TAX CUTS, YES, BUT AT WHAT COST?
Raise your hand if you think the American economy is delivering on its potential. Anyone? Class? Anyone? We thought so. Growth is anemic, impinging on prosperity for everyone while leaving many people far behind. There is hurt in this country, and concern about its future.
President Donald Trump won the presidency on a promise to goose growth to a faster clip. The U.S. standard of living would improve significantly if annual growth grew to 3 percent from roughly 2 percent, where it has languished since the Great Recession ended in June 2009. The fastest way to get there is …. Anyone? Class? Anyone? The answer is tax reform.
The country is long due for an overhaul of its tax code, a jumble of unfair burdens and loopholes that holds back business activity. Trump has the right idea: His plan focuses on cutting taxes for businesses to encourage investment at home, to create growth and jobs. Tax rates for individuals also would come down, among other changes. But we aren’t going to sweat the details here because there are so few. Trump and his team are working off a fact sheet that could have been squeezed onto two Post-It notes.
That’s OK because the numbers and components outlined last week surely will change. Trump’s ideas are a starting point for negotiations with Congress over legislation. The good news is that Republicans, who control Congress, seem engaged, especially in the House, where leaders have worked on their own tax reform proposals for years.
Going forward, we hope to see a robust debate that also involves Democrats. They have just as much to gain by delivering a brighter future to constituents. Fun fact: The last big tax reform achievement, in 1986 under President Ronald Reagan, came from both sides of the aisle. Yes, the partisan chasm is far wider today. It’s also true that during President Barack Obama’s two terms in office we saw no interest by Democrats in using tax reform as an engine of growth. This has a chance now that a growth-first president occupies The White House.
Our biggest concern is that the president’s proposal included no third Post-It note, the one that would analyze the impact of his tax cuts on the national debt and, crucially, ideas for balancing those cuts with additional revenue. Due to decades of reckless spending, the U.S. has dug its way into a nearly $20 trillion hole that threatens to sabotage Social Security and Medicare. Talk about a bleak future.
Treasury Secretary Steven Mnuchin says not to worry — tax reform will pay for itself because more economic activity will generate more tax revenue. Sorry, that’s likely fantasy math. Harvard economist N. Gregory Mankiw, who worked for President George W. Bush, told The New York Times that a general rule of thumb is that only about one-third of the cost of tax cuts is recouped by faster economic growth. The rest must come from corresponding tax increases, closing loopholes and reducing spending, or the national debt will grow. Trump and Congress will have to be responsible.
Tax watchdog groups provide estimates that are frightening to consider. The nonpartisan Committee for a Responsible Federal Budget says Trump’s cuts could cost the Treasury $5.5 trillion in lost revenue over a decade. Without offsets, that would increase federal debt to 111 percent of gross domestic product by 2027 — the highest in U.S. history — from an already worrisome 77 percent today.
Do taxpayers who are now $20 trillion in the hole want to spend trillions more imperiling the future for their children and grandchildren, in order to give some people jobs now? Anyone? Class? Anyone?
The Chicago Tribune