Pages

21 December 2017

H.R. 1 As Economic Policy Part 1 Considering The Bill As A Whole

The new Republican tax bill in 2017, H.R. 1, has been passed by Congress. In a series of posts, I will look at the likely economic impact on the bill, provision by provision.

Like any omnibus collection of different ideas, some are good and some are bad. In this first post, I'll address the combined impact of the bill as a whole.

At this level, the basic issues are twofold. 

First, H.R. 1 massively cuts tax revenues at a time when we need smaller deficits and more government investment in the economy. 

Second, H.R. 1 exacerbates economic inequality at a time when it is already dangerous high.

Combined Revenue Impact

H.R. 1 cuts taxes by an estimated $1.5 trillion over ten years. This is actually an underestimate. The loopholes in the bill cut revenues far more than a quick and dirty Congressional Budget Office (CBO) estimate can determine. And, many of the "expiring" provisions of the bill will be made permanent.

"Dynamic scoring" of the bill estimates that just shy of $500 billion of additional revenue over ten years will result from economic growth created by the bill. This is, at least, an order of magnitude too high and wildly optimistic. The empirical evidence flatly contradicts the notion that big tax cuts translate into economic growth. If anything, there is an inverse relationship between tax cuts and economic growth. And, as further posts in this series will demonstrate, many of the cuts have little or no economic development benefits and simply transfer wealth to the rich.

This is not what the U.S. economy needs.

The U.S. already has the second lowest tax burden relative to GDP of any nation in the OECD. Japan is lower only because much of its welfare state takes the form of employer provided job benefits as opposed to government spending. Excess levels of taxation are not what is wrong with the U.S. economy.

The U.S. also already has too high of a national debt and runs too much of an annual budget deficit. This tax cut increases this problem by titanic proportions. This increases interest rates, causes public debt to squeeze out private sector debt in competition for finite funds available for investment, undermines the creditworthiness of the United States government (which already took one credit rating hit when Republicans threatened a default on the national debt), and puts an undue burden on future generations at a time of a secular decrease in economic growth rates as technological gains plateau.

Further, reduced revenue will put pressure on increased government spending, and U.S. levels of public spending are already low by international standards. We don't invest enough in physical infrastructure like roads, bridges, the power grid, and the like. We don't invest enough in higher education. We have too many unmet health care needs and too many people in poverty. Our total government spending levels are also exaggerated by the fact that our military spending is far higher than any other country in the world, which implies that by international standards, our domestic government spending is even lower than a naive comparison of government spending as a percentage of GDP would imply.

The domestic example of Kansas, historical U.S. comparisons, and international comparisons beyond the OECD, all clearly show that a low tax, low government spending business model is detrimental to economic development, rather than encouraging economic development.

In general, reducing tax revenues and government spending at this time in the U.S. economy is bad policy.

Distributional Impact

H.R. 1 benefits the affluent tremendously, while providing little or no benefit to the less affluent. It will produce greater after tax income inequality.

The U.S. is already in an era of near record income inequality. The last time this happened, it triggered the Great Depression. The lack of shared participation  in economic growth has been a problem since the 1970s and this bill makes it worse.

In general, tax cuts for less affluent people put money into the economy because they increase consumer demand. These also increase funds available to invest in human capital and small businesses which are important drivers of economic growth. In contrast, increased consumption for the affluent is basically wasteful in term of overall economic well being (in addition to being a smaller share of tax cut wealth effects), the rich are already maximally invested in the human capital of their families, and there is no shortage of investment resources right now in the U.S. economy for either big businesses or the affluent.

Big tech companies and wealth individuals are sitting on hundreds of billions, if not trillions of dollars of cash that, in the current economy, they can't find anything worth investing in. The U.S. economy has a shortage of worthwhile investment opportunities that big business and the rich are willing to take a chance upon, not a shortage of funds to invest.

A winner take all economy also discourages a huge share of the workforce from even seriously trying to build businesses and wealth in an economy that is stacked against them, denying the economy their full efforts, and concentrating wealth in families that didn't earn that wealth or acquired it through mere luck and happenstance, means that the management of our available investment capital will be less wise.

Inequality also wastefully diverts money from genuinely beneficial consumption to gate keeping tasks and frivolous luxury spending that are of less value to our economy in ways that go beyond mere GDP than spending on consumption meeting more basic needs and simply pleasures and investments in human capital, by the less affluent.

And inequality has toxic political consequences, encouraging extremist ideologies closer to communism on the left and fascism on the right. We are already seeing this play out.

The political system should be mitigating inequalities driven by economic fundamentals as every other OECD economy does. Instead, this bill exacerbates them, make the tax bill itself unstable and weakening the political-economy generally.

No comments:

Post a Comment