Fear Not William Gale, Tax Cuts Will Make America Great Again
In a column on published at RealClearMarkets last Friday,William Gale, who is a Senior Fellow in Economic Studies at the Brookings Institution and Co-Director at the Urban Brookings Tax Policy Center, laid out his case for why theproposed tax cut plan put forth by President Trump will not make America great again. It is one of the most mistaken pieces I've read in a while.
He started by referring to the argument that the Reagan tax cuts resulted in a major economic boom as “Alternative facts.” What he meant by this he never explained, but he wants you to believe that it never happened because he has applied that label. Yet the robust economic growth of the 1980's that occurred alongside job creation at a record pace and that nearly doubled revenue to the federal government was very real. I know, I lived it. Plus I can read. Federal tax receipts in Fiscal Year 1980, before the tax cuts, were $517 billion. Eight years later they were $991 Billion, almost double. He tries to make a case that the economic growth of the 80's actually was the result of expansive monetary policy that slashed interest rates, invoking Martin Feldstein's name to add credibility to his claim, a military buildup (government spending), and the Baby Boomers supplying young men and women to the workforce. Talk about “alternative facts”!
To the contrary, the 80's, at least if we're going to refer to the Fed as the driver of credit availability (a debatable presumption, but this is what Gale believes), were a time of very tight monetary policy, courtesy of Fed Chairman Paul Volker. As for the dollar, unlike during the Nixon/Ford/Carter decade of persistent weakness, it soared during Reagan's presidency against foreign currencies, and also gold. Figure that the greenback started the decade at 1/875th of an ounce of gold, but in 1989 it purchased 1/380th of an ounce. So this odd theory about easy money, or much more ridiculous, "easy credit" (Gale's plainly never started a business) doesn't hold water.
How about the low interest rates he's claimed? If I told you that the 10-year treasury started the 80's at 10.21% and ended the decade at 8.21% would you call that slashing interest rates? Crediting government spending on a military build up as a cause of economic growth gets it exactly backwards, as dollars taken from actors in the private economy (that's what income taxes do) inhibit the ability of the economy to expand at an even faster rate. If its true that Baby Boomers looking for work caused the economy to boom, shouldn't the record number of unemployed and underemployed workers in the last ten years have caused similar a boom?
Gale does agree in principal that well designed tax cuts can increase economic activity since the lower marginal rates boost the reward for firms and individuals, but he never tells us which tax cuts are well designed and which ones aren't. Mr. Gale goes on to expose the downside to tax rate cuts. Lower rates reduce the need for people to work as hard to achieve a desired living standard. Apparently earning more and keeping more has a downside. Really?
Gale claims to be concerned that if the federal corporate tax rates are reduced, the government will lose a “substantial” amount of revenue such that the deficit will increase. The current corporate income tax produces about $300 Billion a year. Like many, he confuses tax rate cuts with reductions in taxreceipts. The game that Mr. Gale is playing is to get you to believe that if you cut the current tax rate from 35% to 20%, a rate cut of 42%, corporate tax revenue will fall by the same percentage, reducing revenue by $126 billion per year, or about 3.2% of federal spending. Point one: 3.2 percent is not substantial. Point two: Mr. Gale's reasoning only works in math class and not in real world economics, where policies that influence investment and production, not a simple math equation as he would have you believe, are important. He misses completely that incentives for growth will create a larger economy and a bigger tax base, and as the 80s showed, lower rates applied to a larger tax base produce more, not less government revenue.
Near the end he reveals his formula for a better economy, and it has nothing to do with tax cuts. He tells us “Growth is clearly a priority, and there are many ways to achieve it. Evidence indicates that investing in infrastructure or offering people better education, health, and housing can boost long-term growth prospects.” Deficit-financed tax cuts, on the other hand, just won’t get the job done.
The problem here is that we tried that already and it failed miserably. Does Gale forget the deficit spending that produced the $800 billion dollar stimulus plan and all of its infrastructure and educational programs, or the ACA which spent all kinds of money and only increased healthcare costs while reducing healthcare options? Was he asleep during the subsidized housing boom and bust? All that government spending produced was the worst post-war recovery on record, and Mr. Gale wants more of it?
Tax cuts may not be ideal if your perspective of an ideal economy is government-centric, as is Mr. Gale's, but if you'd like to enjoy economic growth that makes room for pay raises and a lifestyle that's easier to afford, you're going to love tax cuts that, for shrinking the burden of the big Other (that's your federal government) on every individual, will make America much greater for doing just that.
