Is It Ignorance, or Fear Driving the Left's Critiques of the Tax Cuts?
Out of ignorance or fear, tax reform’s critics continue seizing every opportunity for attack. The latest is that this recently enacted legislation is not doing enough, quickly enough. Their accusation shows they misunderstand how tax cuts and the private sector work…or that they know all too well and fear that they will.
Less than three months into tax reform taking effect, its liberal critics claim its results have been tepid. Company bonuses are too small, they have been one-time bonuses, and many companies have given none at all. As for the tax cuts themselves, they have not been large enough.
There is irony here. By opposing tax reform, liberals were willing to leave America’s workers and consumers as they were, which is with less than these critics now claim they are receiving.
There is also insight. The left’s complaints show they understand neither tax cuts, nor the private sector benefitting from them.
Tax cuts have a direct and an indirect effect on the private sector — a micro and a macro impact. The direct effect and microeconomic benefit comes from a reduced tax burden and a corresponding increase in individuals’ retained wealth.
That tax reform’s effect, in less than a full quarter of force, is still gaining steam hardly surprises. Its first effect will come through a change in tax withholding — the amount automatically deducted from wages — and these changes must be implemented to take effect. Workers not changing their withholding rate, will not see their benefit until their tax refund.
This same dynamic applies to companies. They realize the positive benefit of lower taxes only as they pay them.
The left’s disconnect about how lower taxes work also demonstrates their misunderstanding of how the private sector works on its own. People and companies react to the reality of a promise, not its rhetoric. If individuals and companies are not spending and investing more, it is because they have not yet realized the means to do so for sufficient duration to feel confident altering their behavior.
This goes to tax cuts’ second and larger indirect effect — its macroeconomic impact. The biggest effect from tax reform was always going to come from the increase in real profits and wages — an effect already being seen. The logic is clear: Savings on the incremental amount of earnings taxed is smaller than an increase in the overall wages themselves.
This dynamic is especially powerful over time, as realized tax savings return to the economy. The result is a multiplier effect that continues to churn and return increased earnings and investment. The positive effect of an increasing economy — which even at high levels of government taxation, remains multiples greater than the tax take — was by necessity going to have a greater impact than the decreasing taxes themselves.
Liberals are implicitly comparing tax cuts to their preferred approach: Public sector over private sector, and increased government spending to decreased taxes. The difference between higher spending and lower taxes is the reason why tax reform will have a greater long-term impact.
Higher government spending is targeted to activities the government wants to encourage. Because the government — not the market — determines winners and losers, its chosen activities likely do not have the highest return initially and certainly not over time. And because the activity in question is the result of government decision, less investment is likely to follow: Why commit resources to what flourishes primarily because of fickle government decisions?
Together diminished return and less investment means a lower multiplier effect in the economy and slower growth than would otherwise be achieved by a private sector left to lower taxes and its own devices. This is the reason why, with its focus on increased spending, the Obama administration’s economy underperformed for eight years.
Tax reform’s liberal critics may not understand how tax cuts work or how the private sector does. Instead they focus on a government-centric strategy where the private sector is at best seen as an inefficient go-between.
Of course the reason for their opposition may be even simpler. They simply want tax reform to fail and grasp anything that makes it seem so. Instead of knowing all too little about tax cuts and the private sector, they know all too well that, given time, the two will work.
Take your pick for tax reform critics’ motivation: Ignorance or fear. They arrive at the same place. The adage can apply: We fear what we do not understand. So too, that we also fear what we understand, especially when it does not suit our desires.
