Republican Representatives and Senators told lies or were victims of fantastical thinking when they try to sell their legislation, Tax Cuts and Jobs Act (TCJA). They claim their tax bill would spur economic growth by increasing investment, curtailing offshoring, increasing wages, and decreasing complexity. Republican claims consist primarily of historical anecdotes buttressed by fantastical beliefs and ignore any potential negative or unanticipated effects of their legislation. Leading business and economic experts dispute these political claims with mounds of contradictory evidence. The nature of the experts’ evidence contradicting the Republican lawmakers depend on scientifically-based economic studies. And, the experts identify the negative consequences of omissions from the legislation.
The bedrock of the Republican legislation consists predominantly of reducing the corporate tax rate to increase investment. According to Republican lawmakers, corporate tax cuts will enable additional investments in activities--such as manufacturing plants, equipment, and hiring more workers--that lead to economic growth. Their support for this position is a “common sense” belief: the more money in private hands rather than the government, the more money will be used for business investment. And, decisions made by individuals about where to spend their money are more efficient than decisions made by government. The arguments often use economic growth following tax cuts in 1963 and 1981 as support for tax reduction now. However, even discounting other factors that contributed to the U.S. economic growth following the tax cuts in 1963 and 1981, the world economy has changed significantly. In particular, the development of the European Union, Chinese, and Indian economies.
While the idea that tax cuts lead to economic growth underpins the Republican Party’s rationale for being, there is little scientific evidence to support it. When chief executive officers (CEOs) were asked if they intended to increase their investments following tax relief, they indicated they would not. CEOs from major firms such as Wells Fargo and Home Depot indicate that they will use the additional funds to increase their dividends and share buybacks. Some firms may also invest in research and automation to increase their competitiveness. Some part of the money spent on these activities could indirectly find its way back into the economy, although neither share buybacks nor investments in research and automation, will directly create jobs or raise wages.
Scientific studies of the effects of corporate tax cuts on the economy cast doubt on the notion that corporate tax cuts lead to economic growth. Economists at Goldman Sachs forecast a slight increase in the economy in 2018 and 2019 due to the tax decrease (.3 percentage points a year), followed by a flat or negative growth from 2020 to 2027. The nonpartisan Tax Policy Center forecast an increase of .7 percentage points per year until 2027. More generally, a Congressional Research Service study of the relationship between corporate tax rates and economic growth between 1945 and 2010 found only a modest relationship. At best, most analysts find the expectation of a large boost in economic growth after slashing tax rates, like the TCJA does, is a long-shot.
A second key claim about the TCJA is that it will curtail offshoring (moving business operations to foreign countries to cut costs) and encourage their reshoring (returning those operations to the U.S.). Tax experts who reviewed the TCJA, however, demonstrate how it may incentivize U.S. companies to offshore to a greater extent than they previously did. While on its face the new law penalizes businesses moving their operations overseas, it provides loopholes for reducing taxes when companies offshore. As labor costs increased in China over the past decade or so, some manufacturing of large items, like appliances were reshored to the U.S., especially in right-to-work states. The TCJA may reverse the slight reshoring trend of the past several years.
Finally, the TCJA also fails to fulfill its promise to decrease the complexity of the tax code. A less complex tax code removes the loopholes that tempt filers to covet shelter in a more beneficial tax category rather than a less beneficial one. A tax code with ambiguities and loopholes is likely to be unfair, inefficient, and encourage efforts to cheat. The TCJA introduces more opportunity for filers to find loopholes and game the system. Some tax analysts estimate this layer of complexity in the TCTA will encourage enough gaming of the system to increase the deficit beyond the current estimate of $1 to 1.4 trillion dollars.
In addition to the above problems caused by what is in the TCJA, other problems are due to what is not in it. The TCJA does not repair the damage done by ending the Affordable Care Act’s individual mandate. As a result, experts expect 9 million people to lose their insurance and premiums on insurance to increase by about 10 percent.
Over 6 million jobs are available for which the trained workers are not available. The TCJA makes no provision for training workers to fill these jobs. Instead, Republican lawmakers promised that this bill would increase the number of jobs.
And, to help pay for the tax cuts for corporations (and the rich), this legislation increases the deficit by 1.4 trillion dollars over the next decade. If recession, war, or natural disasters befall the U.S., the size of the deficit will exacerbate the ill effects. Some Congressmen have already announced that they intend to seek cuts in social welfare programs to reduce the deficit.
Former Ronald Reagan policy adviser, Bruce Bartlett has described a Republican gimmick for reducing the size of social and welfare spending, perhaps the key conservative Republican objective. This gimmick, “starving the beast,” consists of exploding the deficit by reducing taxes and increasing military spending when Republicans control the government. Then, when Democrats assume control of the government, Republicans voice loud concern about the size of the deficit and call for decreases in social and welfare spending. If Democrats comply with the call for cuts in social and welfare spending, then they will disaffect their base. Alternatively, if Democrats ignore the deficit, they will face blame for all of the economy’s ills from Republicans.
This time the “starve the beast” gimmick is even more ominous because the TCJA limits the deductions for state and local taxes, including property taxes. To help their tax payers, states and localities may scramble to lower their taxes. As a result, the states and localities may not be able to supplement the social and welfare programs some of their residents will need.
