Trump Lies Again About Tax Cut for Consumers
There's No Such Thing as a Free Tax Cut
The Trump administration continues to pretend that the 2017 tax cuts were a success. But the cost keeps rising.
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Legend has it that the British economist John Maynard Keynes, asked why he had changed his position on a question of economic policy, responded: "When the facts change, I change my mind. What do you do, sir?"
Treasury Secretary Steven Mnuchin has embraced a different approach: ignoring the facts.
This week, Mr. Mnuchin repeated the risible fantasy that the Trump administration's 2017 tax cuts will bolster economic growth sufficiently for the government to recoup the revenue it has lost by lowering tax rates.
"I'll stick with my projections that the tax deal will pay for itself," he said from Switzerland.
The claim that tax cuts don't cost money is a lie that won't die, because proponents of tax cuts have learned that many voters like to hear it. Republicans have steadily insisted for almost four decades that tax cuts are free, even as each new round of tax cuts fails to pay for itself. Mr. Mnuchin and other proponents of the most recent tax cuts were already peddling a delusion when they made the claim in 2017.
Two years later, the results are in. The annual federal budget deficit has topped $1 trillion. And it is even more difficult to understand how anyone could make such a claim.
Mr. Mnuchin's willingness to keep doing so suggests that expedience has won out over experience.
His defiance of reality probably pleased President Trump, who likes lieutenants to pretend everything is going according to plan.
But Mr. Mnuchin would better serve his country by encouraging his boss to confront reality.
The longer Congress waits to clean up the damage caused by the tax cuts, the higher the cost will be: The cuts were funded with borrowed money, so the government must spend more on interest payments with each passing year.
The cuts also were designed to provide the largest benefits to wealthy households and big companies. Administration officials predicted the cuts would catalyze a wave of capital investment, which in turn would produce a sustainable increase in economic growth. Mr. Trump went so far as to predict growth would reach 6 percent a year, an astonishing figure.
The cuts delivered a dose of stimulus to the economy — by putting money into the pockets of consumers, a page from the old Keynesian playbook. But the effect quickly dissipated and the "supply side" theory embraced by the Trump administration did not play out. An initial rise in capital investment fell short of expectations, and then quickly faded; investment actually declined in the second and third quarters last year, the most recent data.
The exact mechanics will be studied for years to come. Gary Cohn, a chief architect of the tax cuts during his time as Mr. Trump's chief economic adviser, argues plausibly that the uncertainty created by Mr. Trump's trade policy has worked against the tax cuts, discouraging companies from making long-term investments.
A study by the International Monetary Fund, by contrast, found that the supply-side effects were even smaller than the total increase in investment. The study concluded that businesses responded to increased demand more than they did to the lower tax rates.
The distribution of the tax cuts also has served to exacerbate economic inequality.
Mr. Trump and his advisers, sensitive to the optics of openly favoring the wealthy, have repeatedly promised that they are about to unveil a tax cut aimed at the middle class. They started saying this before the midterm elections, and they have been saying it again this week. Mr. Trump, also in Switzerland this week, went so far as to promise a plan in the next 90 days. He is not in the habit of keeping such promises, but in this case, that is probably for the best.
The economy doesn't need another round of Keynesian stimulus at the moment, and the federal government needs more tax dollars, not fewer.
The Trump administration instead could press Congress to reverse the 2017 cuts.
The administration also could make a meaningful difference by collecting more of the taxes that corporations and the wealthy still owe. The government estimated in 2010 that Americans failed to pay about $400 billion in taxes. Since then, Congress has continued to cut funding for the Internal Revenue Service. That has particularly affected the agency's ability to audit large corporations and wealthy households, because it lacks the muscle for those fights.
The I.R.S.'s head explained in a September letter to Congress that the agency audits low-income households at the same rate as high-income households because it doesn't have the resources for the harder fights. A ProPublica story highlighting Microsoft's success in fending off the I.R.S. illustrates the difficulty. The agency is still in a long-running battle over the company's 2005 taxes, and the end is not in sight.
But it's too much to hope facts will alter the policies of the Trump administration. Mr. Trump is touting the tax cuts as a signature triumph as he runs for re-election. It will be up to voters to hold the administration accountable for the actual results.
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Source: https://www.nytimes.com/2020/01/22/opinion/trump-tax-cut.html
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