What Is the Trump Administration's U.S. Tax Cut Plan Likely to Look Like?: Not So Fresh at Project Syndicate

Supply Side Amnesia by J Bradford DeLong Project Syndicate

Supply-Side Amnesia https://www.project-syndicate.org/commentary/republican-tax-cuts-budget-deficit-by-j--bradford-delong-2017-09: In the spring of 1980, Martin Feldstein co-taught (with Olivier Blanchard) the second-best macroeconomics class I ever took. (The best was a class I took from Olivier alone three years later.) From 1982-1984 Martin Feldstein served in Ronald Reagan's cabinet as Chair of the President's Council of Economic Advisers. There he waged an effective if lonely bureaucratic war for the proposition that the size of the Reagan tax cut of 1981 had been a big policy mistake, and that America would suffer if that mistake was not repaired. That position was unpopular inside the Reagan White House: chief-of-staff James Baker tried to get everybody on to the page of delay, in the hope that something would turn up, and avoid the administration having to admit that its signature tax-cutting initiative was, at least in part, a mistake.

James Baker and company won the political debate. The U.S. budget deficit created by the Reagan tax cuts was not tamed until Bill Clinton in 1993—over the unanimous objections of every Republican in the House and in the Senate—put the spending and revenue trends on trajectories that did not diverge but converged. In the meantime, from 1982 to 1993, the Reagan deficits helped give the economy a faster recovery from the recession of 1981-2, but also slowed growth from 1984 on as resources that ought to have funded investment in America were instead diverted to funding elite consumption spending, and in the process hammered midwestern manufacturing and created the so-called "Rust Belt": as Feldstein wrote even before it happened, the circumstances then were such that a high deficit led to higher interest rates which led to a stronger dollar and contraction of America's import-competing manufacturing sector.

An America in which Marty Feldstein had been listened to in 1982-1984 would be a stronger and a happier America today.

Thus it is with dismay that I read Martin Feldstein here at Project Syndicate https://www.project-syndicate.org/ writing that he is "optimistic that a tax reform serving to increase capital formation and growth will be enacted, and that any resulting increase in the budget deficit will be only temporary..." (See "Tax Reform and Budget Deficits in America" https://www.project-syndicate.org/commentary/us-tax-reform-and-budget-deficits-by-martin-feldstein-2017-08):

  • When, in our lifetime, has a Republican-sponsored tax cut failed to create a deficit?

  • And when has that deficit been "temporary" in any sense other than it is eventually put on a trajectory back toward sustainability when a later Democratic administration reverses it—Clinton with the Reagan tax cut, Obama with the George W. Bush tax cut?

  • And when, in our lifetime, have whatever incentives making savings and investment more profitable are included in a Republican tax cut bill raised national savings by more than the budget deficit drain has reduced it?

The answers to those three questions are, respectively: "never", "never", and "never".

A pro-growth revenue-neutral tax reform might—I say might—be possible in the United States if it began with a core group of suppoprters comprised of a bipartisan group pro-growth anti-deficit centrists. Then you could indeed assemble supporters from the now highly taxed by promising to lower their rates, and assemble supporters from the now lightly taxed by promising that their taxes would not go up very much and that the growth benefits from these particular changes in the tax code are relatively large. But it is not possible if you begin with a core group of supporters comprised of right-wingers who believe that taxes are a confiscatory invasion of the liberties of billionaires, centi-millionaires, and deka-millionaires; and who regard cutting their taxes with little regard as to whether it leads to increases in investment in America as job #1.

Yet that is what we have now: build the coalition for the tax bill from the right heading toward the center, rather than from the pro-growth center spreading out.

If you look at how Martin Feldstein describes the Republican—and it is Republican, not, as the 1986 bill was, bipartisan—tax plan, I saw one "would"—"would cut the top tax rate back to 30% or lower", and then I saw three "mights". Reading further, I saw another "would—"reduce that [corporate] rate to 25% of less"—followed by an "is likely". What might—but also might not—make whatever tax bill might move through the U.S. Congress this fall a net benefit for America rather than just for its super-wealthy hinges on whether those "mights" and that "is likely" actually come to pass. And history and logic tell us that such an outcome starting with a core supporter group that is on the hard right is very unlikely indeed.