with permanently higher taxes (and government spending). From 1950 to 2014, federal revenues averaged more than 17 percent of GDP.
Despite the radical differences in taxes as a share of the U.S. economy, the annual growth rate of real GDP per person averaged about 2 percent over each period. Despite big changes in taxes, long-term economic growth barely budged.
Republicans are pursuing a giant, irresponsible tax bill for political, not economic, reasons. They desperately need a “win,” and their donors and activists still worship at the altar of supply-side economics, which nicely coincides with economic self-interest.
Imagine a different scenario. Congress pursues a revenue-neutral corporate tax reform akin to the 1986 tax reform bill. Instead of delivering big tax cuts to the rich, Congress looks to policies that might boost productivity, prevent further income inequality and look to the long-term economic health of the country. An infrastructure bill, new trade deals to open foreign markets, investment in worker training and alternatives to four-year colleges and revamping of legal immigration (not to cut numbers but to bring the best and the brightest to the United States). That might not thrill the Mnuchins or the Trumps, but it would actually address the needs of ordinary Americans, including those in the Rust Belt who need something better than trickle-down economics.
In sum, the political tumult surrounding the tax bill obscures a fundamental economic reality — it’s rotten policy that diverts revenue and focus from far more beneficial policy endeavors.