Sometimes you find yourself having to say the obvious. So here goes: There is no good economic or social motive for the two $792 billion tax cuts just passed by the Republican Senate and House of Representatives. The justification for the cuts rests upon a misapprehension of the lessons of the 1980s, a foolishly optimistic view of the certainty of economic forecasts, a confusion of public and private goods, and an almost willful averting of the eyes from the realities of the U.S. economy. I know the cuts were dead on arrival. But it’s still amazing that the Republicans passed them.
Last things first. Tax cuts, in good Keynesian fashion, stimulate the economy. But the economy is already running at or near its productive capacity. Bond yields have soared above 6 percent on fears of inflation, and an interest-rate hike by the Fed at its August meeting now seems a foregone conclusion. In this environment, tax cuts serve only to overheat an already racing economy. And increased consumption is hardly what the economy needs. An argument can be made that spending on education and infrastructure would help boost the economy’s productivity in the long run. Certainly spending down the debt, reducing government borrowing, would have that effect by encouraging more productive uses of capital. It’s hard to imagine that a cut in today’s hardly confiscatory tax rates would do the same, especially when the major beneficiaries of both bills would be the wealthy, who have already reaped enormous benefits from the boom.
But perhaps, as we’ve been told time and again by Bill Archer and Phil Gramm, we should trust the people to spend their own money. Of course we should. Unlike economist Robert Frank, who’s worried that we’re buying too many Expeditions and Boxsters, I don’t really care what particular private goods consumers consume. But the people should also be able to spend their money on public goods such as public schools, highways, and stealth fighters, and they can’t do that if the share of the federal budget devoted to discretionary spending keeps getting smaller and smaller. No matter how much I’d like to, I can’t get together with my neighbors and pay for road improvements on the Interstate, or invest in NASA. I know the obviousness of this point is staggering, but so too is the disingenuousness of the rhetoric surrounding tax cuts. The money’s going to be spent in one place or another. It’s just a question of where, not a question of trusting the people or not.
A centerpiece of both tax cuts is a severe trimming of the capital-gains tax, which seems like a very odd decision at a time when short-term investing is on the rise and companies are having absolutely no trouble raising capital. Here again, the benefits of this cut will flow almost entirely to the wealthiest, and will solve a problem that currently does not exist (that is, capital scarcity). And although any capital tax distorts capital allocation, isn’t encouraging long-term investing a distortion that recent events in the global economy suggest might not be such a bad thing?
Most important, it’s essential to remember that all of these tax cuts and spending plans are predicated on the idea that the CBO or the White House can make meaningful predictions about economic growth, tax revenues, and budget surpluses 10 or even 15 years out. They can’t. The record of economic forecasting is an abysmal one, not because the forecasters are stupid or biased but because the economy is just too complex to predict with any accuracy. Phil Gramm did generously say that if the surpluses don’t materialize, Congress could just raise taxes to make up the difference. He also said that he had some Florida swampland, the Brooklyn Bridge, and a couple of hot Internet IPOs he wanted to sell us.
