The Corner

Economy & Business

Bad Argument For Tax Reform: The Keynesian Edition

It is often the case that when one party is in power, some of their principles are thrown out the window. Remember when President George W. Bush, who had already presided over a large increase in spending — not just on defense — and the creation of a new entitlement program, explained that he “had to abandon free market principles to save the free market system”?

I could spend the day listing the too-many instances where Republicans and their supporters are willing to abandon free market principles not in the name of saving the free market but politics or special interests. But I won’t bore you with that. Instead, I want to highlight this disturbing use of a Keynesian argument to justify not making the tax cuts deficit neutral:

White House Budget Director Mick Mulvaney is signaling similar flexibility, saying on CNN Sunday that decisions about deductions remain up in the air as “the bill is not finished yet.” He took it a step further, by adding that a tax plan that doesn’t add to the deficit won’t spur growth.

“I’ve been very candid about this. We need to have new deficits because of that. We need to have the growth,” Mulvaney said. “If we simply look at this as being deficit-neutral, you’re never going to get the type of tax reform and tax reductions that you need to get to sustain 3 percent economic growth.”

Come again? We need deficits, meaning overspending, to bolster the economy? And Mick Mulvaney said that? The Mick Mulvaney who was a member of the House Freedom Caucus and for whom I had great hopes upon his nomination to be OMB director couldn’t have said that.

After my colleague Chris Koopman send it to me, I stared at the words for a while with my mouth open. I mean, it’s not the first time Republicans have made Keynesian arguments to justify cutting taxes. During his speech in Missouri, the president made the case that cutting taxes would put money back in people’s pockets, and Americans would, in turn, spend that money on U.S. goods, get a new lease on life, and boost the economy. Other Republicans also make that same type of argument when they argue that tax cuts should be retroactive to boost the economy. But that’s not how it works! Consumption follows economic growth, not the reverse. And I wasn’t expecting this from Mulvaney.

I get that President Trump’s refusal to touch entitlement spending — the true driver of our future debt — and his embrace of policies that are more traditionally pushed by Democrats aren’t helping make the case for fiscal responsibility, free market, and smaller government. Maybe the new direction of the party has helped liberate some of its members from the tedious requirement of free-market principles and calls for spending cuts. I also guess that talking about cutting spending is as uplifting as the promise of a root canal. But that’s not a reason to pretend that all we need is a good tax cut, that any tax cuts will pay for themselves, or that government spending and deficits are stimulative.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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