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Make America Great Again: Don't Cut Taxes

Irwin M. Stelzer

Before we get into a brawl over whose tax cut is better than whose, wouldn’t it be wise to ask: Should we cut taxes at all? And if so, why?

The president says we need the largest tax cut in American history to get the economy growing. But it is already growing at something like a 3.1 percent annual rate, and we won’t know whether that’s sustainable until the effects of the storms in Texas and Florida are played out and stop affecting the growth rates we will see in the next few quarters. And if this rate is sustainable, we will face the hard question of whether the economy is capable of growing much faster.

Our 4.4 percent unemployment rate meets any reasonable person’s definition of full employment. Anyone who thinks there is a large reserve army of the unemployed sitting out there waiting for job offers that would materialize if the economy grew even faster should talk to employers in almost any industry, who are complaining of labor shortages.

Of course, lowering the corporate tax rate might increase businesses’ incentive to invest in new plants and equipment. But U.S. corporations are rich in unused cash and can borrow at interest rates that are low and likely to remain so for a very long time. Given this already-large pot of unused capital it is difficult to see how a cut in the tax rate on these companies will induce them to invest more than they already plan to. (A tax on retained earnings might do that, but that’s a conversation for another day.)

We are also told that by reducing the tax rate on repatriated earnings we will unleash a flood of cash into the coffers of America’s firms, and they will use this money to boost their investment in the United States. Never mind that the last time we tried that—it was Ronald Reagan who bought into the theory—the result was a series of share buybacks, not a lot of brand new plants. Now, there is nothing wrong with share buybacks: They put cash into the hands of folks who own the shares. But that is unlikely to do much for growth, since the supply side of the economy, afflicted as it is with labor shortages, won’t be able to grow faster in response to increased demand. And it won’t do much for the middle class and the poor, since share ownership is concentrated in upper-income groups.

What a tax cut will do—or at least what any of the reductions being bruited about will do—is increase the deficit.

Not by as much as a static computation of the amount of revenue lost, since there is something to be said for dynamic scoring that takes account of reactions to reduced taxes. But no serious person believes that the response is so great as to make these tax cuts “pay for themselves.” So it will take overtime operation of the accounting fudge factory to make it seem that tax cuts will not increase the deficit and the size of the national debt. Which are already approaching levels relative to the size of our economy that economists believe will stifle growth.

There is a case for revenue-neutral tax reform. Lower the employee-payroll taxes and increase the top tax rate on the highest earners and one inequity of the total tax system would be reduced.

End the indefensible gift to millionaire and billionaire hedge fund operators—treating their ordinary incomes as if they were capital gains—and you will take another step down the road to greater equity.

End the deductibility of interest-paid on corporate debt and you will deleverage an inefficient, highly-leveraged corporate sector, which is less able than it should be to withstand either a recession or a rise in interest rates.

If you you think it is possible—not certain, but merely possible—that the climate is warming as a result of carbon emissions, then you might consider a starter-tax on carbon.

And if in addition to all of that, you believe that the fact that president thinks a border adjustment tax is too complicated (which says more about him than about the tax) and really want to level the international playing field, you could reconsider a border adjustment tax that puts our automakers on an equal footing with Germany’s high-polluting companies.

Then and only then would it be time to start arguing over which taxes to cut, or programs to expand.

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