President Trump and congressional Republicans have long held tax reform as a major policy objective. With no Democratic support, Republicans passed a major tax bill in 2017. But it was not “reform,” defined as “change to correct something that is wrong.”
True tax reform would reduce after-tax income inequality through shifting the tax burden toward top income earners who have gained disproportionately from increasing prosperity over the last four decades. Instead of reducing after-tax income inequality, the tax bill exacerbates it by substantially reducing taxes for the wealthiest members of our society. This is not reform. This tax bill is a giveaway to 1 percent of our wealthiest citizens who do not need it, at the expense of everyone else who will bear the consequences.
What are the consequences? First, there is the matter of equity or fairness. Fairness is subjective, a matter of opinion. But most people would agree that 75 percent of the tax cuts going to 1 percent of our wealthiest citizens is not fair. The very top income earners will enjoy average annual tax reductions of some $321,000.
A second, though longer-run, consequence of that tax bill is that it is unsound fiscal policy on multiple counts. Critics had forecast that this tax bill would produce increasing federal deficits at the wrong time. Let’s be clear — federal deficits are not always bad policy, depending on the state of the economy. During recession, federal deficits are unavoidable because of decreased tax collections. Furthermore, incurring deficits, even expanding them, is necessary to compensate for deficient private spending in order to lift the economy out of recession, as was the case during the Great Recession.
The counterpoint to this is that deficits should be reduced during economic recovery and prosperity. Reduced deficits, especially relative to the size of an expanding economy, give the president and the Congress the economic ability and the political cover to spend on education, research, infrastructure improvement and other essential programs. In addition, reduced deficits and smaller public debt relative to the size of the economy enable policymakers to increase public spending to counter the next recession.
This is not sophisticated PhD. level economics. It is introductory college sophomore-level economics. Or if students don’t get it the first time around, surely no more complex than junior- or senior-level college intermediate economics.
In other words, this tax bill does the opposite of what sound fiscal policy demands. Instead of reducing federal deficits during prosperity, it has increased the FY 2017 deficit of $666 billion to $779 billion for FY 2018. This will put policy makers in a tremendous bind when additional federal spending is needed to counter the next recession. This, all while awarding huge tax giveaways to the top 1 percent of income recipients who have already profited disproportionately from the improving economy, even as wage growth in inflation-adjusted terms has remained stagnant for decades.
Speaking of inflation, record deficits during an improving economy tend to be inflationary, prompting the Fed to increase interest rates. While we are not currently in runaway inflation, we are already hearing complaints about recent interest rate increases by the Fed.
Another part of the 2017 tax bill is reduced corporate taxes. A good theoretical case can be made for totally eliminating corporate taxes if, and only if, the shortfall in revenue would be made up by a more steeply progressive individual tax system. But given our current politics, this cannot happen. The next best would be to counter reduced corporate taxes with increased individual taxes to make the bill revenue neutral. But this did not happen.
Economists and impartial analysts warned that the 2017 tax bill would produce increased deficits at precisely the time when deficits should be reduced. Proponents of the bill insisted that the stimulus and incentives produced by the bill would foster economic growth sufficient to generate revenues to compensate for the cuts in tax rates. Some enthusiasts even asserted that the bill would produce economic growth sufficient to pay off the national debt. This is preposterous — just plain eyewash.
The fact that the bill has resulted in that $779 billion deficit has apologists for the bill insisting that time has been too short for the bill to work its magic. Give it more time, they insist, and revenues will increase. Never mind that we are already at full employment, and further juicing the economy risks inflation.
Another tack taken by apologists is that it really isn’t the tax bill that is responsible for the deficits. No, they insist, “Social Security and Medicare must be cut.” These are separate accounts, but that’s another story.
Outgoing congressman Paul Ryan and Senate Majority Leader Mitch McConnell have long led Republican voices to cut Social Security and Medicare benefits. Even as they insisted that the tax bill would “pay for itself,” and reduce deficits, McConnell now observes that the $779 billion deficit is “very disturbing.” Although this tax bill was exclusively Republican, McConnell insists that the need to cut Social Security and Medicare is a “bipartisan problem.”
Republicans had planned to tout the tax bill as a signature accomplishment benefitting the middle class. Low- and middle-income taxpayers doubtlessly appreciate the few extra bucks some of them may receive. Nevertheless, the gambit of pushing the tax bill as a major accomplishment for them does not seem to be working as planned.
Will the gross inequities and wrongheaded macroeconomic policy comprising the tax bill matter for the upcoming election? Not much.
The nation’s wealthiest have locked in the bill’s benefits into the future. The economy is functioning satisfactorily, for now. The future consequences of record deficits during economic prosperity are not currently evident. So, the negative consequences of the bill will be evident in the future but politicians are concerned only with the next election.
Therefore, the election will turn on other issues.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net.
