Bring it Home: A Defense of Supply-Side Tax Relief (Second of two parts.)
Call it a hunch.
So what if more than three-dozen top economists last month dismissed GOP claims that its tax bills would boost the economy and would most likely balloon the national debt? There’s a reason why economics is called “the dismal science” and we at Anfield support tax reform with tax cuts at its core.
On principal at least – and with conditions, in particular the imperative of thoughtful revenue-neutrality.
It is difficult to comment specifically on the House and Senate bills as they enter the reconciliation process en route to become a law. Nevertheless, we believe in the elegantly simple theory that cutting taxes enhances growth: consumers, empowered by an effective raise in pay, will spend money on things they could otherwise not afford. For an economy that relies on consumption for nearly three-quarters of its growth, that is no small thing.
Despite unscientific surveys to the contrary – at a high-profile seminar attended by top CEOs last month, only a handful indicated they would invest the proceeds from tax cuts to the chagrin of a senior Trump economic advisor – our intrepid head of research informs us that dozens of business chiefs have committed themselves to converting tax relief into new jobs. According to the Washington, DC-based Tax Foundation, the Trump plan would lower marginal tax rates and the cost of capital, which would lead to 3.5 percent higher GDP over the long term, 2.7 percent higher wages, and an additional 890,000 full-time jobs. While that may be a stretch, we think it’s at least heading in the right direction.
In addition, the wholesale backlash against Republican supply-side orthodoxy is relatively new if previous polls are anything to go by. In a 2012 survey of top economists, the University of Chicago’s Booth School of Business found that 35 percent thought cutting taxes would boost economic growth. A roughly equal share, 35 percent, were uncertain. Only 8 percent disagreed or strongly disagreed.
We are also aware that some tax cuts are more effective than others. We would hardly be traitors to our class by pointing out that cutting taxes for lower earners might boost activity more than cutting the top marginal rate, as lower-income Americans with an extra $100 are more likely to spend that money than millionaires. Moody’s research arm confirmed back in 2008 that temporary tax cuts such as rebates could boost GDP. Further, they found that stimulating programs like food stamps had a stronger effect on spending.
On the other hand, the case for tax cuts would be an easier pitch if the federal government did not spend more than it raises in revenue – $440 billion or so for the current fiscal year, in case you’re wondering. Our public spending gaps – intrinsic to one outgoing administration after another, regardless of party affiliation – can swamp even the most thoughtfully composed tax reform plan and the president’s estimated $1.4 trillion shortfall may be too large a gap to swallow, even for members of his own party.
Our house view is that chronic debts, though regrettable, are also sustainable so long as the dollar is the reserve currency. As we believe this state of affairs will prevail for some time we do not share the fervor of budget hawks in Congress. It is also worth noting that the tax bills under consideration are less extravagant than the proposals bandied about last year on the campaign trail, when candidates were auctioning tax relief in the neighborhood of $2 to $4 trillion – proof perhaps, that responsibility engenders restraint.
Still, we’d feel better about the bills – and what stands for fiscal rectitude – if they arrived with a side car of meaningful spending cuts. As Doug Holtz-Eakin, former director of the Congressional Budget Office, put it recently: “[A tax cut] won’t pay for itself. You’re not going to cut taxes by a dollar and get a dollar back in revenue from the growth.”
No doubt shareholders and corporate war-chests will benefit from tax reform but so, we hope, will small-to-mid-sized businesses, the spine of the economy. After eight years of onerous regulation we welcome a new tax regime that promotes innovation and puts capital where it will do the most good. Only then can we realize the quality of growth one expects at a time of full employment and record-cheap capital.