What the Republicans are offering on taxes is a bad bargain for America’s future. They would borrow — roughly $1.5 trillion over a decade — to finance tax cuts that are pleasing for the present. Future Americans would pay the bill. There are at least three reasons why the Senate should reject its version of this self-serving deal.
First, it's got the proper priorities reversed. What we need is a tax increase, not a tax cut. As almost everyone should know by now, the nation faces chronic budget deficits as far as the eye can see. In its latest estimates of the long-term budget outlook, the Congressional Budget Office puts it this way:
“Under current law, spending growth — driven by outlays for Social Security, the major health care programs, and net interest — is projected to outpace revenue growth.”
For fiscal 2017, the deficit totaled $666 billion, or 3.5 percent of the economy (gross domestic product). By 2030, according to the CBO's long-term projections, the deficit will increase by nearly two-thirds as a share of GDP to roughly $1 trillion or more (in today's dollars).
Just how much longer this can continue without provoking some sort of crisis is anyone’s guess. To be fair, and given all the inevitable uncertainties, the CBO’s projections are likely to be wrong — but the error could be an underestimate of the deficit, rather than an overestimate. Why? The projections assume that defense and other discretionary spending decline to near post-World War II lows. These deep assumed cuts may be politically impractical.
But wait, say Republicans: Our tax package — particularly the tax reduction from 35 percent to 20 percent on corporate profits — will increase economic growth, improving the budget outlook. Writing in Monday's Wall Street Journal, nine respected conservative economists endorsed this position. The general argument is that the extra economic growth stimulated by the tax cut would pay for all or most of the $1.5 trillion in additional borrowing to finance the tax cut.
Among other economists, there is ample skepticism. A study by Moody's Analytics concluded that neither the House nor the Senate tax plans "would materially increase long-run economic growth, but each would add significantly to the government's deficits and debt load."
Second, even if a tax cut represented good economic policy, the timing is wrong. The economy is at or near so-called "full employment" — which means that most people who want a job can find one. The unemployment rate is 4.1 percent.
Adding further “stimulus” to the economy now could boomerang. It could intensify inflationary pressures, forcing the Federal Reserve to tighten money and credit faster than is now expected to preempt a wage-price spiral. This could also trigger a confrontation between the Fed on the one side and the Trump White House and Republican Congress on the other.
If Republicans believe, as they say they do, in the potency of corporate tax-rate reductions for added economic growth, they should finance these reductions by ending other tax breaks or cutting spending. There should be no net increase in budget deficits; indeed, other taxes (a carbon tax?) should be gradually increased to help close the long-term gap between federal spending and taxes.
To close the budget gap also implies cuts in retirement benefits, which now dominate federal spending. But liberal Democrats have been as stubborn in protecting these benefits as Republicans have been in promoting tax cuts. Hence, the political and policy stalemate.
Finally — and this follows from the political paralysis — the Republican tax plans fail because they’re Republican. Not that everything Republican is automatically suspect. But if we’ve learned anything in the past few decades (and it’s not clear that we have), it’s that major economic and social legislation should have at least some bipartisan support. Otherwise, we get caught in a game of ceaseless disruption. One party enacts some of its agenda; then the other party, when it gains power, undoes or modifies the status quo. Uncertainty rises.
Of course, this is what politics is about, but what starts as normal can be taken to undesirable extremes — and that has happened to U.S. politics in recent decades. The search for consensus, cooperation and compromise has become increasingly futile. That is the story of the Affordable Care Act (“Obamacare”) and other policies. If the Republicans succeed in overhauling the tax code, their handiwork could meet the same fate.
To avoid that, kill this legislation. It’s an easy call.
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