Republicans pitch broad tax cuts. Is that what economy needs?
Washington and Boston—In laying down a sweeping tax reform Thursday, House Republicans have put all their trust into a central tenet of conservative thought: Tax cuts will spur growth.
By itself, it may not be that controversial an idea. But for the current US economy, it’s also not the obvious need.
In fact, a big challenge for the GOP is to show that its specific mix of tax cuts will provide enough short-term oomph to America’s economic engine now that it will have enough momentum to counter some of the long-term drag from more federal debt.
And that is an iffy proposition, economists say. It depends on two things: the timing of tax cuts and whether they make the economy more competitive.
From a timing perspective, the Republican tax cut looks odd. The economy is growing steadily. Wages are growing, albeit slowly. Unemployment is very low by historical standards.
Do America’s taxpayers really need a stimulus to spend more? Probably not.
“If you have tax cuts [to fight] a recession, that’s one thing,” says Michael Klein, an economist at Tufts University’s Fletcher School of Law and Diplomacy in Medford, Mass. But “if we’re already at full employment, it’s not clear how much you can goose the economy beyond that.”
Seeking to bring profits back from overseas
But from a competitiveness standpoint, the need for tax reform is urgent, Republican officials and some economists say.
The United States has the highest corporate tax rate in the developed world. By slashing it, the GOP has a chance to make US businesses more competitive internationally. And through various other reforms, the United States will eliminate loopholes and make it easier for multinationals to invest their foreign profits back into the US.
Even if, by eliminating loopholes, some industries pay more in corporate taxes, reform has the advantage of shifting incentives toward industries that provide the most economic growth, rather than those with the most lobbying power in Washington.
“It is an incredibly historic opportunity that we are embarking on,” says Jonathan Williams, chief economist of the American Legislative Exchange Council, which represents conservative state legislators. “Hopefully, we’ll be able to give the American people a Christmas present.”
But the GOP faces a problem in getting corporate tax cuts through Congress. They’re about as popular as fruitcake. In a CBS poll released Wednesday, only 17 percent of respondents wanted corporate taxes reduced; 56 percent said they should be increased.
Do tax cuts boost growth?
So the Republican leadership is twinning corporate tax reform with tax cuts for individuals, almost across the board, in a package they’re pitching as “pro-family, pro-growth.” Polling suggests the idea of lightening tax burdens on the middle class is a popular idea with the American public.
And economists generally see an opportunity to modestly boost gross domestic product (GDP) through reforms that simplify the tax code in a “revenue-neutral” way. Lower tax rates, with fewer deductions, might create a tax code with stronger incentives to work and invest.
With revenue-losing tax cuts, the view shifts. In the short run at least, a cut in taxes can provide a stimulus by putting more money in people’s pockets. Longer run, the effects aren’t so clear. In a nation with high and fast-rising public debt, and chronic deficits, a risk is that tax cuts financed by borrowing will if anything slow future growth, by worsening the nation’s credit rating and adding to the tax burden of future generations.
By blending reform and tax cuts, the Republican plan would be the most ambitious tax-code overhaul in 31 years, while deepening official deficit projections by $1.5 trillion over the next 10 years.
What’s in the plan?
On Thursday, House Speaker Paul Ryan touted the stimulative impact of putting an estimated $1,200 a year back into the pockets of a typical family of four.
“About half the country today is living paycheck to paycheck,” Mr. Ryan said in introducing the legislation. “If we don’t do this, we will not get the kind of economic potential that we know we can reach.”