October 23, 2018

The Tax Cuts Were a Failure... In Most Ways

“A tax cut has a big first-order effect: the people whose taxes are reduced have more money, and the government has less. Since both of these — more inequality and higher deficits — are generally regarded as bad things, Republicans habitually dismiss them, and instead focus on second-order effects they predict will happen. The supply-side economic theory favored by most Republicans holds that rich people are exquisitely sensitive to tax rates, and their willingness to work or invest rises and falls dramatically in response even to small changes in tax rates.

This is why Republicans predicted upper-bracket tax hikes, like those passed under Bill Clinton and Barack Obama, would massively depress economic activity and raise less revenue than standard forecasts predicted. (It didn’t.) It is also why they predicted tax cuts passed by George W. Bush, and Republican governments in states like Kansas, Oklahoma, and Louisiana would yield far more revenue than predicted. (It didn’t.) They maintained the same belief about President Trump’s corporate tax cuts. The conviction is so strong that even the most moderate Republicans insist higher growth would cause revenue to rise rather than fall is response to the tax cuts.

In the ten months that have passed since Trump signed the tax cuts into law, the second-order effects have been undetectable. Nothing bad has happened to the economy; on the other hand, nothing especially good has happened, either. Growth and wages have tracked at about the same pace as before Trump took office. Republicans built a messaging campaign around one quarter of 4 percent growth, which they treated as unprecedented and now permanent development, ignoring the fact that the economy produced several such quarters under the Obama administration.”

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