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Tags: donald trump | tax | cuts | economy

Trump Tax Cuts Are Bad Idea With a Bright Future

Trump Tax Cuts Are Bad Idea With a Bright Future

(Getty/Joe Raedle)

By    |   Saturday, 03 December 2016 10:55 AM EST

In just over a month, Donald Trump will be the president of the United States. What’s he going to do with that office?

That’s harder to tell than it is with most presidents-elect. Usually, there has been some extended discussion of issues during the campaign, so we have an idea of the main items on our new president’s agenda, and which of them he is likely to tackle first. When George W. Bush came in, we knew that big tax cuts were in store; when President Obama came in, we knew that health-care reform would be a priority.

But Trump's policy agenda has so often seemed to consist of vague wishes. Moreover, his party is far more divided than any party has been in recent history; what the Republicans in Congress want (Obamacare repeal and tax cuts) is not necessarily what Trump is interested in (immigration reform, infrastructure spending, and jawboning companies into keeping their operations here, as far as I can tell). How that will play out is yet to be seen. Even Trump's priorities largely remain to be seen. He often seemed to waffle over whether he really wanted to repeal Obamacare, and as for "replace" … he’s offered rather more lyrical praise for single-payer systems than is traditional among Republicans.

There is one unfortunate area where traditional Republicans seem to be in sync with New and Improved Republicans Special Trump Edition Version 3.0. On tax cuts, the president-elect has out-Republican’d the Grand Old Party. Most of the primary contenders proposed wildly fiscally irresponsible plans that required  unreasonably high GDP growth projections (and a lot of blinking and swallowing) to avoid unsustainably ballooning the deficit.

Trump did not simply ignore questions of fiscal responsibility; he flung them down and danced upon them, offering a large and regressive tax cut that the Committee for a Responsible Federal Budget estimated would add about $4.5 trillion to the deficit over 10 years. And that’s before you consider the additional interest we’d have to pay on all that new debt. “Under Trump’s campaign proposals,” the organization has written, “debt would exceed the size of the economy before the end of a theoretical second term and approach 150 percent of GDP after two decades.”

It’s not that I don’t want smaller government. I’m a libertarian; my ideal government is about the size of one of those miniature dogs that have to wear coats all the time because they don’t generate enough body heat to keep themselves warm. The problem is, the voters don’t want smaller government. They’d like to pay lower taxes, of course, but they go wild if anyone suggests cutting any sizeable portion of the services that those taxes pay for. By and large, politicians have refused to cut spending anyway. And without doing so, you can’t have a tax cut in any real sense, because to spend is to tax (eventually).

What do I mean by that? Well, what happens if you cut taxes without cutting spending to match? You have to pay for it by issuing new debt. Why do people buy your debt? Because they expect to be paid back more than you borrowed. And where do you get the money to pay back the debt, with interest? Eventually it has to come out of tax revenue.

If Republicans push through a huge tax cut without substantial offsetting decreases in spending, they will not actually be cutting taxes; they will simply be transferring those taxes into the future. This will be a good deal for some people (those who die before the bill must be paid), but for anyone lucky (?) enough to be around for a while, it’s at best a wash. And of course, it’s a particularly bad deal for young people who will have to pay the higher taxes of the future but don’t earn enough now money to benefit from the tax cut in the present. It’s hard to make an ideologically coherent argument in favor of this sort of transfer, and if you could, such an argument certainly couldn’t be called conservative.

In reply, Republicans might claim that tax cuts will make the economy grow faster, so the people in the future will be richer, and can afford to pay their higher future taxes while still having some extra money left over for themselves. The problem is that there’s no evidence that tax cuts have such a strong effect on economic growth. There is probably some marginal effect on growth from cutting taxes, as some people decide to work harder because a lower marginal tax rate makes work more rewarding. But tax rates are not the only factor that determines economic growth, or even (at current levels of taxation) the most important factor. It is extremely unlikely that Trump’s tax cuts will generate enough extra growth to make them a good deal for future generations.

Alternatively, those arguing for tax cuts might say that cutting taxes now helps you cut spending later to pay for those cuts. The idea is that when taxes are low, people are resistant to letting them rise. Cutting taxes will therefore make it harder for future Democratic administrations to raise spending -- and as deficits rise, that will put pressure on the government to actually starting cutting what we spend now.

In the 1980s, this theory, popularly known as “starve the beast,” might have been plausible. At this point it is, to paraphrase Ambrose Bierce, a vagrant notion, wandering around the right half of the political spectrum with no visible means of support.

The Bush tax cuts did not keep Obama from enacting the biggest entitlement expansion in decades, and it was the Democrats' stinging loss in the 2010 midterms, not the legacy of Bush’s tax policy, that kept him from adding still more government spending in the latter years of his administration. William Niskanen has convincingly argued that unfunded tax cuts actually make it easier to increase government spending, because current voters get to enjoy the goodies without feeling the sting of paying for them.

We can’t afford to try the same experiment yet again and hope that this time, we get a different result. The Committee for a Responsible Federal Budget estimates that Trump will enter office with the highest level of federal debt since Harry Truman. Unlike Truman, however, he will not be dealing with a large-but-shrinking war debt; he will be facing a steadily growing entitlement problem, one that will raise our debt-to-GDP ratio still higher if we keep all our laws just as they are. Adding big tax cuts to the mix would turn a sizable problem into a fiscal disaster.

Such high debt-to-GDP ratios may act as a drag on economic growth, and will definitely leave the country with less fiscal capacity to manage any future crises. That’s bad policy. It's not even good politics. As I’ve noted before, thanks to previous rounds of tax cuts, most people don’t pay enough income tax for Republicans to pick up new voters by fiddling around with the marginal tax rates.

Nonetheless, I’m very worried that huge tax cuts will end up high on our new president’s agenda, not because they’re a good idea, but because most of his party’s factions can agree on them. With the U.S. government already in a fiscal hole, Republicans may well decide that the easiest thing to do is to keep digging.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.


Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”


© Copyright 2023 Bloomberg L.P. All Rights Reserved.

In just over a month, Donald Trump will be the president of the United States. What's he going to do with that office?That's harder to tell than it is with most presidents-elect. Usually, there has been some extended discussion of issues during the campaign, so we have an...
donald trump, tax, cuts, economy
Saturday, 03 December 2016 10:55 AM
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