President Trump and congressional Republicans want Americans to think that their proposed tax legislation is all about increasing economic growth.
As I wrote in September for The Washington Post, “there’s no evidence that a tax cut now would spur growth.” Yet leaders such as House Speaker Paul D. Ryan still maintain the fantasy that their brew of income and corporate tax cuts will mean “faster economic growth” and “better jobs being created.” It’s an idea belied by Trump’s own tweets, in which he routinely extols the economy:
He’s not wrong. But with near-full employment and a roaring stock market, you don’t cut taxes.
When past presidents — John F. Kennedy, Ronald Reagan, George W. Bush — proposed tax cuts on the order Trump now proposes, it was always when the economy had considerable slack: underutilized resources such as unemployed workers and idle factories. In each case, according to the National Bureau of Economic Research, we were either in a recession or just past one. At times of economic slack, there can be a lot of bang-for-the-buck from a well-timed and well-targeted stimulus program. Indeed, when the stimulus takes the form of public works that will pay dividends for decades, it gives the economy a double benefit, putting unemployed workers to work at a time when wages, raw materials and interest rates are low. It’s like buying something you need when it’s on sale.
If anything, by enacting a stimulus now, in the form of a tax cut, when the economy is near full employment, the government risks raising inflation, which would mean the stimulus generates higher prices rather than reduced unemployment — when employers can’t find additional workers to meet increased demand, they have little choice but to bid up wages, which get incorporated into prices.
So, why do it? Because for decades, conservative intellectuals have pushed for big tax cuts; less to grow the economy and more because they want to “starve the beast.” They want to force a major overall spending cut that would be a political non-starter without first passing a tax cut that creates a deficit so large, something must be done about it. Spending cuts must be enacted, then, as they would be presented as the only way to pay for the already passed tax cut’s lost revenue.
Americans for Tax Reform, for instance, led by starve-the-beast enforcer Grover Norquist, is quite open about its goals. The organization’s infamous tax pledge attempts to ensure that budget deficits can never be reduced with higher taxes, only spending cuts. Other fiscal responsibility groups are passive allies. They care about deficits but tend to be far more concerned about slashing entitlement programs such as Social Security and Medicare than they are about opposing tax cuts. In practice, they ally with starve-the-beast advocates.
These days, if tax cut hawks nod at all to cutting deficits, it’s with the false promise that tax cuts bring more growth, even at lower rates, and thus more revenue available for deficit reduction. As Freedom Caucus leader, Rep. Mark Meadows (R-N.C.), told Politico, “What you have to do is you have to mitigate the damage by being as aggressive as you can be on tax rates, which would lessen the damage of our lack of fiscal responsibility over time.” Good luck with that, congressman.
The stage is being set for an all-out attack on the welfare state the minute a tax cut is signed into law. Per an analysis by the Committee for a Responsible Federal Budget, the Republican budget already assumes $4 trillion in cuts to mandatory spending over 10 years, a euphemism for Social Security and Medicare. But no action has yet been taken to implement the spending cuts.
Indeed, as The Post reported Tuesday, Republicans just added repeal of Obamacare’s individual mandate to their tax package to “free up more than $300 billion in government funding over the next decade that Republicans could use to finance their proposed tax cuts.” As The Post also reported, the Congressional Budget Office has warned that the tax cut would “add $1.5 trillion to the debt over the next decade,” potentially leading to an automatic cut of $25 billion to Medicare in 2018 because of a law known as paygo (pay-as-you-go) designed to prevent higher deficits.
Republicans might find a way around paygo, but it’s a safe bet that once the tax cut is out of the way, Trump’s Office of Management and Budget will begin issuing warnings about rising deficits, financial collapse and hyperinflation unless immediate action is taken to reign them in.
Which, in turn, may create a bandwagon effect that overwhelms opposition. That’s what happened recently in Kansas, where the GOP hurt revenue by misleading Kansans about tax cuts’ stimulative impact to get them passed. Right-wing economist and consultant Arthur Laffer, hired by Gov. Sam Brownback, portrayed the effect of tax cuts as if increased revenue from growth would take care of budget shortfalls — the same thing that Treasury Secretary Steven Mnuchin predicts from the Trump tax proposal when he claims, “The tax plan will pay for itself with economic growth.”
In Kansas, when revenue collapsed, Republicans didn’t respond by admitting error and restore the taxes that had been cut. They “slashed university budgets, canceled highway projects and convinced reluctant lawmakers to go along with a plan to borrow $1 billion to shore up the state’s public pension fund.” Eventually, facing continued shortfalls, Republicans voted to raise the sales tax and a tax on cigarettes which disproportionately hit the pockets of poor and working-class Kansans who had received virtually no tax cut at all. Only when spending had been slashed and regressive taxes raised did Republicans finally restore some of the taxes that had been cut.
By framing their opposition to Trump’s tax plan as a worry that it does too little for the middle class, as they’ve done so far, congressional Democrats risk playing into the Republican playbook by agreeing in principle to the virtue of tax cuts.
I’ve yet to hear a Democrat say that no tax cut is either necessary or justified by current economic conditions. While it is true that the middle class is suffering, it’s not from high income taxes, which are at a historically low level. According to the Tax Policy Center, a family with the median income pays an income tax rate of just 5.34 percent, less than half what it paid during the Reagan administration, even after the 1981 tax cut.
Trump’s top economic adviser, former Goldman Sachs executive Gary Cohn, says the benefits of the tax cut will trickle down to the middle class, an absurd suggestion. The rich aren’t going to buy second and third yachts just because they got a tax cut. And the idea that a tax cut for big corporations will raise wages is nonsense. Just this week, chief executives balked when Cohn tried to get them to agree that they’d invest in hiring if a tax cut passed. Wages fell steadily after the corporate tax rate was cut to 34 percent from 46 percent in 1986. They also fell in Britain when it cut the corporate tax. The tax savings will primarily go to corporate executives and shareholders.
Democrats should oppose any tax cut. And of course they should oppose slashing Social Security and Medicare — by making these programs less attractive, it aids in their gradual abolition through privatization, another goal of the GOP. They may not have much leverage in the tax debate, but they should try to force Republicans to put on the table details about the spending cuts that their tax cut is designed to bring about.
If they’re worried about political cover, they shouldn’t be: A Quinnipiac Poll released Wednesday shows that by a 2-1 margin, Americans oppose Republicans’ current plan.
Once we can see the whole picture, Americans will have a clearer idea of the net benefit to them. The rich don’t need either Social Security or Medicare — it’s the middle class, which depends on both, that needs to know how tax cuts and spending cuts affect them. If Social Security and Medicare cuts follow tax cuts, on net, even those who would get a tiny tax cut will be much worse off when the spending cuts are factored in. This will give a true, complete picture of the distribution of pain and gain in the GOP program.
Republicans have played this game before — luring Americans toward government downsizing with the promise of tax cuts. The best way to avoid getting played again is not to play the game.