The Corner

Politics & Policy

Tax Reform: Il Faut Reculer Pour Mieux Sauter

CNBC, yesterday:

Sen. Bob Corker said Tuesday a “backstop” to curb future budget deficits could help to win his crucial vote for the GOP tax bill. The Tennessee Republican and others are seeking the protection in case the nearly $1.5 trillion in proposed tax cuts do not meet the GOP’s expectations for sparking economic growth. The “trigger” described by Corker would raise taxes if the plan does not boost the U.S. economy enough.

I don’t quite know how such a trigger would work or (fiscal hawks take note) if it’s credible that it would ever be squeezed, but even in principle it’s a bad idea. If the tax plan isn’t generating the desired growth (whatever that may be), it may well be because the economy is in recession. Increasing taxes during a recession is usually (but not, to be fair, always) a very, very bad idea. If it takes a bad idea to convince Sen. Corker to vote for a bad bill then perhaps he should just vote no.

Much of the difficulty and danger that the GOP now faces can be traced back to the Republican leadership’s desperation to get something passed. The Wall Street Journal’s Greg Ip notes:

In their rush to pass a sweeping tax overhaul, Republicans and the Trump administration may be headed for a reckoning with the law of unintended consequences.The U.S. tax system is a complex, jury-rigged contraption. At the best of times, tampering with any part invariably triggers collateral consequences. Those risks are magnified now by Republicans’ determination to pass the plan with minimal hearings on party lines by Christmas.

Well, when leaping off a cliff it can be more comforting to keep one’s eyes closed.

Ip:

The bills, as they stand, contain countless incentives for gamesmanship: differing tax rates for different types of foreign property and profits, arbitrary expiration and implementation dates to hold the 10-year deficit impact below $1.5 trillion…

Whatever happened to that postcard?

And:

“There are more ticking time bombs in this bill than a Road Runner cartoon,” says Martin Sullivan, chief economist for the nonprofit group Tax Analysts.

For more time bomb talk, take a look at Fred Bauer’s piece over on the homepage. 

Oh yes, amid the debate over removal of the state and local tax (SALT) deduction, I hadn’t noticed one particular twist. Those who defend ending that ‘break’ argue, Ip writes, that “the deduction serves no economic purpose and merely subsidizes state and local government spending”, but:

The same is true for the federal break for municipal bond interest, yet its benefits are more evenly shared by Republican and Democratic states and thus it hasn’t been touched.

Principled conservatism indeed.

But, but, the corporate tax cut will boost corporate spending and generate wage increases.

Bloomberg:

Instead of hiring more workers or raising their pay, many companies say they’ll first increase dividends or buy back their own shares.

Don’t get me wrong, I support a corporate tax cut, although there’s no magic in the 20 percent number, but the corporate sector is already flush with cash and is not particularly keen on putting it to work and, as for wage rates, well…  To believe that the tax cut will ‘automatically’ change company’s behavior is  a mistake. Over time, if tax rates stay low and if corporate managements believe that they will stay low, making it easier to hit post-tax return hurdles on investment will clearly be a positive, but the magic words are ‘over time’. The midterms are in less than twelve months. 

Meanwhile FiveThirtyEight looks at some polling:

About a third of voters currently support the Republican tax reform package, according to an average of five surveys released1 this month. In a Quinnipiac University survey, just 25 percent of voters approved of the plan. Surveys from ABC News/Washington Post, CNN, Morning Consult and YouGov put approval of the plan slightly higher, but all are still at 36 percent or lower. Meanwhile, an average of the five polls puts opposition at 46 percent….

[M]ajor tax cut plans are usually more popular than unpopular. Heck, even some tax hikes have been more popular than the current GOP bill.

Part of the reason for that is that for large numbers of people (who, unlike corporations, vote), this is not a tax cut, and even after making adjustments for the fact that a good part of the political damage caused by the Republican plans will be to make blue states bluer still, it’s hard to believe that that damage will be confined to those states. How big is that Republican majority again?

There’s a useful French maxim, il faut reculer pour mieux sauter, which recognizes that a strategic retreat can be the best way to prepare for a subsequent, more effective advance (Napoleon was a fan in his earlier, more successful days). Any Republican Senator or Congressperson able to recognize the mess that the GOP is now making for itself would do well to remember it.

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