One of the problems with assessing whether policies designed to promote growth actually work is that the U.S. economy is unfathomably huge. There are millions of different variables, making it difficult to figure out what caused what. For example, economists are still debating all these decades later the effect FDR’s New Deal had on the Great Depression.
Also, the public debates about any issue today are so partisan and so hateful that real analysis often gets lost.
With that background, it’s difficult to tell what effect the Republican tax cuts will have on the economy. But let’s step back for a moment and look at the basics:
1. The bill will cut taxes considerably for everyone, but moreso for businesses than individuals.
2. The tradeoff is it adds debt.
Conservatives argue a pro-growth policy of law taxes will lead to a stronger economy. In general, I believe that. Look at Hong Kong, an inconsequential spec on the edge of China with no natural resources to speak of. Yet it’s rich because it pursued a low-tax, low-regulation course.
The alternative, though, is that it’s doubtful that a tax cut will trickle down so that the economy grows to the point where the government takes in more tax revenue as it did before the cuts. Think of it from a business perspective: In most cases it’s not plausible to cut prices and make more money. Sure, you’ll sell a little bit more at a lower price, but it never seems to be enough to offset what you lost. Hence why we have persistent inflation and never deflation: It’s usually in the best interest of profits to raise prices, not lower them.
Business tax cuts are cast as helping greedy corporations at the expense of the working man. I get that point of view, but the other side is that if you’re trying to shape tax laws to build the economy, your goal is to create incentives for businesses to invest. The million dollar question is whether lowering the corporate tax rate will do that.
My prediction is in the short term corporations will simply increase their dividends to satisfy hungry shareholders. But in the long term, a significantly lower corporate tax does give more incentive to try and make more money. It’s pretty discouraging to think that I’m going to bust my back to make a profit, and the government’s going to take 39 percent of what I worked for. In that light, 21 percent is a lot more palatable.
The lingering question behind all this is how much debt our country can take on before collapsing. That answer is dependent on how much the economy keeps growing. If it continues to do so, then we’re not in trouble as we’ll bring in enough in new money to pay our bills as they come due. But if we hit an extended period of a shrinking economy, then it’s going to be trouble.
Who knows what will happen?
In light of that uncertainty, I’m reminded of some timeless advice about not putting too much stock in things that can quickly disappear: “Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal: For where your treasure is, there will your heart be also (Matt. 6:19-21).” n
Reach C-P Editor and Publisher Charlie Smith at csmith@columbianprogress.com.
