GOP betting that fix for U.S. economy will defy warnings
The tax WASHINGTON — overhaul of 2017 amounts to a high-stakes gamble by Republicans in Congress: That slashing taxes for corporations and wealthy individuals will accelerate growth and assure greater prosperity for Americans for years to come.
The risks are considerable. A wide range of economists and nonpartisan analysts have warned that the bill will likely escalate federal debt, intensify pressure to cut spending on social programs and further widen America’s troubling income inequality.
Congress is expected to vote this week on the bill, the most far-reaching rewrite of the U.S. tax code since 1986. It would shrink corporate taxes, prod companies to return trillions in profits they’ve kept overseas, cut taxes on wealthy estates and drop tax rates — but only temporarily — for individuals.
It puts its faith in the pros- pect that lower taxes will make corporate America turn more generous and spend more expansively.
“This is a bet on our coun- try’s enterprising spirit, and that is a bet I am willing to make,” Tennessee Republican Sen. Bob Corker said Friday after dropping his previous opposition to higher defi- cits and throwing his support behind the bill.
In pushing the plan through a divided Congress — no Dem- ocrat in either the House or Senate backs it — Republi- cans have insisted that the economic virtues they envision from the tax-cut package outweigh the risks that many analysts are warning about.
“This is going to be one of the greatest gifts for the mid- dle income people of this country that they’ve ever gotten for Christmas,” President Donald Trump said Saturday as he prepared to leave the White House for the weekend. “Jobs are going to come pouring back into this country.”
The legislation would add at least $1 trillion to federal deficits that were already sure to swell as baby boom- ers retire and draw on Social Security and Medicare. And the tax-cut’s gains are skewed toward wealthy taxpayers, who historically are less inclined to spend additional money than are households of more modest means. One likely result is that corporations and rich individu- als will widen the economic gap between themselves and everyone else.
Even the political calcu- lus for the Republicans looks questionable: A Quinnipiac University poll found that American voters, convinced that the benefits will flow mainly to corporations and the wealthy, oppose the plan 55 percent to 26 percent.
But Republicans have char- acterized the brew of tax cuts as an economic elixir. The job market appears healthy. But the pace of economic growth, though it’s perked up the past two quarters, has been underwhelming for years. From 2010 to 2016, U.S. growth averaged 2.1 per- cent a year, a pittance com- pared with the 3.2 percent average annual growth from 1948 through 2016.
Like its counterparts in Europe and Japan, the U.S. economy has been slowed by a slump in worker productivity, a vital ingredient for a robust economy. U.S. productivity — worker output per hour — trudged ahead at an average annual rate of just 0.6 percent a year from 2011 to 2016, down sharply from a post-World War II average of 2.1 percent.
The more productive that workers are, the more their employers can afford to pay them. And the more that workers are paid, the more they can propel consumer spending, the economy’s primary fuel.
Republicans say their cor- porate tax cuts offer a solution to the productivity slump. Their plan will cut the corpo- rate tax rate from 35 percent to 21 percent. Multinational corporations would receive a one-time tax break on profits they’ve kept overseas, thereby encouraging them to return the money to the United States. The thinking is that these changes would induce companies to invest in equipment, software and plants that would make their workers more productive. As these workers became more efficient, the thinking goes, they would be rewarded with higher pay. An effusive White House predicted in October that the average American household would enjoy a $4,000 raise.
Rising wages could ease another big economic prob- lem: a shortage of workers. The percentage of Americans who are either working or are looking for work has declined as the vast baby boom generation retires. To grow at a healthy pace, an economy steady needs a steady infusion of workers.
“To the extent this heats up the economy, that will help draw people back into the labor force,” says Phillip Swagel, a University of Mary- land economist who served in President George W. Bush’s Treasury Department.
But it’s more than just an aging population: Even work- ing-age Americans — ages 25 to 54 — are less likely to work than they used to, in part because so many blue-collar jobs have disappeared.
Douglas Holtz-Eakin, president of the conservative American Action Forum and former director of the Congressional Budget Office, and other supporters of the tax plan don’t deny that the tax plan will elevate deficits. But they insist that it will be worthwhile. They argue that companies will use their windfalls to hire, expand, invest and raise pay — and thereby energize the econ- omy.