The revisions to the tax code will offer a marginal, although temporary, win for low income individuals, a major slap for moderately successful wage earners and home owners, especially in the high tax Blue States, and a huge victory for the extremely wealthy and certain categories of business owners. It is certain that the plan will add to the growing deficit.
Trump and Congress will hail this achievement as being a major victory for the American people. But the true winner will be the swamp that Trump promised to drain.
Taxes are the price we pay for government. If Republicans want to reduce the tax burden, they need to make government less expensive. Tax cuts without spending cuts is the Republican version of a free lunch. If government spending is not paid for with tax revenue, alternate sources must be found that will ultimately prove more costly than the forgone tax revenue.
Despite endless campaign rhetoric to the contrary, the Republican Party is no longer the party of limited government, fiscal responsibility, Federalism, the Constitution, sound money, or any of the principals that they typically espouse while stumping for office or raising money.
Republicans argue that the economic growth that will be generated by lowering the corporate tax rate from 35% to 20% will generate enough new tax revenue to offset what is lost. While that idea is sound in theory, nothing about our current situation would suggest that a growth surge is around the corner, with or without corporate tax cuts.
We are already in the ninth year of a supposed economic expansion. Over the last century, these expansions (the time between recessions) have lasted, on average, about five and a quarter years. So, already our current “expansion” has lasted nearly twice the average. It is also clear that this expansion has relied heavily on surging asset prices in stocks, real estate, and bonds. But all three of those markets could easily reverse course.
The stock market has surged to all-time highs based on the expected likelihood that tax reform would be passed early in the Trump Administration. When this hope becomes reality, it may be that we will get a “buy the rumor, sell the fact” decline, especially if the final package is not all that investors hoped it would be. The real estate market may actually suffer under the new rules as high-end properties become more expensive to own and less attractive to buy given the limits on property tax and mortgage deductions.
Of course, instead of raising future taxes to repay the money borrowed to fund today’s cuts, a cooperative Federal Reserve could simply print the money needed to buy the additional Treasury debt. But this does not mean we get all this government for free. The cost will come in the form of higher consumer prices as a new round of monetary expansion could cause a continuing drop in the dollar. So Americans may end up with more after tax dollars in their paychecks, but the reduced value of those dollars means they will actually be able to afford to buy less stuff.
