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It's a Turkey: Trump's Tax Reform Is Good for Corporations, Bad for Federal Debt

Irwin M. Stelzer

Thanksgiving has come and gone, diets have been broken, and some 88 percent of us have eaten turkey, carving up some 46 million birds in the process. The hunter-gatherers are safely home from the malls—or at least most of them are. The less courageous stay-at-their-computers are resting their fingers for another surge on Monday, when the time they spend online is their employers’.

This year the dinner ritual had real significance for economic policy. The average cost of a meal for a gathering of 10 came to $49.12 per person, down from $49.87, decrease of 1.5 percent from last year, to the lowest level in 5 years. The Farm Bureau Federation says that the rise in the cost of pumpkin pie mix, whipped cream, fresh cranberries, and stuffing was more than offset by declines in the prices of turkey, sweet potatoes, and bread rolls. Who could oppose these savings for the non-rich, whose incomes have more or less stagnated in recent years?

The monetary policy committee of the Federal Reserve Board, that’s who.

These policymakers want inflation to run at an annual rate of 2 percent. The theory seems to be that a modest increase in inflation makes it easier for borrowers to repay debt in the depreciated currency, and then borrow more from lenders who don’t mind seeing the money they have lent being repaid in dollars that are worth less than those they have lent. Or something. Such is the current state of economic theory.

The central bank has hit its target, first set in January 2012, only once. Since then, inflation in America has averaged 1.3 percent annually. But with the unemployment rate down to 4.1 percent, the monetary policy committee worries that frantic bidding for scarce workers—which is already occurring in many industries—will drive up wages. Who could object to some wage increases for a workforce that has long gone without any? The policymakers at the Fed. They worry that higher labor costs will carry the inflation rate to well above their 2 percent target.

The persistence of below-target inflation makes it difficult for Janet Yellen, in the chair until the end of January, to explain why the Fed is raising interest rates at a time when the Trump administration wants to cut taxes to increase the rate of economic growth, now running at a rate of around 3 percent annually.

Trump says those who claim the cuts will add $1.5 trillion over the next 10 years to the already swollen national debt are wrong. Led by Treasury secretary Steve Mnuchin (who doesn’t know better) and Trump’s top economic adviser, Gary Cohn (who should) the president’s team contends that the tax cut will pay for itself by generating more jobs and investments, and therefore higher tax revenues. Count me with the sceptics.

There is no doubt that reducing taxes will stimulate growth. But not enough to recoup all of the foregone revenue. Perhaps the most reliable estimate comes from Harvard professor Gregory Mankiw, who says that his survey of the academic literature leads him to believe that the typical tax cut recoups about one-third of the cost of the cut. That would reduce the increase in the debt to a mere $1 trillion. But buried in the fine print are gimmicks that make the $1.5 trillion an underestimate. The more honest figure is $2.2 trillion according to the Committee for a Responsible Federal Budget.

Whatever the increase in our debt might turn out to be, we would add it to the debt already set to be incurred before these tax cuts, and come to the key number among the many being bandied about: If we stay on this course, in about a decade our national debt will be roughly equal to our GDP. That’s a level that would make it difficult for the economy to grow, and would require interest payments that would swallow a large portion of our income.

The House has already passed a tax bill, and the Senate will try to follow suit, although it has a very different version. As of this writing, majority leader Mitch McConnell does not have the votes to pass the Senate bill. If he can manage to satisfy the hold-outs, passage of a House-Senate compromise is deemed likely, for two reasons. The president wants something he can sign by Christmas, a sort of present for an un-adoring populace. And Congress and the president want to prove they can get something—anything really—done, after failing to repeal and replace Obamacare. Neither of these reasons has anything to do with the national interest, which probably requires a tax increase, but that’s a story for another column.

If Trump does get his wish to play Santa, some Americans will find cash in their stockings, others a lump of coal (one of the president’s favourite fuels). The bulk of the tax cuts will go to reduce the current corporate tax rate from 39.1 percent—although the real corporate rate today is effectively 28 percent after all the deductions are applied—to 20 percent. Trump says with such low rates it will be boom time in America. Critics say that corporations already are earning record profits, have huge piles of unused cash, and will plow their extra after-tax earnings into dividends and share buybacks, neither of which are likely to create many new jobs or find their way into workers’ pay packets.

The overall effect of this so-called tax reform is to tilt the scales even more in favor of the better-off:

  • Corporations, and the big ones at that, pay lower rates.
  • The special tax advantages of hedge fund operators, derided as “getting away with murder” by candidate Trump, are largely preserved.
  • Exemptions from the inheritance tax are to be made more generous, and the tax eventually repealed.
  • “Commercial real estate . . . fares well in tax plan,” trumpets a New York Times headline. The industry’s chief lobbyist claims Trump “has an insight” into the industry “that most people don’t have.” And also an interest.

Meanwhile, graduate students who grade papers and teach in lieu of paying tuition, will henceforth have to pay tax on their hypothetical income and it will be more difficult for some taxpayers to deduct medical expenses. You get the idea: cuts for corporations must be made up by increasing taxes on others. And by borrowing.

There are lessons here for tax collectors everywhere. First, unless you are willing to reduce entitlements—social benefits—almost the only feasible way to reduce tax rates is to finance cuts by borrowing. Second, cutting taxes is easy, reforming the tax code is well-nigh impossible. Special interests—big business, trade unions, the elderly and others—will always have their say.

Finally, prepare to be amazed at the flexibility of business leaders. Almost exactly five years ago, Jamie Dimon, CEO of JPMorgan Chase, and dozens of his peers agreed that, “The inability to face our fiscal reality is a concern.” Now that tax cuts are aimed at benefiting their companies, few chief executives seem concerned about the addition of $1.5 trillion to our national debt.

There is historic precedent for such a reversal of positions. In Britain, when socialist Nye Bevan ran into doctors’ opposition to the establishment of the National Health Service, he won them over by assuring them of high incomes—“stuffing their mouths with gold” as he described it. Trump has overcome business executives’ opposition to increases in the national debt by stuffing their pockets with tax cuts. Bevan called it politics, Trump calls it The Art of the Deal. Dispassionate observers might call it a bribe.

So much for what has Americans unhappy with the political class. Get out of Washington, and there is more to life than Nancy Pelosi and Mitch McConnell, not to mention the tweeter-in-chief.

According to a handy summary by Axios, Pew reports that “86 percent of Republicans believe they are on the way to achieving the ‘American Dream’ or have achieved it, along with 80 percent of Democrats. . . . Only about one-in-five (17 percent) say the American dream is ‘out of reach’ for their family.” And Gallup adds that “the proportion of Americans who reported they were satisfied with the way their life was going reached 87 percent, up from 78 percent in 2011 and only one percentage point below the highest number reported since the poll question was first asked by Gallup in 1979.”

Most Americans are unhappy with their president (approval rating 38 percent) and think even less of their Congress (approval rating 17 percent). But there is more to life than politics. A large majority of us believe the American Dream is alive, well, and attainable.

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