In what world is that populism? I know: Trump world, where such facts are not welcomed.
—Supply-side, trickle-down fairy dust doesn’t work. Team Trump assures us that its tax cut will have powerful growth effects. By cutting high-end income and corporate taxes, they claim it will boost capital investment and thus productivity growth, which in turn will rain down goodies on the middle class. But history belies these claims. I’ve looked under every rock for correlations between high-end tax cuts and growth in jobs, investment, productivity and growth. It’s not there. The current state of fiscal affairs in Kansas is Exhibit A in this failed experiment.
What you find instead are battered budgets and greater after-tax income inequality.
–Tax cuts already helped send the budget deficit up in fiscal 2016 without help from Trump. Although a bipartisan tax deal at the end of 2015 contained some important improvements to the Earned Income Tax Credit and the Child Tax Credit, it also extended some big, wasteful tax breaks and enshrined some other ones into permanent law. Some of these breaks — the research and experimentation tax credit, “bonus depreciation”— would probably have kept getting extended on a bipartisan basis even without the deal. But that doesn’t change the fact that these wasteful tax breaks were unpaid for and thus helped pave the way for the first increase in the deficit since 2011, from -2.5 percent of gross domestic product in 2015 to -3.2 percent of GDP this year.
There are commonalities with the last president who lost the popular vote and rode in on a big tax cut: George W. Bush. But they can be overdrawn. When Bush took office in 2001, the budget was in surplus to the tune of 1.2 percent of GDP and the debt stood at 31.4 percent of GDP. Today, the debt is about 77 percent of GDP.
Also, Bush’s 2001 tax cut amounted to less than 1 percent of GDP in terms of lost revenue. Trump’s, as conceived, will be two to three times that.
Now, this next bit is very important. I yield to no one when it comes to eschewing the terribly damaging policy of fiscal austerity (reducing deficits when they’re needed to support weak economies). As such, I fully support and have called for a temporary increase in the deficit to help close the gap between where we are and truly full employment, ideally through investments in productive public infrastructure.
But there’s a world of fiscal difference between that idea and the tax cut under consideration.
To sell the package, its proponents will pretend that it’s revenue neutral or that its revenue losses sunset after 10 years. But we’ve seen this movie. When we hit the built-in fiscal cliff, Republicans cry bloody murder at anyone who, in following the law they wrote, will allow tax rates to rise.
An infrastructure spend-out, conversely, is temporary, and it’s the permanent, not the temporary stuff, that creates structural deficits. Which raises my next point:
–Optimal fiscal policy means being a CDSH: cyclical dove, structural hawk. When we’re in a recession or weak recovery, we want the deficit to be going up to help offset the private-sector demand contraction. But once you’ve hit full employment, you want your receipts to get closer to covering your outlays.
As I said, we’re not at full employment. There are still too many underemployed people and potential workers sitting on the labor market’s sidelines. But a permanent tax cut will create a structural deficit, meaning that even at full employment, revenue fails to pay for current services.
My concerns here are underscored by the fact that, based on demographics alone, the future will unquestionably demand more, not less, revenue. In addition to population growth, the share of the population age 65 and older is growing as well, projected to rise from around 15 percent to above 20 percent around 2040. Without benefit cuts, spending on programs such as Medicare and Social Security must grow as the percentage of the population in the age range eligible for them increases.
Of course, we could cut our social insurance programs, which is, I fear, the end game. Here’s the plan:
- Discredit factual analysis. This step is essential for all that follows.
- Get elected on an allegedly populist, anti-establishment platform.
- Pass a big, regressive tax cut; claim that although the scorekeepers say it doesn’t deliver tax relief to your base voters, it will boost growth and trickle down to them. (If that seems flimsy, see step 1).
- When growth fails to appear, throw up your hands, say “Who knew?!” and insist that the only way to avoid big deficits is to cut Medicare and Social Security.
Okay, I’m out. I understand that keepin’ it real here means this all reduces to: “Chill, liberal. We won, you lost, so there’s a big-ass, regressive tax cut coming.”
I get that. But I still can’t shake this crazy idea that it’s crazy.