The debate over the Republican tax cut plan comes down to this: Opponents view it as a wasteful giveaway of much-needed government revenue to the wealthiest households and businesses that need it the least. Supporters argue that it will unleash significant economic growth, enough to offset its costs.
Full disclosure: I’m in the opposition. The idea of adding $1.5 trillion to the national debt over the next decade, of which almost half (47% of cuts in 2017) goes to the wealthiest 1% (average income: $3.6 million), seems totally misguided. No question, our code needs improvement, especially on the corporate side. But this plan has nothing to do with genuine tax reform.
Real reform would pay for lower rates by closing loopholes, and would be revenue neutral — the government would take in at least the same percentage of Gross Domestic Product in tax revenues as it does now. The Republican plan, by contrast, loses revenue while opening up a fat new loophole that encourages high-end earners to reclassify their income as profits from a pass-through business.
And what about the advocates’ arguments regarding unleashed growth? They turn out to be the same evidence-free, trickle-down sales job tax cutters have been making since Ronald Reagan was president.
Economic growth is a function of two broad factors: labor force and productivity growth, the latter being how efficiently workers produce the goods and services we want and need. In the last decade, both have significantly slowed. For the labor force, that’s largely due to our aging demographics. There’s nothing the tax code can do about the growing share of retirees.
Productivity is a more plausible target, because if businesses have higher after-tax profits, they could invest in more productive equipment or worker training. But here’s the thing: We have a long, empirical record showing little to no correlation between tax changes and business investment. I could easily cite the statistics, but better to cut to the chase and quote Warren Buffett, who knows a little something about investing: “I have worked with investors for 60 years and I have yet to see anyone … shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.”
Note also that U.S. businesses have been highly profitable for years now — that’s one reason the stock market’s been crushing it — and the cost of investment capital (the rate of interest) is very low. If firms wanted to make more productive investments, nothing’s stopping them, and there’s no reason to think a huge rate cut, from 35% to 20%, is going to do anything other than further boost their profits and share prices. In fact, that expectation is another reason U.S. equities have been on such a tear.
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What about wage growth? In an analysis that’s been widely pilloried, including by the economists whose work they cite, President Trump’s economics team claims that their big corporate rate cut will deliver at least $4,000 to every family. That’s a lot of chickens in every pot. But this claim depends on a chain of many weak links: The cuts will boost investment (nope), that, in turn, will boost productivity (maybe), and faster productivity will boost middle-class wages.
That last link is particularly problematic, as important work by the Economic Policy Institute has shown a long and persistent de-coupling of productivity growth and middle-class compensation.
All of which begs the question: Is there a tax plan that would boost growth and wages?
Believe it or not, the answer to the wage part is simple. The U.S. has an extremely effective pro-work, anti-poverty program called the Earned Income Tax Credit which significantly subsidizes the earnings of low-income working parents. Expanding the credit to more workers and increasing its value would be a surefire way — there’s no links in this chain — to raise the pay of low-income workers.
Productivity is much harder as economists simply don’t know what makes this critically important variable speed up or slow down. But in the long-term, it’s a good bet that investment in physical and human capital will help. As noted, the government can’t dictate private sector actions in this space, but it can make those investments itself, through productive public infrastructure such as transportation, water systems, air travel, ports and education, starting with preschool.
But we can’t make those public investments if we squander trillions on a wasteful tax cut. Not only will this benighted plan fail to “unleash growth.” By deeply worsening our fiscal outlook, it will block us from adopting policies with a much better chance of helping those who could use the help — none of whom, to state the obvious, reside in the top 1%.
Jared Bernstein, a former chief economist to former vice president Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of The Reconnection Agenda: Reuniting Growth and Prosperity. Follow him on Twitter: @econjared