Tuesday, November 13, 2018

The Trouble with Tax Cuts

Everybody likes tax cuts. What’s not to like? But there is a proper time for tax cuts, and they cause serious problems if they come at the wrong time or go to the wrong people. The recent Republican tax cut was a mess, on multiple levels. In an effort to reward their major donors and show that they could accomplish something, anything, legislatively, the GOP squeaked through a tax cut that went primarily to the wealthy and to corporations, and they did it at a time of economic expansion. This time they didn’t even pretend that the purpose of the tax cut was to trickle down to the lower levels of the economy. Supply-side economics is totally discredited anyway, so the pretense would have been an empty gesture. But to push through a tax cut during a time of economic expansion has two effects: it balloons the debt, and it likely overheats the economy and drives interest rates up.
Tax cuts have been used as a political tool (not an economic tool) by the GOP for nearly forty years now, and the Republican addiction to tax cuts is so extreme that this tool has become their only answer to every economic question. Tax cuts are a cure-all. Of course, this is nonsense. Ronald Reagan started the modern GOP on the supply-side path to massive deficits with his tax cuts. George W. Bush paid for two wars and an expansion of Medicare with tax cuts. And now Trump has given himself and his ilk a tax cut for no economic reason at all.
Tax cuts do serve a very limited purpose. If the economy is in recession, tax cuts can induce consumer spending, which can serve as a brake on the downward economic spiral. But once the economy turns around, those tax cuts should be repealed so that we can pay off any debt accumulated during the recession and possibly build a surplus. With the debt totally out of control now, and with the economy expanding, the last thing we need is low taxes, especially on those who have made off like bandits during the past forty years. Largely because of the Republican tax cuts, we are seeing a level of inequality that is dangerous to our long-term well-being. And anyone who tells you otherwise is either filthy rich or has sold his or her brain to those who are filthy rich.
Because one political party has been lying about the effects of tax cuts for decades now, we are stuck between a rock and a hard place. First, let’s be clear about one thing. Tax cuts never pay for themselves. But the Republicans have been making this claim since Reagan. Second, because the GOP has been successful in spreading this politically expedient lie, the Democrats get punished politically for trying to do the responsible thing: increase taxes to pay for what we expect government to do for us. And this is a primary problem with tax cuts. They are easy to enact, but devilishly difficult to repeal. And increasing taxes is political suicide, even though all politicians should be making a case for higher taxes.
Another lie that Republicans have been spreading is that Americans are overtaxed. The numbers show how dishonest this claim is. Among the 35 OECD countries, only four have lower tax revenue as a percentage of GDP than the U.S.: Chile, Ireland, Mexico, and Turkey. Total U.S. taxes (for all levels of government) are 26.0 percent of GDP. The percentages for a sampling of other countries are: Austria, 42.7; Canada, 31.7; France, 45.3; Germany, 37.6; Netherlands, 38.8; Norway, 38.0; Sweden, 44.1; United Kingdom, 33.2. The average for all 35 OECD countries is 34.3 percent. We are more than 8 percent below the average. Of course, part of the difference is that these other countries provide health care for all citizens and a far more extensive safety net than we provide. And anyone who claims that these other countries’ taxes are inefficient needs to recognize that they pay sometimes only half of what we do for health care as a percentage of GDP. So their taxes are actually being used far more wisely than our pirated health-care dollars.
Perhaps the most significant problem with tax cuts is that they render us incapable of paying for the things we need and want government to do for us. The Republican answer to the debt created by their tax cuts is to slash “entitlements.” What that means is cutting benefits to the elderly, the sick, the disabled, and the poor. Yes, we need to do some means testing. Some retirees do not need Social Security, for instance, and they should probably pay premiums for Medicare. But this represents a small percentage of the gap between what we bring in as revenue and what we need to pay out for these programs. Because businesses have kept wages low and have cut pension plans, a frightening portion of retirees are leaving the workforce without any savings at all. They will rely totally on Social Security. And Baby Boomers are retiring at the rate of 10,000 per day. What this means is that we will not be able to cut Social Security and Medicare for decades. The only solution to this dilemma is to increase taxes to where they were before the great Republican tax cut fetish began.
It’s interesting to look at the top marginal tax rate over time. In 1944 and 1945, at the end of World War II, the top rate was 94 percent. In 1963, it was still 91 percent. It dropped to 70 percent in 1965, and stayed there until 1982, when Reagan pushed through his tax cut that dropped the top rate to 50 percent. Then, in 1988, it dropped to 28 percent. Under Clinton, the top rate rose to 39.6 percent. Bush dropped it to 35 percent, but Obama let that cut expire, so the top rate went back up to 39.6 percent. The Trump tax cuts will drop the rate this year to 37 percent. (Yes, I do understand that it is Congress that passes tax legislation, but the president in office has to sign the bill, and he always gets the credit or blame.)
Of course, the tax revenue picture is more complicated than the simple top rate percentage. You have to look at the brackets, tax credits, the presence or absence of personal exemptions, the increase in the standard deduction, and other features to compare one year with another. But overall, the Trump tax cuts have added $116 billion to the deficit just this year. And most of that money went to the wealthy. I am middle class, but my taxes will go up under the new Republican tax “relief.” This is why Republican candidates could not run on their sole legislative “victory” in the 2018 elections. It’s hard to buy votes with a tax cut when most people receive a few dollars and the wealthy get thousands or millions in savings.
What I am hoping for is a political movement that recognizes reality, that insists on raising taxes until we can pay for the government services we expect and demand, and that will pay down our massive debt. This will not be painless, but it will be responsible.