What we have here is a glaring example of a political bribe — tax cuts — masquerading as economic policy. The economy is already near “full employment,” with budget deficits of $12 trillion projected for the period of 2020-2029. Any Trump tax cut would simply add to the total. To be fair, Democrats’ various spending proposals — for expanded health care and free college — seem to treat present deficits as a fait accompli and build on top of them.
At this stage of the business cycle, the government should be running small or large budget surpluses. Instead, any new Trump tax cuts would amount to campaign spending. Trump would borrow with one hand and give away the proceeds with the other. The message would not be subtle: Vote for me and receive, in return, more tax cuts. The cost is likely to be considerable.
Even if the prospective tax cuts were legitimate economic policy, it would be bad policy. Here’s why.
A discouraging aspect of the current economic expansion is the weakness in corporate investment in factories, buildings, computers and other machinery. It has declined for the past six months, despite the generous treatment of profits in Trump’s 2017 tax cut.
To remind: The top rate on corporate profits dropped from 35 percent to 21 percent. The inability of such a large tax cut to raise corporate investments raises questions about how much lower tax rates actually stimulate new investment, absent strong demand.
Many theories have been advanced to explain lackluster corporate investment: (1) There’s ample surplus capacity in many industries, reducing the need for new investment; (2) the trade wars between the United States and China have discouraged companies from investing in trade-sensitive industries; (3) general uncertainty on many fronts — Brexit, fighting in the Middle East, the possible impeachment of Trump — has made CEOs more cautious.
But there may be another factor: Companies may have become addicted to government “stimulus” programs of lower taxes and higher spending. That is, companies wait on their own investment plans until governments signal that they’re pushing ahead with their stimulus programs. This already seems to be occurring with Federal Reserve monetary policy — reflecting interest rates and credit conditions — and it may also affect fiscal policy (spending and taxes).
You will notice the irony in this possibility. In a capitalist system, private enterprises are supposed to be the primary risk-takers. But do they try to minimize their risks by following the government’s lead? Have they been conditioned by so many stimulus packages to wait and see? If so, the explosion of stimulus packages may have the perverse effect of delaying economic recovery.
Whatever the answer, it’s worth noting — in fairness — that Trump is hardly the first president who has tried to twist economic policies to create a political advantage. The best example of this in the post-World-War-II era was Richard M. Nixon. In 1971, he slapped wage-price controls on most of the economy. The idea was to suppress inflation and then attack unemployment with easy money. In 1972, Nixon won reelection in a landslide, though Watergate made his triumph short-lived.
Could history repeat itself?