Will tax cuts spur the American economy? Maybe with a time machine.

Yahoo News

Will tax cuts spur the American economy? Maybe with a time machine.

Matt Bai, National Political Columnist         December 7, 2017

Photo illustration: Yahoo News; photos: Getty Images (2), AP

Matt Bai’s Political World

Finally, Americans are going to get that massive corporate tax cut they’ve been clamoring for.

OK, not really — voters don’t put taxes high on the list of issues that keep them up at night, and the bill now careening through Congress is even less popular than the president, which is saying something. But Republicans are finally going to get the elusive legislative victory they can talk about in their districts over the winter break, and that’s why they’re hurrying to pass a bill they’ve barely had time to read.

A lot’s been said about this tax bill and the motives that underlay it. Critics charge that it’s really just payback for the corporations and contributors who have invested so heavily in Republican campaigns. They say Republicans who voted for the plan know full well that their economic program won’t magically pay for itself, and that the bill is a political weapon, designed to punish urban states.

My experience, though, has been that most politicians who espouse an economic philosophy actually believe in it, or think they do. So let’s just dispense for the moment with all the talk about Republican corruption and subterfuge, and let’s instead take the bill — and its backers — at face value.

Because it seems to me that if you’re looking to understand where we are as a country right now, the substantive theory behind this bill may tell you more than the political chicanery surrounding it.

For the last four decades or so, going back to Ronald Reagan, Republicans have been guided by a single tenet when it comes to growth: the alluring conceit of “supply-side” economics. What this means, essentially, is that lowering taxes puts more money into the hands of businesses and affluent consumers, which leads to more capital investment and spending, which leads to accelerated growth and ultimately higher revenues.

And, the theory holds, since businesses are the ones who hire working-class Americans and pay their wages, and since wealthy consumers are the ones who buy the most stuff, the additional wealth created by tax cuts inevitably “trickles down” to everyone else.

Liberals have always derided this entire theory (as did no less a Republican than George H.W. Bush, who called it “voodoo economics” when he ran for president in 1980). But all these many years and multiple tax cuts later, we should at least put Reagan’s program into some kind of larger context.

When Reagan came into office, at the height of a brutal recession, the top marginal tax rate was a whopping 70 percent; he immediately cut it to 50 percent. In 1986, Reagan and the Democratic majorities in Congress agreed to slash those taxes again, but they also raised the rate on capital gains. (That’s what actual tax reform looks like, by the way — some rates go down while others go up.)

You can certainly argue about how much of the economic recovery during the 1980s (and the recession that followed) can be attributed to Reagan’s policies. But it’s reasonable to assume that Reagan’s supply-side program had both positive and negative effects.

Putting all that money back into the pockets of business and the affluent probably did help spur some investment and hiring. But the tax cuts didn’t pay for themselves with added revenues, and even as Reagan agreed to raise other taxes a few dozen times during his presidency, the federal debt continued to grow.

A few decades after Reagan first cut taxes, George W. Bush pursued his own version of the same program, pushing through two huge tax cuts totaling about $1.5 trillion — or about as much as the Republicans’ current proposal. Again, those cuts (like all tax cuts, by definition) mostly accrued to the wealthy, on the theory that more money for job creators would ultimately trickle down, as Reagan promised.

But here’s the thing: A lot had begun to change in the structure of the economy — and in the structure of the entire society, really — in the years between Reagan and the second Bush. And that change has accelerated rapidly in the last decade or so, to the point where a theory that seemed at least plausible in 1980 should now be viewed as recklessly out of date.

Corporations today, as you might have heard, are doing business in a global marketplace that barely existed in 1980. They’re judged almost entirely by their stock prices from one quarter to the next, which means their imperative is to cut costs today, rather than invest for the next decade.

American capital drifts overseas, where labor is cheap. And manufacturers who do invest here are taking full advantage of a revolution in automation; go to any auto or steel plant, and what you will see are acres of robots, with a fraction of the workers who would have been needed in Reagan’s day.

That trend is about to remake the job landscape again. According to a nice roundup of the current research in last week’s New York Times, artificial intelligence will likely displace tens of millions of jobs in the next few decades, although new career paths may arise, too. The imminent takeover by automated cars could, by itself, overturn entire industries.

What this means, practically speaking, is that however hopeful the “trickle-down” idea may have been in the 1980s, it’s just specious now. The critical link between the fortunes of big employers and the American workforce has been all but severed; what’s good for the stock price (and stocks have been soaring these last few weeks) is no longer an especially useful indicator of what’s good for you.

And, yes, the additional trillion bucks in federal debt that will pile up as a result of this bill will add even more pressure, inevitably, to cut social programs that primarily benefit lower-income Americans. In effect, they’ll lose twice: once when the tax cut fails to create all kinds of new jobs or thriving communities, and again when the programs on which they rely turn out to be unsustainable.

All of which may add to a feeling of moral superiority among the president’s critics — but it shouldn’t, really, and this gets to my larger point about the generational failure that pervades Washington.

The populist left’s alternative answer to the transforming economy — to create all kinds of new federal giveaways while punishing the rich with pre-Reagan tax rates — seems just as nostalgic and futile as the one we’re about to see enacted. Neither approach gets to the core challenge we face, which is how to reconnect the fortunes of businesses and workers, so that the success of one doesn’t have to come at the expense of the other.

There are some promising ideas along these lines, though you probably haven’t heard much about them. Mark Warner, the Virginia senator and a tech millionaire himself, has been pushing, among other things, tax incentives that would reward corporate investment and a series of metrics to judge companies on their commitment to workers.

The think tank Third Way, which occupies the lonely center in the Democratic Party, has a couple of intriguing proposals. These include a guaranteed private retirement account for every worker on top of their Social Security, funded in part by employers, and the elimination of all payroll taxes for the poorest workers, which ought to have bipartisan appeal.

But there’s no real constituency in Washington for modernizing government. There are only constituencies for going back and doing what we did in one or another golden age when the economy looked completely different.

The main failing of this tax bill isn’t the crazy, one-sided process, or the little provisions dropped in for contributors, or the contempt for blue state voters — although all of these are flat-out disgraceful. The main failing is that the entire policy is based on a played-out intellectual theory, aimed squarely at the problems of an America we hold in our memories.

The supply of outdated ideas is endless, but our moment demands something better.

Author: John Hanno

Born and raised in Chicago, Illinois. Bogan High School. Worked in Alaska after the earthquake. Joined U.S. Army at 17. Sergeant, B Battery, 3rd Battalion, 84th Artillery, 7th Army. Member of 12 different unions, including 4 different locals of the I.B.E.W. Worked for fortune 50, 100 and 200 companies as an industrial electrician, electrical/electronic technician.

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