Are Republican lawmakers lying or victims of fantastical thinking when they try to sell this plan to the American people? Some lawmakers may be incredibly naïve and believe the promises about the TCJA, Most of them, however, are lying. They were too smart and experienced to believe the fantasy they were trying to sell us. And, they must have reasons for lying. Pundits suggest that some lawmakers are “cashing out” at the end of their legislative careers. Other lawmakers want to enhance their wealth and collect a “Corker kickback.” Still, others are paying back donors so they could run for office again or ask to work for them. And, a few continue to believe they can complete their dream of entitlement reform and privatization: a long-time dream of many Republicans, with Paul Ryan carrying the flag.
Whatever their motives, we now have a picture of what Republican lawmakers are all about. We knew about the grifter, Trump and are not surprised at his behavior as President. But, some of us thought that Republican lawmakers, like John McCain, Susan Collins, and Jeff Flake were decent people whose support for the bill was misguided. Now we know they were flimflamming us. We are all graduates of Trump University now.
While the idea that tax cuts lead to economic growth underpins the Republican Party’s rationale for being, there is little scientific evidence to support it. When chief executive officers (CEOs) were asked if they intended to increase their investments following tax relief, they indicated they would not. CEOs from major firms such as Wells Fargo and Home Depot indicate that they will use the additional funds to increase their dividends and share buybacks. Some firms may also invest in research and automation to increase their competitiveness. Some part of the money spent on these activities could indirectly find its way back into the economy, although neither share buybacks nor investments in research and automation, will directly create jobs or raise wages.
Scientific studies of the effects of corporate tax cuts on the economy cast doubt on the notion that corporate tax cuts lead to economic growth. Economists at Goldman Sachs forecast a slight increase in the economy in 2018 and 2019 due to the tax decrease (.3 percentage points a year), followed by a flat or negative growth from 2020 to 2027. The nonpartisan Tax Policy Center forecast an increase of .7 percentage points per year until 2027. More generally, a Congressional Research Service study of the relationship between corporate tax rates and economic growth between 1945 and 2010 found only a modest relationship. At best, most analysts find the expectation of a large boost in economic growth after slashing tax rates, like the TCJA does, is a long-shot.
A second key claim about the TCJA is that it will curtail offshoring (moving business operations to foreign countries to cut costs) and encourage their reshoring (returning those operations to the U.S.). Tax experts who reviewed the TCJA, however, demonstrate how it may incentivize U.S. companies to offshore to a greater extent than they previously did. While on its face the new law penalizes businesses moving their operations overseas, it provides loopholes for reducing taxes when companies offshore. As labor costs increased in China over the past decade or so, some manufacturing of large items, like appliances were reshored to the U.S., especially in right-to-work states. The TCJA may reverse the slight reshoring trend of the past several years.
Finally, the TCJA also fails to fulfill its promise to decrease the complexity of the tax code. A less complex tax code removes the loopholes that tempt filers to covet shelter in a more beneficial tax category rather than a less beneficial one. A tax code with ambiguities and loopholes is likely to be unfair, inefficient, and encourage efforts to cheat. The TCJA introduces more opportunity for filers to find loopholes and game the system. Some tax analysts estimate this layer of complexity in the TCTA will encourage enough gaming of the system to increase the deficit beyond the current estimate of $1 to 1.4 trillion dollars.
In addition to the above problems caused by what is in the TCJA, other problems are due to what is not in it. The TCJA does not repair the damage done by ending the Affordable Care Act’s individual mandate. As a result, experts expect 9 million people to lose their insurance and premiums on insurance to increase by about 10 percent.
Over 6 million jobs are available for which the trained workers are not available. The TCJA makes no provision for training workers to fill these jobs. Instead, Republican lawmakers promised that this bill would increase the number of jobs.
And, to help pay for the tax cuts for corporations (and the rich), this legislation increases the deficit by 1.4 trillion dollars over the next decade. If recession, war, or natural disasters befall the U.S., the size of the deficit will exacerbate the ill effects. Some Congressmen have already announced that they intend to seek cuts in social welfare programs to reduce the deficit.
Former Ronald Reagan policy adviser, Bruce Bartlett has described a Republican gimmick for reducing the size of social and welfare spending, perhaps the key conservative Republican objective. This gimmick, “starving the beast,” consists of exploding the deficit by reducing taxes and increasing military spending when Republicans control the government. Then, when Democrats assume control of the government, Republicans voice loud concern about the size of the deficit and call for decreases in social and welfare spending. If Democrats comply with the call for cuts in social and welfare spending, then they will disaffect their base. Alternatively, if Democrats ignore the deficit, they will face blame for all of the economy’s ills from Republicans.
This time the “starve the beast” gimmick is even more ominous because the TCJA limits the deductions for state and local taxes, including property taxes. To help their tax payers, states and localities may scramble to lower their taxes. As a result, the states and localities may not be able to supplement the social and welfare programs some of their residents will need.
Are Republican lawmakers lying or victims of fantastical thinking when they try to sell this plan to the American people? Some lawmakers may be incredibly naïve and believe the promises about the TCJA, Most of them, however, are lying. They were too smart and experienced to believe the fantasy they were trying to sell us. And, they must have reasons for lying. Pundits suggest that some lawmakers are “cashing out” at the end of their legislative careers. Other lawmakers want to enhance their wealth and collect a “Corker kickback.” Still, others are paying back donors so they could run for office again or ask to work for them. And, a few continue to believe they can complete their dream of entitlement reform and privatization: a long-time dream of many Republicans, with Paul Ryan carrying the flag.
Whatever their motives, we now have a picture of what Republican lawmakers are all about. We knew about the grifter, Trump and are not surprised at his behavior as President. But, some of us thought that Republican lawmakers, like John McCain, Susan Collins, and Jeff Flake were decent people whose support for the bill was misguided. Now we know they were flimflamming us. We are all graduates of Trump University now.