“I want you, I need you, But there ain't no way I'm ever gonna love you, Now don't be sad, 'Cause two out of three ain't bad”
Meatloaf, Two out of Three Ain’t Bad.
Democrats have pressed three main argument against the Tax Bill: (1) it only benefits the middle class if corporate decision makers generously raise wages; (2) it is a major spending package favoring wealthy and corporate interests; and (3) it won’t pay for itself through economic growth.
“Two out of three ain’t bad.”
(1) The tax bill only benefits the middle class if corporate decision makers generously raise wages.
Individual acts of corporate generosity cannot improve the economy. At best, such acts can temporarily redistribute wealth or other perks to employees, but unless such policies improve profitability, they are more likely symbolic than sustainable. Corporate spending policies are based on expected marginal returns, compared with other opportunities, for each incremental expenditure. Under the new tax law, CEOs will assess marginal opportunities for myriad policies, including research and development, stock buy backs, shareholder dividends, wage increases, facility locations, and even governmental lobbying. (Because future Congresses are not bound, firms relying on the new tax law will lobby against its repeal.)
Whichever policies firms embrace will potentially, but not inevitably, benefit the economy. Buying back stock, paying dividends, investing in R&D, and the like, each infuse liquidity into the economy even if not immediately benefiting middle class employees. Buying stock implies confidence that the firm will continue to thrive. Paying dividends motivates stockholders, who are generally wealthy, to make their own marginal calibrations between consumption and savings. Increased R&D or facility relocations pump money into the economy. Whether increased liquidity benefits the middle class, whose welfare depends first and foremost on a robust economy, through one step or several, it is economic growth, not corporate generosity, that ultimately benefits the middle class. This includes, perhaps especially, those not yet in it, but who aspire to be. Making wealthy individuals wealthier will undoubtedly spur more consumption. Wealthier people also save at higher rates, and aggregate savings is the flip side of, and thus the critical spur to, investment. Whether corporations improve worker wages directly, or otherwise infuse capital into the economy, the infusion has at least the potential to spur economic growth.
Some might read this as a blind endorsement of supply side reasoning. That’s mistaken. The reasoning of supply side economics isn’t the problem. Rather, supply side economics depends on ambitious assumptions that do not invariably hold. Whether tax cuts to the wealthy and to corporations will generate growth by infusing capital into the economy largely depends on interest rates and unemployment levels. It is also affected by infrastructure quality and an available skilled workforce, factors largely endogenous to economic conditions.
The most serious challenge for the new tax law is that interest rates and unemployment are already extremely low. The economy is humming, and therefore, capital is already cheap. Assuming that infusing more capital through a tax cut primarily benefiting the well-off will spur significant new investment opportunities, thereby benefiting the middle class in these conditions, requires an ambitious leap of faith.
(2) The tax bill is a major spending package favoring wealthy and corporate interests.
Some (not all) on the right insist that this tax cut, or any other, cannot be characterized as a government expenditure because it simply returns money that is ours. This isn’t a word game; they believe it. Those holding this view further believe that government is only legitimate when it facilitates private economic activity. And some go so far as to claim that anything that doesn’t serve that limited function, thereby ensuring a minimalist state, is tantamount to theft.
In a separate post, I recently explained why I am not a libertarian. I regard this argument from the right as indefensible. There has never been an idyllic minimal state. There has never been a libertarian utopia. We live in the world. The real one. The United States, like all developed capitalist nations, benefits from a robust combination of private industry and a well-developed governmental infrastructure that provides public goods and services, along with, among other things, a social safety net.
Trying to unravel how much private industry “owes” to governmental infrastructure, and thus trying to identify the valuation point beyond which taxation becomes theft, is rather like trying to recapture the separate ingredients after the cake is fully baked. Even setting aside the contestable philosophical premises of the claim, the task is impossible. A more fruitful question is whether there is a better place to move capital, hoping to secure a more favorable return on investment, while also enjoying the myriad benefits that the United States, or a comparable developed economy, provides. If such superior opportunities don’t exist in the real world, and they don’t, it’s time to stop claiming theft and also time to stop characterizing pre-tax-cut moneys as “ours,” at least in the individual, as opposed to collective, sense. Sure, everyone should continue to press her or his preferred policies, including tax policies, but let’s have that conversation against a meaningful baseline. When we do, it becomes clear that characterizing the tax cut as an expenditure, one that almost inevitably raises the national debt, is defensible.
(3) The tax bill won’t pay for itself through economic growth.
If the tax bill won’t finance itself, the law is not merely regressive, redistributing from poor to wealthy, but also inter-generationally unfair, redistributing to today’s wealthy at the expense of future generations of workers. Some insist that tax cuts are invariably self-funding. As the economy grows, following helpful policies that came before, the base becomes larger and larger. As Albert Einstein observed: “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”
The problem, however, is that the intuition applies equally to GDP and to the national debt. For the tax law to be a net positive, it’s not sufficient that GDP grow more than the national debt. Paying off the national debt requires a sustained budget surplus. The federal deficit is simply the annual accretion to the national debt. Moving from deficit to surplus, as is required to reduce the debt, also requires capturing part of the economic growth spurred though the tax cuts. Of course, the new tax law dramatically reduces tax rates, lowering revenue recapture, all else equal. The stated rationale is to keep economic activity at home, and to invite capital flows from abroad, so that all else will not be equal, and in a good way. Let’s hope so.
Even assuming we end up with significant growth, the federal government only captures part of the resulting GDP growth through taxation. The critical question becomes: Will the economy grow sufficiently on a sustained and ongoing basis that the incremental gain in tax revenues, captured at now-reduced rates, will overtake the corresponding diminution in tax revenues resulting from the same reduced rates? Answering that question requires nuanced and complex calculations by econometricians and tax experts. I am neither, and so I necessarily rely on experts who are. By virtually all credible budgetary assessments, the answer is no. See here and here. This is not news, and these calculations, which have never been a secret, were available before the final voting. Everyone knew it all along, despite claims—sure, one might call them lies—to the contrary.
In another Meatloaf hit, the protagonist feverishly pursues his singular goal, which requires that the woman sharing the front seat of his car willingly engages. The growing sexual intensity matches the heat of conversation.
“Will you love me forever?
Let me sleep on it
Will you love me forever!
I couldn't take it any longer
Lord I was crazed
And when the feeling came upon me
Like a tidal wave”
The #MeToo movement renders the moral valence of “Paradise by the Dashboard Lights" ambiguous at best. On the one hand, the man is willing to say virtually anything to get what he wants, “swearing to my god and on my mother's grave, That I would love you to the end of time!” On the other hand, we learn that he’s a man of his word. I envision this tragic character reflecting back, decades later, on the enormity of a decision made under intense pressure. Through the rear view of time, the tidal wave of hormonal youth must weigh heavily, at the edge of nearly each waking thought.
And so, I think about today’s Republican leaders, decades hence, looking back upon a time when, after a truly remarkable year, having controlled all three branches, they risked going home empty handed. The mounting pressure intensified, suddenly focused on a singular goal.
Will they too think: “It was long ago and it was far away, And it was so much better that it is today”? I hope the consequences of their commitment, which binds us as well, proves less tragic.
I welcome your thoughts and comments.