Tax wager is worth the gamble
The Republicans’ tax legislation is built on economic projections that are as confidently as they are cheerfully made concerning the legislation’s shaping effect on the economy over the next 10 years. This claim to prescience must amaze alumni of Bear Stearns and Lehman Brothers, which were 85 and 158 years old, respectively, when they expired less than 10 years ago in the unanticipated Great Recession.
The predictions of GDP and revenue growth assume, among many other things, continuation of the current expansion. It began in June 2009 and has been notable for its anemia relative to other post-1945 expansions: Its average annual growth rate has been 2 percent; theirs, 4.3 percent. But it also has been remarkably durable. It is 102 months old; the average since after World War II is 58 months. Unless the business cycle has been repealed, a recession is almost a certainty during the 10-year window for which the tax bill has been tailored.
What the legislation’s drafters anticipate, indeed proclaim, is that Congress will not allow to happen what the legislation says, with a wink, will happen. So, this might mark the historic moment when Washington decided that it no longer will bother to blush. The legislation says the tax reductions for individuals will expire by 2025. Treasury Secretary Steven Mnuchin, however, says “we have every expectation that down the road Congress will extend them.” Of course Congress will. The phantom expiration is an $800 billion fudge, a cooking of the books in order to cram the tax bill into conformity with arcane parliamentary procedures that make the measure immune to filibuster. We have been down this road before: For the same reason, some George W. Bush tax cuts of 2001 were scheduled to expire at the end of 2010; 82 percent of them (measured by revenue) did not.
The Democrats’ denunciation of the Republicans’ tax cuts because they especially benefit the wealthy is a recyclable denunciation of any significant tax cut. The top 1 percent of earners supply 39 percent of income tax revenues, the top 10 percent supply 70 percent, the bottom 50 percent supply 3 percent, 60 percent of households pay either no income taxes (45 percent) or less than 5 percent of their income, and 62 percent of Americans pay more in payroll taxes than in income taxes. So, any tax cut significant to macroeconomic policy — any that might change incentives sufficiently to substantially change businesses’ and individuals’ behaviors — must be primarily a cut for the affluent.
Democrats pretend to worry that Republicans are executing a diabolical double play, using tax cuts to placate donors, then citing the cuts’ enlargement of the national debt as an excuse to cut entitlements. Surely Democrats know that Republicans are not insubordinate to their president, who has vowed to oppose any significant (i.e., touching Social Security or Medicare) entitlement reforms. Besides, whenever Republicans run large budget deficits — the tax legislation probably means that the next decade’s will be even larger than they would have been — they serve the Democrats’ basic agenda: They legitimize the bipartisan penchant for making big government seem cheap. Republicans, too, give people $X worth of government services and charge the recipients $Y, with Y significantly less than X.
In 2002, when Dick Cheney — a strict constructionist, but not of economic data — said “Reagan proved deficits don’t matter,” the publicly held national debt was 33 percent the size of GDP; today it is 75 percent. At some point, the debt’s size matters, and we seem determined to learn the hard way where that point is.
This tax legislation, an amalgam of earnest hoping and transparent make-believe, is a serious lunge for sustained 3 percent growth. Without this, the economy, and hence the entitlement state, will buckle beneath the strain of 10,000 of the elderly each day becoming eligible for Social Security and Medicare. The Republicans purport to know how changed tax incentives will affect corporations’ and individuals’ decisions, and how those decisions will radiate through the economy. Republicans do not know — nobody, including the Republicans’ equally overconfident critics, does -- but they might be right, and their wager is worth trying.
Economics is a science of incentives, and like all sciences it is never “settled.” Both sides, with their thumping predictions, have given hostages to the future, which will deal harshly with some. Perhaps most. Possibly all of them.