With Tax Cuts, the Deficit Obsession Obnoxiously Hides the Spending Problem

With Tax Cuts, the Deficit Obsession Obnoxiously Hides the Spending Problem
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“Most Economists Agree: Trump Tax Plan Will Widen Budget Deficit”, blared the headline last Friday in an article about President Trump's proposed tax cuts. Media outlets often alter a writer’s original title, so I don’t know if the authors or an editor wrote the title, but it’s a very skewed title.

The inescapable first impression of the title is its negativity. The message is unmistakable: Trump’s proposal to cut taxes is a bad idea. Perhaps the negative spin is explained by the old cliché in the news business, “no news is good news.” It would have been just as easy to give the story a positive title. Examples: “Trump Proposes Tax Cuts to Stimulate Growth” or “Tax Plan Would Make American Businesses More Competitive.” No such luck. Trump-bashing must be more fun.

A second possibility is that there were partisan motives at work. Have you ever noticed how some people (namely, progressives) suddenly get religion about fiscal responsibility and worry about federal deficits only when tax cuts are in play? The media must have known that Democrats would jump all over the tax proposal, but I guess they wanted to get the first punch in on behalf of the progressive cause.

It is possible, though, that there is a more innocent reason for the critical tone of the title. It could be attributable to simple economic ignorance – an erroneous notion about how the world works. Apparently, the 26 economists surveyed by Bloomberg News for this story forgot to include economists’ standard qualifier for predictions: ceteris paribus (i.e., assuming everything else stays the same). The ceteris paribus qualifier applies here in two different ways. First, the tax rate changes themselves will alter economic calculations and behavior, and therefore affect the amount of tax revenue. Second, tax revenues are not the only issue to consider when talking about deficits.

Let’s take a closer look at these two points.

First, the last two major personal income tax cuts (the so-called Kennedy tax cuts of the 1960s and Reagan tax cuts of the 1980s) unleashed such powerful economic growth that federal revenues actually rose. From $116 billion in 1965 (the first full year of lower tax rates) federal revenues increased in each subsequent year, all the way to $192 billion by 1970. Similarly, when the Reagan tax cuts took effect in 1983, federal revenues, which were $600 billion that year, again rose every year to reach $991 billion by 1989.

However, both of those tax cuts featured large reductions in marginal tax rates – the rate on the last dollar earned. The details of Trump’s tax plan, such as at what level of income a taxpayer will enter the next tax bracket, haven’t been announced yet, but it seems likely that marginal rates wouldn’t go down as significantly as in the ‘60s and ‘80s. In fact, for some taxpayers (I read one estimate of 12%) – specifically, many of those who stand to lose the state and local deduction on their 1040s – Trump’s plan would actually raise their tax bill and negate any potential supply-side stimulative effect. This is more defensible for ethical reasons instead of economic reasons, because the state and local tax deduction unfairly shifts some of the burden of financing the federal government from citizens of low-tax states to those of high-tax states. (One might think that the social justice, soak-the-rich crowd would side with Trump’s bid for more tax fairness, but their silence on this aspect of Trump’s proposal is deafening.)

The more economically stimulating component of Trump’s tax plan is his proposal to reduce the most obtuse, disruptive, and economically unjustifiable tax of all, the corporate income tax. A major reduction there would (ceteris paribus) greatly enhance the competitiveness of American businesses, make the US a more attractive tax domicile for foreign multinational corporations, and boost job formation (and indirectly, then, tax revenues).

My own best guess is that federal revenues are more likely to increase rather than decrease if the Trump proposal is passed. At the same time, let me make it clear that seeking ways to increase government revenue is not the right reason to cut taxes. Instead, we should cut taxes for both ethical and economic reasons. More of our country’s wealth should be left in the hands of the people who produce it whether they be individuals or business enterprises disciplined by the profit & loss calculus (i.e., wealth creators) rather than appropriated by the spendaholics in Washington (i.e., wealth redistributors). That is both more just and also will unleash more economic rationality and consequently more prosperity.

The more important point, though, is that we should remember that whether tax receipts rise or fall, federal revenue is only one side of the federal budget. Deficits result when the government spends in excess of its revenue. Therefore, a headline that tries to pin the blame for future deficits on tax cuts is afflicted with a gigantic blind spot. Attributing government deficits to insufficient tax revenues as ridiculous as using a scissor that only has one blade – it totally ignores the spending side of the federal ledger. For economists, journalists, or anyone else to say that the Trump tax plan will widen deficits is inaccurate, if not dishonest. It completely ignores the primary culprit – government overspending.

C’mon, reporters, get the story right. Even if you want Trump’s tax reform proposal to fail, you don’t need to stoop to one-sided reporting. I doubt you have anything to worry about. You don’t really think that the gang that can’t shoot straight (congressional Republicans, of course) are actually going to pass Trump’s tax proposal, do you?

Mark Hendrickson is a Professor of Economics at Grove City College, and author most recently of Problems With Piketty: The Flaws and Fallacies in Capital in the Twenty-First Century.  

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