It ain’t over til it’s over, but it’s almost over.
I’m talking about the terrible tax debate of 2017, which, barring unforeseen Republican vote reversals, will soon end with President Trump signing these destructive changes to our tax code into law.
In this post, I want to talk about one aspect of this debate — the growth effects from tax changes — that has been particularly misleading. As far as the plan itself is concerned, I’ve explained my views in many posts, and I won’t repeat them. I thought the renowned inequality scholars Thomas Piketty, Emmanuel Saez and Gabriel Zucman recently summarized it well:
“The tax bill … will turbocharge inequality in America. Presented as a tax cut for workers and job-creating entrepreneurs, it is instead a giant cut for those with capital and inherited wealth. It’s a bill that rewards the past, not the future.”
By privileging some types of income over others, such as passive or inherited wealth over earnings, it also increases the complexity in the code and, in so doing, opens wide new loopholes for anyone with a tax lawyer to discover, much to their surprise, that the very type of income they have gobs of is the type newly favored by the code.
And it accomplishes these goals while adding at least $1 trillion to the 10-year deficit.
The plan remains highly unpopular. Most people don’t believe they’re going to get anything from it, and they correctly intuit that the way to help them is not by boosting corporate profits and hoping some of the benefits trickle down. But for all the complicated alterations of the code, the scores and the growth claims, what happened is very simple: Republicans won the election, and their donors want a tax cut.
To sell the plan, its proponents argued that it would unleash torrents of economic growth that would more than offset its revenue losses and raise earnings for working families by thousands of dollars. The magnitudes of these claims are beyond ridiculous. Tax cuts never pay for themselves — none of the unbiased scores got even close — and the wage claims implied workers would get multiple times the value of the tax cuts in their paychecks.
That’s not merely trickle-down. It’s a torrential typhoon, wherein the wealthy, against all evidence and in contrary to the trend of rising inequality, rain part of their winnings down on the working class. In this scenario, they do so by investing more, which raises productivity, which leads to faster wage growth. Every link in that chain is broken. U.S. corporations could easily invest more now if that’s what they wanted to do. Profits are high and investment capital is cheap. And we’ve long known that there’s a persistent gap between productivity growth and the compensation of middle-wage workers (another symptom of rising inequality).
Well-designed revenue-neutral tax plans can nudge growth rates up a few tenths of a percent. And short-term deficit-financed tax cuts can give the economy a temporary nudge. In fact, we could well see some of that in 2018-2019 as the bill boosts the deficit significantly in those years (more on that in a moment). But that’s it. Scatter plots of tax changes against growth rates either over time or across countries (see Figure 4) generate random patterns (though, notably, high-end tax cuts are correlated with rising inequality).
And yet virtually every time I debated anyone on this tax plan, they touted outsize growth effects and trickle-down. While Republican Rep. Tom Cole’s claim that “there are about as many economists as there are opinions” about the plan’s growth and revenue effects is an overstatement — most economists don’t buy the hype — a sizable group of reputable members of the guild gave succor to the false claims.
If the plan soon passes, expect these voices to continue telling all kinds of trickle-down stories in years to come. Every positive tick in an economic data point will be thanks to the tax cut. This will, of course, be largely false, though it’s certainly possible that the more than $400 billion in deficit spending over the next two years could juice growth in the near term. Again, I’m talking a few tenths, and that’s assuming the Federal Reserve doesn’t raise interest rates faster to reverse any such effects based on inflationary concerns.
But let’s be clear about any such temporary outcomes: They are Keynes’s effects, not Laffer’s. That is, any near-term growth effects from the tax cuts will be due to the demand-side effects that put more money in people’s pockets, not to supply-side effects with a lasting impact on growth. They’re sugar, not fiber.
Moreover, this deficit spending is ill-advised. As my Fed comment suggests, it comes at a time when the economy’s already closing in on full employment, so it’s an odd time for Keynesian stimulus. Also, while I could think of useful ways to target $400 billion right now to reach those who are still left behind in this nine-year-old expansion — direct job creation, higher wage subsidies for the working poor — that’s the opposite of what these resources will be spent on. It gets worse: Republicans are already using the excuse of bigger budget deficits generated by their plan to call for cuts to anti-poverty programs.
I wish I knew how to improve the quality of these debates. It’d be great if anyone who uttered the phrase “these tax cuts will pay for themselves” or “$4,000 more in wages!” or “6 percent growth!” would pay a hefty fine. Instead, they’ll be rewarded by their donors. Which is, at the end of the day, one of the main reasons we are where we are. In the 2016 election, “about 40 percent of contributions to campaigns … came from an elite group … equivalent to 0.01 percent of the adult population.”
These wealthy donors are driving this debate, and this country, down an increasingly perilous road.