When Will They Ever Learn?

The continual claim one hears today from Republicans, including the President and the three men in the photograph below—that their new tax bill will  generate greater revenue for the government, produce higher wages for workers and increase the prosperity of the middle class—flies in the face of reason, as the article below explains. Thomas Piketty clearly stated this in his book Capital in the 21st Century. Many qualified economists (see below) have warned us against this erroneous belief, and now the warning appears in an editorial in the leading conservative business newspaper.

It remains only for us to wait and see these three men and numerous others fall into the hole of debt they will have dug with their obduracy. Unfortunately, all of us will have to suffer too. How will they explain it when lowering taxes doesn’t produce the growth and prosperity they have predicted for small businesses and the middle class? On whom will Trump’s supporters take out their rage?

BN-WG255_3iE5o_M_20171121082313Senate Majority Leader Mitch McConnell, Republican Senator Orrin Hatch and Treasury Secretary Steven Mnuchin at work on the new tax bill.  Photo: J. Scott Applewhite/Associated press

By WILLIAM A. GALSTON  Nov. 22, 2017 for The Wall Street Journal

Six months ago, Senate Majority Leader Mitch McConnell favored revenue-neutral tax reform. Despite the new GOP budget, which permits a $1.5 trillion increase in the deficit over the next decade, and despite estimates from the Joint Committee on Taxation that the Senate Finance Committee’s tax proposal would in fact generate this increase, he insists that he still does.

In a recent CNN interview, Sen. McConnell suggested that the tax cuts would generate enough economic growth to make up for the lost revenue. “I actually think it’s a fairly conservative estimate of how much growth we’re likely to get out of this pro-growth tax reform,” he said.

It depends on how he defines “conservative.” If he means the estimate favored by many conservative politicians, he may be right. But if he means the estimate most conservative economists are offering, he is dead wrong.

Consider the view of Douglas Holtz-Eakin, who served as Congressional Budget Office director under President George W. Bush. “If it’s a well-designed tax policy, it will partially offset the cost” of the tax cuts, he said. But “there’s no evidence anywhere that a tax cut of that magnitude, regardless of composition, will offset” the full cost.

Or consider the argument made by Gregory Mankiw, one of the country’s most respected conservative-leaning academic economists. In principle, he favors so-called dynamic scoring, which builds the effects of increased growth into revenue models. It is “potentially more accurate,” he wrote in the New York Times. But he adds a caveat: “It is also more easily abused by those who want to promote their policies with an unhealthy dose of wishful thinking.”

 So where is the line between solid analysis and wishful thinking? Professor Mankiw continued: “Tax cuts rarely pay for themselves. My reading of the academic literature leads me to believe that about one-third of the cost of a typical tax cut is recouped with faster economic growth.”

If Mr. Mankiw is right, then the Senate bill would add $1 trillion to the national debt over the next decade. And the actual outcome could turn out to be even worse.

Here’s why. As drafted, the Senate bill reduces the cost of tax breaks through phase-in and phase-out provisions. The bill earns a better budgetary score from the Joint Committee on Taxation by setting all individual tax breaks to expire by 2025.

Republican congressional leaders are sensitive to the criticism that this amounts to a bait-and-switch strategy to sell the tax package. Democrats are gearing up to charge that while the corporate rate reductions are permanent, many individuals would find themselves paying higher taxes by the mid-2020s.

In response, Treasury secretary Steven Mnuchin has said, “there are certain parts of this that expire, but we have every expectation that down the road, Congress will extend them.” He may well be right. If so, the real 10-year cost of the bill would be $2.2 trillion, adding nearly $1.5 trillion to the national debt. Republicans cannot have it both ways.

Moreover, this is not a good time to be adding to the nation’s debt burden. According to the CBO, we are already on track to add more than $10 trillion to the national debt over the next decade, raising it from an already high 77% of GDP to a sky-high 91%. If there is even one recession during this period, the debt will rise even higher. We’re in a deep hole, and the Republican plan would dig it deeper.

Standard economics tell us that the best time to stimulate the economy is when unemployment is high and output is well below its potential. This is not what we see today. The labor market stands at what most economists believe is full employment, and the gap between potential and actual output—which stood at 6% during the lows of the Great Recession—has virtually disappeared. Economic output has accelerated, and there are early signs of more rapid increases in both wages and inflation.

 Republicans seem to think that 2017 is 1981 all over again and that large tax cuts are needed to counteract economic slack. But the better analogy for our current situation is to 1986, when Republicans and Democrats came together on historic tax reforms that lowered rates and broadened the base, without adding to the deficit.

Republican tax-drafters must have known that they could lower corporate tax rates to internationally competitive levels and wipe out a slew of special-interest provisions—without worsening the deficit. They made a different choice.

We needed bipartisanship in the service of tax reform and fiscal responsibility. Instead, we’re getting a party-line bill that cuts taxes and increases the deficit—without even giving permanent tax relief to President Trump’s working-class supporters. I wonder what will happen when they find out. 

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