Note: This is part of a series. Part I can be found here.
OPINION - This series aims to address some of the considerations behind the White House’s pursuit of pro-growth tax reform that lowers the corporate income tax rate and provides tax relief to families and small businesses. Part I focused on the country’s recent experience with pro-growth tax cuts. Part II will analyze how Trump’s plan could impact the economy and the federal budget.
How healthy is the economy? The first quarter of 2017 saw economic growth of only 0.7%. Economic growth has averaged 1.9% annually since 2000. Economic growth is a function of government spending, consumer spending, business investment, and trade and it is most heavily influenced by hiring and productivity. It’s become common practice among politicians, especially populists, to lament that economic measures such as gross domestic product (GDP) and the unemployment rate do not capture the real-life experiences of most people. They have a point, as seven years of growth above 1% has not materialized in greater confidence for most Americans. Many still feel like the recent recession never ended, and in parts of the country, it really hasn’t. Throughout America, there are cities and towns that never fully recovered, and increased productivity means absolutely nothing to American workers if it’s the result of offshoring, automation, and the hiring of more foreign-born workers. It is this experience that drove Donald Trump’s and Bernie Sanders’ campaigns, and it is this “carnage” that Trump’s economic platform aims to address.
The ostensible purpose for cutting the corporate income tax rate to 15% is to make the country’s economy more competitive in the race for global capital. Trump has also proposed allowing the owners of limited liability corporations that currently file as individuals to pay the lower corporate income tax rate in order to free up more capital for small businesses; that would enable them to hire more workers and invest in equipment. These ideas form the basis of the pro-growth side of Trump’s proposal. The other side can be called the pro-family side and includes raising the standard deduction to $24,000 for families, eliminating the alternative minimum tax, ending the estate tax, eliminating most itemized deductions, and reducing the current bracket levels from seven to three brackets of 10, 25, and 35%. According to the Gary Cohn, the president’s chief economic adviser, the result of these changes would be a 3% increase in the country’s gross domestic product (GDP), but the public has a right to worry about the proposal’s impact on the federal budget.
To reach economic growth of 3% annually, American business would likely have to hire a lot of displaced workers. If a growth rate of 1.9% misses the real-life experience of many families, it probably wouldn’t at 3%. However, a temporary tax relief package could be of little solace, even though global markets are becoming less desirable places to invest, and there would likely be a rapid infusion of cash if the United States lowered taxes on corporate income earned overseas. If they didn’t invest in hiring more workers, though, any resulting growth would be short-lived and Trump’s pro-growth tax cut would go down as a predictable, and costly, failure. Luckily, hiring is off to a good start in 2017 and will likely continue but economists do not project the economy will grow as rapidly as the White House claims.
Are deficits and interest rates a concern? Speaker of the House Paul Ryan has staked his entire reputation on warning of an impending debt crisis driven by overspending. With the federal government locked in to spend more than $4 trillion annually for the next ten years, it’s a very real concern. Spending on Social Security, Medicare, and Medicaid is adding to the country’s long-term debt more and more every day. Unless Republicans plan to run the discretionary budget they oversee through a woodchipper, it’s hard to imagine they’ll find a way to pay for everything.
That is really what the talk of economic growth is all about. As Vice President Mike Pence explained in a recent interview, “if we don't get this economy [growing] at 3% or more as the president believes that we can, we are never going to meet the obligations that we've made today.” He’s right, but 18.4% is the historical average for federal revenue as a percentage of GDP, and spending is set to consume no less than 22% of GDP within the next ten years. High growth or low growth, that is a recipe for prolonged, increasing deficits.
The White House released a budget proposal in March that aimed only at maintaining the current deficit and focused exclusively on cutting non-defense discretionary spending. Like the tax cut proposal, that is basically their wish list. Congress writes the actual legislation, Congress controls the discretionary spending purse, and Congress has to ensure deficit neutrality if they wish to make the tax cuts permanent. Supply-side tax advocates have long argued that it is wrong to subject pro-growth tax reform to such a rubric, but Republicans can’t complain about increasing deficits when the president is a Democrat and insist they aren’t a concern under a Republican president.
At this point, anything other than a truly revenue-neutral tax reform should be off the table. The country can’t afford a potential loss of revenue without assurances that spending will come down to a sustainable level, and betting on hopes that such cuts will lead to an era of high, sustained economic growth is too much of a gamble.
You can follow the author on Twitter @CACoreyU
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