“The key les­son of Ron­ald Rea­gan’s ‘voodoo’ sup­ply-side eco­nom­ics has not changed: tax cuts like these do not lead to faster growth, but only to lower rev­enues”

Financial Mirror (Cyprus) - - FRONT PAGE -

Hav­ing failed to “re­peal and re­place” the 2010 Af­ford­able Care Act (“Oba­macare”), US Pres­i­dent Don­ald Trump’s ad­min­is­tra­tion and the Repub­li­can con­gres­sional ma­jor­ity have now moved on to tax re­form. Eight months after as­sum­ing of­fice, the ad­min­is­tra­tion has been able to of­fer only an out­line of what it has in mind. But what we know is enough to feel a deep sense of alarm.

Tax pol­icy should re­flect a coun­try’s val­ues and ad­dress its prob­lems. And to­day, the United States – and much of the world – con­fronts four cen­tral prob­lems: widen­ing in­come in­equal­ity, grow­ing job in­se­cu­rity, cli­mate change, and anaemic pro­duc­tiv­ity growth. Amer­ica faces, in ad­di­tion, the need to rebuild its de­cay­ing in­fras­truc­ture and strengthen its un­der­per­form­ing pri­mary and sec­ondary ed­u­ca­tion sys­tem.

But what Trump and the Repub­li­cans are of­fer­ing in re­sponse to these chal­lenges is a tax plan that pro­vides the over­whelm­ing share of ben­e­fits not to the mid­dle class – a large pro­por­tion of which may ac­tu­ally pay more taxes – but to Amer­ica’s mil­lion­aires and bil­lion­aires. If in­equal­ity was a prob­lem be­fore, en­act­ing the Repub­li­cans’ pro­posed tax re­form will make it much worse.

Cor­po­ra­tions and busi­nesses will be among the big ben­e­fi­cia­ries, a bias jus­ti­fied on the grounds that this will stim­u­late the econ­omy. But Repub­li­cans, of all peo­ple, should un­der­stand that in­cen­tives mat­ter: it would be far bet­ter to re­duce taxes for those com­pa­nies that in­vest in Amer­ica and cre­ate jobs, and in­crease taxes for those that don’t.

After all, it is not as if Amer­ica’s large cor­po­ra­tions were starved for cash; they are sit­ting on a cou­ple of tril­lion dol­lars. And the lack of in­vest­ment is not be­cause prof­its, ei­ther be­fore or after tax, are too low; after-tax cor­po­rate prof­its as a share of GDP have al­most tripled in the last 30 years.

In­deed, with in­cre­men­tal in­vest­ment largely fi­nanced by debt, and in­ter­est pay­ments be­ing tax-de­ductible, the cor­po­rate tax low­ers the cost of cap­i­tal and the re­turns to in­vest­ment com­men­su­rately. Thus, nei­ther the­ory nor ev­i­dence sug­gests that the Repub­li­cans’ pro­posed cor­po­rate tax give­away will in­crease in­vest­ment or em­ploy­ment.

The Repub­li­cans also dream of a ter­ri­to­rial tax sys­tem, whereby Amer­i­can cor­po­ra­tions are taxed only on the in­come they gen­er­ate in the US. But this would only re­duce rev­enue and fur­ther en­cour­age Amer­i­can com­pa­nies to shift pro­duc­tion to low-tax ju­ris­dic­tions. A race to the bot­tom on cor­po­rate tax­a­tion can be pre­vented only by im­pos­ing a min­i­mum rate on any cor­po­ra­tion that en­gages in busi­ness in the US.

Amer­ica’s states and mu­nic­i­pal­i­ties are re­spon­si­ble for ed­u­ca­tion and large parts of the coun­try’s health and wel­fare sys­tem. And state in­come taxes are the best way to in­tro­duce a mod­icum of pro­gres­siv­ity at the sub-na­tional level: states with­out an in­come tax typ­i­cally rely on re­gres­sive sales taxes, which im­pose a heavy bur­den on the poor and work­ing peo­ple. It is thus per­haps no sur­prise that the Trump ad­min­is­tra­tion, staffed by plu­to­crats who are in­dif­fer­ent to in­equal­ity, should want to elim­i­nate the de­ductibil­ity of state in­come taxes from fed­eral tax­a­tion, en­cour­ag­ing states to shift to­ward sales taxes.

Ad­dress­ing the panoply of other prob­lems con­fronting the US will re­quire more fed­eral rev­enues, not less. In­creases in stan­dards of liv­ing, for ex­am­ple, are the re­sult of tech­no­log­i­cal innovation, which in turn de­pends on ba­sic re­search. But fed­eral gov­ern­ment sup­port of re­search as a per­cent­age of GDP is now at a level com­pa­ra­ble to what it was 60 years ago.

While Trump the can­di­date crit­i­cised the growth of US na­tional debt, he now pro­poses tax cuts that would add tril­lions to the debt in just the next ten years – not the “only” $1.5 trln that Repub­li­cans claim would be added, thanks to some growth miracle that leads to more tax rev­enues. Yet the key les­son of Ron­ald Rea­gan’s “voodoo” sup­ply-side eco­nom­ics has not changed: tax cuts like these do not lead to faster growth, but only to lower rev­enues.

This is es­pe­cially so now, when the un­em­ploy­ment rate is just over 4%. Any sig­nif­i­cant in­crease to ag­gre­gate de­mand would be met by a cor­re­spond­ing in­crease in in­ter­est rates. The “eco­nomic mix” of the econ­omy would thus shift away from in­vest­ment; and growth, al­ready anaemic, would slow.

An al­ter­na­tive frame­work would in­crease rev­enues and boost growth. It would in­clude real cor­po­rate-tax re­form, elim­i­nat­ing the tricks that al­low some of the world’s largest com­pa­nies to pay minis­cule taxes, in some cases far less than 5% of their prof­its, giv­ing them an un­fair ad­van­tage over small lo­cal busi­nesses. It would es­tab­lish a min­i­mum tax and elim­i­nate the spe­cial treat­ment of cap­i­tal gains and div­i­dends, com­pelling the very rich to pay at least the same per­cent­age of their in­come in taxes as other cit­i­zens. And it would in­tro­duce a car­bon tax, to help ac­cel­er­ate the tran­si­tion to a green econ­omy.

Tax pol­icy can also be used to shape the econ­omy. In ad­di­tion to of­fer­ing ben­e­fits to those who in­vest, carry out re­search, and cre­ate jobs, higher taxes on land and real-es­tate spec­u­la­tion would re­di­rect cap­i­tal to­ward pro­duc­tiv­i­tyen­hanc­ing spend­ing – the key to long-term im­prove­ment in liv­ing stan­dards.

An ad­min­is­tra­tion of plu­to­crats – most of whom gained their wealth from rent-seek­ing ac­tiv­i­ties, rather than from pro­duc­tive en­trepreneur­ship – could be ex­pected to re­ward them­selves. But the Repub­li­cans’ pro­posed tax re­form is a big­ger gift to cor­po­ra­tions and the ul­tra-rich than most had an­tic­i­pated. It avoids nec­es­sary re­forms and would leave the coun­try with a moun­tain of debt; the con­se­quences – low in­vest­ment, stalled pro­duc­tiv­ity growth, and yawn­ing in­equal­ity – would take decades to undo.

Trump as­sumed of­fice promis­ing to “drain the swamp” in Wash­ing­ton, DC. In­stead, the swamp has grown wider and deeper. With the Repub­li­cans’ pro­posed tax re­form, it threat­ens to en­gulf the US econ­omy.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.