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Tax Reform? No Reform.

“But in this world nothing can be said to be certain, except death and taxes.”
– Benjamin Franklin

 

Thus taxes are the central plank in every political platform. Lincoln championed the tariff. Warren G. Harding advocated unprecedented cuts. And President Reagan is best known for his Economic Recovery Tax Act of 1981, reducing rates by 25% across the board.

Not much has changed over the past thirty years. When Donald Trump originally ran for president, he proposed a system of four rates ranging from 10% to 25% while exempting millions of families from taxes altogether. Political realities (and perhaps a bit of the proverbial swamp) induced him to revise his plan, first raising the uppermost bracket to 28%, then 33%, and now finally 35%, not much lower than the present top 39.6% levy.

Needless to say, Trump and his Republican supporters are pitching this plan as a win-win for Americans, one which will not only benefit the average Joe but even reduce the deficit. The Democrats, naturally, oppose the plan with such vitriol their arguments almost seem cartoonish. This isn’t to say the GOP is completely in the right – any significant tax cut at this point will likely increase the deficit, and, in fact, do little to help the economy.

This might come as a shock; it is the guiding principle of conservatives that low taxes stimulate economic growth. There is certainly value to this argument – after all, it is only logical that if producers and consumers have more to save and spend, they’ll be better off. But this supply-side view of the economy ignores two crucial factors: borrowing (i.e., the deficit), and inflation. “Starving the beast,” as Reagan put it – lowering taxes to reduce government revenues, which in turn shrinks the size of government – rarely works, as Reagan himself discovered.

Government keeps on getting bigger, or at the very least it won’t get smaller, and declining returns from taxation only serve to increase the deficit. To avoid defaulting on its numerous loans, the government must resort to alternative methods of survival, principally borrowing. To most conservatives, this is innocuous; however, it is no different from taxation: resources are siphoned from the private to the public sector, and the tax cuts become an illusion – the producers have no more capital than before.

Another scheme of government is inflation (equally bad, doubly sinister) – rather than taxing its citizens into oblivion or borrowing its way into the abyss, Uncle Sam simply prints more money. The consequences of this are numerous but subtle – income disparity (as prices and, therefore, corporate value rise, CEOs and other executives earn fatter paychecks), a higher cost of living (meaning greater poverty and a lower quality of life), and a whole host of social ills revolving around easy access to, and, therefore, an unhealthful desire for, money. Capital assets are devalued, destabilizing the economy. Stock market booms are fueled by government fiat. And the state continues to absorb money better used elsewhere.

In short, any tax cut that leads to a higher deficit isn’t a tax cut at all. The government either negates the beneficial effects by borrowing the leftovers away or by debasing them. Any positive results are ephemeral.

This is not to say there are no positive results at all. The Kennedy (or, more appropriately, Johnson) tax cuts resulted in a windfall of fresh revenue for the government and unleashed an era of prosperity – but then the 1970s washed it all away. Ronald Reagan slashed rates (only to raise them shortly thereafter), but it was the high interest rates his administration promoted that lifted the economy out of the 70s malaise. Perhaps the most successful example of tax cuts comes under the much-maligned Warren G. Harding, who slashed rates from over 70% – but this was accompanied by a commensurate reduction in federal spending and a return to sound money (unfortunately abandoned in 1927, which led directly to the Great Depression).

Assuming Trump and his acolytes pass their proposal (and in the words of my friend, “They will have completed ONE thing”), the economy might improve. But Trump’s vocal fondness for debt and low-interest rates doesn’t bode well for the future. Those hoping for a change for the better under Trump had better start looking elsewhere, for without significant cuts to both taxes and spending, and even more importantly, a return to a sound dollar, this tax reform will be no reform at all.

One Comment

  1. *sigh of relief* Another sensible, insightful, and overall enjoyable article from Joshua Orsi! Thanks so much. This helps me understand the Tax proposals much better. Well done, my friend.
    By the way, I would argue the point of this Tax Plan being the “ONE” thing the GOP has recently accomplished 😛