The Republican tax plan: “A big beautiful Christmas present” or coal in our stockings?

The real question: why?

Why this Republican tax proposal? Well, it’s billed as “reform,” and God knows our federal tax system is an ungodly mess crying out for reform. But this bill isn’t it. Fewer brackets means nothing. Admittedly, eliminating some deductions and, particularly, the Alternative Minimum Tax would be significant simplifications. Yet in other ways, new complications are actually added. Trump’s saying nine out of ten would be able to file on a postcard is a lie even biglier than usual for him.

It’s also a lie to call it the biggest tax cut in our history. It would be true if Trump had added the words for corporations.

And why cut taxes? Because they’re too high? When for decades government spending has exceeded taxes by hundreds of billions of dollars yearly? When the federal debt now tops twenty trillion?

Republicans — supposedly the party of fiscal conservatism — originally were supposedly aiming for a revenue-neutral reform — that is, making up the cuts by getting revenue elsewhere, like capping 401Ks. But of course taking any benefit away from anyone is political poison. So predictably, they jettisoned any notion of paying for the cuts. The budget they passed recently (with virtually no debate) permits them (due to arcane rules) to now enact a tax cut costing a whopping $1.5 trillion, over 10 years, with only 50 Senate votes, rather than an impossible 60.

But even with that giant window, making the math work is very hard. Especially with corporations getting most of the $1.5 trillion available. Additional fat cuts for fat cats necessitate compensatory tax increases for many middle and upper middle class folks. At best, some less affluent people will get peanuts, while caviar is served to the richest and, especially, corporations.

After decades of Democrats caricaturing Republicans as caring only for the rich, the GOP is now shamelessly proving it. When economic inequality has been a growing concern, to propose a tax bill that will significantly aggravate that inequality is disgraceful.

But they say the aim is to stimulate the economy, spur growth, and create jobs. Producing so much more income, and thus more tax revenue, that the cuts will pay for themselves. They’ve been making this argument for forty years. It has never proven true. A tax cut might be stimulative if it put money in the pockets of Joe Sixpack who’ll spend it. But not when most goes to the rich who’ll just save it. And corporate hiring simply has nothing to do with how much tax they pay on profits.

Meantime, the whole growth stimulation idea ignores the impact on deficits and debt. Which are set to explode in years ahead as ever more older people collect pensions and benefits while ever fewer work and pay taxes. We can finance the gap by borrowing, as long as interest rates remain at historic lows. But if ballooning debt spooks the financial markets, interest rates will spike up, and we won’t be able to afford much except interest payments. That makes cutting taxes suicidal economic insanity.

And snuck into the bill is this hidden stinker: repealing the Johnson Amendment, which bars churches from partisan politics. A terrible idea. (Read about it here.)

No wonder they want to ram this through quickly, without any pesky hearings or debate. Before anybody can really figure out what’s happening. Just like they tried to do with health care. Rushing such a hugely complex and consequential plan is also disgraceful and crazy.

But finally, for Republicans, the real reason behind all this is not economic policy. It’s more like religious belief. Tax cuts are a matter of faith, comparable to belief in God for Christians. Never mind economics, reality, or sanity.

Will it pass? Very doubtful. Likely it will get watered down into something insignificant — which Trump will nevertheless call a “big, big win.”

Huuuge!”

(Note, my family would benefit significantly from the GOP plan. And I was a Republican myself until recently. This tax plan epitomizes why I quit.)

 

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5 Responses to “The Republican tax plan: “A big beautiful Christmas present” or coal in our stockings?”

  1. Chips Says:

    I have no problem with tax cuts under the right conditions. Today, it seems desirable to cut taxes (and increase the earned income credit) for poor and middle class households while increasing taxes on the Wealthy (even if it should affect me personally). This is needed to address the staggering wealth and income gap in America today.

    That said, my real reason for commenting is the troubling and stubborn misapprehension that the “National Debt” is a true debt. I think it is more accurately described as the National Savings Account.

    Consider that every dollar created only has value when it is spent on goods and services in the U.S. Absent that, a dollar is only a picture on a piece of paper. Sometimes dollars accumulate in the treasuries of corporations, or the accounts of foreign trading partners, pension funds, and households because they are not ready to spend them. Sometimes government agencies, like Social Security, collect dollars that they are not obligated to spend at the moment. These dollars can either sit idle with those entities, or they can be offered an incentive, interest, to put them on account with the U.S. Treasury. More simply said, to save them.

    This is not unlike the basic business model of a Savings & Loan. The bank offers you interest to put your dollars in a passbook account and then they use the money to make investments.

    This is precisely what the U.S. does. It offers interest for dollars created, but currently not in circulation, so they can be put to use supporting its investments in national defense, security, infrastructure, reasearch, education, and the like.

    We do not typically consider the passbook savings accounts of a bank as a “debt”, but as a measure of its size and effectiveness, its success, as an institution. In this case its success in acquiring funds which may now be invested. While the passbook savings are obligations to pay, they are also a resource integral to the S&L (the S in S&L).

