The Good, The Bad and the Ugly – Republican Tax “Reform”

First off, this is not really tax reform, which would not be a bad idea.  It is a tax cut, which is not always a bad idea, but is a very bad idea right now.  It is, of course, a pretty popular idea with a lot of people, because, well, almost everybody would rather pay lower taxes, in the same way that they would rather pay less for everything else they spend money on.  Pure self-interest.  That’s the basic appeal, and it is always politically popular.  And sometimes, it even makes economic sense.

Right now, it does not.  The first two questions that should always be asked when considering a major change to the tax code are: 1) Do we need it?; and 2) Can we afford it?  The answer to both questions is emphatically NO!!

One good reason to give a tax cut is to stimulate the economy when it is doing poorly.  That is not the case now.  Our economy is exceptionally strong.  We have had more than a hundred consecutive months of economic growth since June 2009, one of the longest in modern history.  Our unemployment rate is 4.4%, actually below the rate most economists long assumed to be the structural minimum in our economy.  Our economy is really strong right now, and has been for some time.  And not many people are predicting this will change in the near future.

A lot has been made of the fact that our economic recovery has been “uneven” and that not all have benefited equally, with some being left behind.  That is always the case with every economic change in the economy, however.  Income inequality is indeed a massive problem, and if this were real tax reform aimed at addressing that inequality, it might be worth supporting.  But it’s not.  It’s a tax cut, the provisions of which will make that inequality even greater.

So we obviously do not NEED a tax cut.  So let’s turn to the second question, about affordability.

Another reason to give a tax cut might be if we were running a significant and sustainable budget surplus.  If that were the case, why not give the people a tax cut?  That was some of the rationale behind the Bush tax cuts of 2001.  At the time, after the strong economic performance and prudent spending of the Clinton administration, we were running a significant budget surplus, and the Congressional Budget Office (CBO) was predicting that we would continue to run surpluses for many years to come.  Tax cuts weren’t needed, but they seemed eminently affordable, so why not?  Many who were usually budget hawks, like myself, were convinced to support it.  Of course, the CBO has rarely been so dramatically and disastrously wrong.  In their defense, they could not have predicted 9/11 and the economic downturn that immediately followed it, and while a few doomsayers were sounding warnings about the instability of the sub-prime market and overexposure of key financial institutions, few economists believed that the economy was in such danger.

They were wrong, and our economy tanked, causing tax revenues to implode while we were simultaneously dramatically increasing military spending to support wars in Iraq and Afghanistan.  In previous wars, such increased expenditures were often supported by raising taxes, but that was politically difficult to do, particularly during an economic recession.  So the Bush tax cuts were reaffirmed and eventually most of them were made permanent, and we went deeper and deeper into debt, a trend that has continued to this day.  The debt is not yet unmanageable, and it could be argued that the deficit spending was necessary to help pull us out of this recession, but that case can no longer be made.  I don’t mean to over-dramatize the debt.  So long as the economy stays strong, it is manageable.  However, if we have another recession, it might quickly become so, and we will have few macroeconomic tools left to address it.  Both increasing spending or lowering taxes will simply be impossible.

We’ve painted ourselves into a fiscal corner with a huge bucket of red paint, and no longer have room to maneuver.  We certainly can’t afford to add more red paint, but that is precisely what the Republican tax cut will do.  Trillions of dollars of new debt, backing us further into a fiscal corner.  Any economic downturn could quickly become disastrous.  Some conservatives will talk about the economic stimulus a tax cut will bring, and it might well do so, but the cost is too high.  Too dangerous.

We don’t need it, and we can’t afford it.

All that said, not everything in the Republican bill is a horrible idea in and of itself.  I have no problems with reducing the number of tax brackets.  The basic concept of increasing the standard deduction while cutting the number of deductions is a good one, although it will be politically difficult to accomplish, as every one of those deductions has powerful vested interests who will fight to the death to keep them.  Cutting the business tax is not a terrible idea in and of itself – ours is high by world standards and some good might come out of a moderate cut in it, particularly if the promised elimination of deductions for those taxes accompanies it.

There are, however, a few horrible stinkers in the bill, blatant giveaways to the very wealthy which will make income inequality even worse in our country.  The repeal of the estate tax, currently only paid by the wealthiest one tenth of one percent in America, is one such giveaway.  So is the elimination of the alternative minimum tax, enacted precisely to prevent wealthy people from gaming the tax system to pay less than their fair share.  Another stinker is the reduction of the rate for “pass-through” businesses, a godsend for a very few extremely wealthy individuals.  To cap it off, the elimination of the tax deduction for local and state taxes is blatantly political, punishing those states that voted Democratic, which tend to have higher taxes (and stronger economies and better services, amazingly enough), and rewarding those states that voted Republican.

All of this is interesting to discuss and debate, particularly if the purpose was really tax reform.  But it’s not, because this isn’t tax reform.  It’s a tax cut.  So, the merits of the individual ideas are largely irrelevant.  Because it fails both of the two most basic tests for a tax cut.

We don’t need it and we can’t afford it.

 

 

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