    Since I have adopted this view, it has radically changed my perception of the currently accepted mass media-hyped narrative of the National Debt as a disaster. It caused me to realize how misunderstood the concept is. If you allow yourself to view the debate through this framing, you can see that the “huge” debt is also a market measure of the soundness and greatness of our economy and nation. And, doing this relieves you of the anxiety and hand wringing about the debt as a burden, and refocuses your thinking to the really important decision of how that boon should be invested. The decisions made in the political realm about spending and investment then become paramount as they should be.

    Hooray! We have unused dollars on account! Now, let’s discuss where we should invest them.

  2. rationaloptimist Says:

    I am sorry, Chips, but unfortunately this is incorrect. The National Debt is NOT like putting money in a savings account. Quite the contrary — it is quite simply BORROWING. Like when you run up a balance on your credit card. That doesn’t improve your financial position! The government borrows because it doesn’t have enough money from collecting taxes to pay its current expenditures. It borrows by selling bonds, on which it pays interest (very little, fortunately, right now). Some of those bonds are bought by Americans, but a big chunk by foreigners; China holds a goodly part of that $20 trillion debt. Imagining that this is somehow a good thing for our economy is magical thinking.
    The financial markets buy the bonds because they believe the government has the capability to ultimately make good on them — even if that really means selling new bonds in order to pay off the old ones. But there is a limit to this; to how much we can borrow before the financial markets say, “Whoa, wait a minute. . . “

  3. Chips Says:

    That is clearly the accepted wisdom. However, it overlooks so much.

    It is not borrowing if we are the bank. We are not borrowing when we ask those with dollars to invest them temporarily in government bonds. Not only are we the bank, we can always repay the depositors. In bank paralance we have “reserves” which are always sufficient to repay the depositers in full at any time because the debts are denominated in dollars and the government can create dollars if it so chooses.

    Why doesn’t it create dollars then? The impact on inflation expectations is one reason [though economists are beginning to doubt this as a concern because they observe that despite central bank efforts to increase the inflation rate and the infusions of trillions to offset the financial meltdown, inflation has not occurred]. Yet, the big reason it doesn’t create dollars is they already exist. We need only to encourage their reuse.

    Using your example of China, dollars holders—you and I—have purchased goods from China. The only way China can secure a dollar is to have us exchange one for some product or service China provides. Now, when they accumulate dollars this way, this is not always in our strategic interests. Dollars could, for example, be held in a stockpile by a foreign entity and “dumped” on the world economy with disastrous disruptive effect. So, we offer an incentive to the Chinese, an opportunity cost, to stockpiling dollars and that is the interest foregone by failing to invest unused dollars in treasury bonds. Quite simply, we bought a Chinese made computer or phone, they have our dollars now, and we offer them interest if they will let us use those dollars to fuel our government spending. From their perspective, it is in a safe secure place earning interest, just like you have traditionally viewed a passbook savings account.

    And, now to the credit card example. If I fail to pay my auto loan or my mortgage, those loans are backed by an asset, the car or the house, and I suffer the risk of losing the asset if I fail to repay. But, we have offered holders of treasury bonds no collateral. If we default (a total impossibility as previously discussed but let’s go with it), China will not own one of our aircraft carriers or a National Park. Thus, the National Debt must be some type of unsecured loan and the “credit card” is offered by the debt-is-bad crowd as the basis for making the argument that we are a nation-spendthrift. (This is also perhaps a clue as to why the loan analogy is flawed as only one type of loan is applicable.)

    Normally, a bank issues a credit card to a worthy borrower using dollars it has on account. The credit card holder repays the card balance or makes payments with interest. If they fail to repay, the bank will give them a black mark and their cost of borrowing in the future will be much higher if they can get credit at all.

    But, a bank does not consider its own investments and depositors activity as “credit card” transactions. It considers them internal business transactions. And, that is exactly what is happening in this instance. We are not a borrower offering property as collateral for a loan, or a credit card holder, we are a Bank where every dollar on deposit is backed by our full faith and credit.

    I am not asking you to accept this. I am only planting a seed. If the ground is hard, it will not take root. But, I hope if you do more reasearch, particularly by exploring the economics of Modern Monetary Theory, you may come to have an expanded understanding of these concepts that you may someday find illuminating. Start by googling “Stephanie Kelton” or “William Black” or reading here: http://neweconomicperspectives.org/modern-monetary-theory-primer.html.

    Best Always, Chips

  4. rationaloptimist Says:

    There is so much wrong here it’s futile to attempt to answer it point by point. But you are right in saying it’s an UNSECURED loan — which heightens the risk that at some point the financial markets will balk. And “we can always repay the depositors” — seriously? $20 Trillion? Sure, the government could pay it off by printing $20 trillion in currency. And you think that would not crash the value of your dollars?

  5. Didius Julianus Says:

    Chip: The U.S. Govt is not the bank, the Fed is. The Fed is a private corporation. You can find this info from good sources if you look into it. A house of cards and the globalist use of the U.S. $ as the world trading currency is nearing it’s end, sort of like Venice, Spain, Holland, France, UK and others before them. A fantastic discussion of this and other interrelated matters is at this web site – http://philosophyofmetrics.com/ , enough of which is freely available it will either change your world view completely or the reader might reject the cognitive dissonance and be actively choosing the “blue pill” to use “The Matrix” movie terms.

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