Monday, September 18, 2017

Trump, Tax Cuts and Republican Inertia

Last week I received a fundraising email from the Republican National Committee. It appeared to be a joint effort by the RNC and President Trump; my interest in supporting the RNC is barely above freezing, but since I like the president I pitched in a small donation.

When the thank-you note arrived, it was not exactly what I had expected (and bear in mind that I got this email a few days ago):

Thank you for your donation of $xx to the Republican National Committee (RNC). Your support of the RNC paves the path to victory in 2016. Simply put, we can’t win the White House without you. I’m grateful for your commitment to our shared goal of electing a conservative president in 2016. Your donation to the Official Committee in Charge of Taking Back the White House makes a big impact.
So, how should I interpret this...? On the one hand, it could be seen as an expression of their resentment toward the fact that Trump won: they still think they need to "win the White House". I was under the illusion that my donation would somehow help further the president's agenda, but the money apparently went to "the Official Committee in Charge of Taking Back the White House".

On the other hand, there is the possibility that the donations managers sent out the wrong thank-you note. That, however, raises another question: why are they so careless that they still keep a year-old response letter on file, ready for mass distribution? Is this how little think about us? 

In other words: what is the difference between the Republican Party and government? (No, that is not a rhetorical question - I would really like to know...)

Of course, a thank-you note hiccup is no reason to throw the entire Republican party out the door. But the whole experience reminded me of one of the most troubling political problems in this the Trump era: Republicans in Congress suffer from political inertia. 

This is not just a punch line. It is a serious legislative problem that raises a number of questions about our nation's future: does the Congressional Republican leadership, with whom this inertia originates, have even the faintest idea what is at stake here?

And no, next year's election is not one of the items at stake. This is about far more than that. If the Republican political inertia continues, one of the first victims is going to be the American economy.

As I explained recently, the rise in GDP growth so far this year is predominantly the result of Trump getting elected and his first few months in office. He has begun deregulating the economy, and he has sincerely tried to get Republicans in Congress to go along with ACA repeal-and-replace. These items, together with the prospect of a comprehensive reform to the federal income tax system, have worked like a B-12 injection into the economy. 

While the effects of deregulations are going to be permanent, the positive outlook associated with repeal-and-replace, and with tax reform, is only going to last for so long. Republican political inertia has shut the door on free-market reforms to our health insurance system - barring a leadership revolution in the Republican Congressional caucus, we will be sitting pretty much where we are until the Democrats create their single-payer system. 

Yes, that's right. Our market-based health care system will be the first casualty of GOP's political inertia. Do not mistake Senator Grahamnesty's Obamacare pirouette last week for a real reform effort: it was nothing more than a tragic attempt at deflecting voter resentment. 

In addition to sacrificing our health care system, the GOP's decision not to deliver on their eight-year-old repeal-and-replace promise will inevitably put a damper on Trump-inspired economic optimism. Families and entrepreneurs will inevitably realize that the cost savings they hoped to see from repeal-and-replace are not going to happen.

Our economic prosperity is the second casualty of the political inertia. 

The consequences for the economy will be reinforced by the coming tax-reform debacle. This is even more serious, because after the repeal-and-replace failure, even more of our economic future now hinges on a good, growth-inspiring tax reform. 

Trump wants to see cuts to both corporate and personal income taxes, and a simpler life for tax filers. The problem, again, is that there is a big elephant in the room that is very comfortable where it is. Thanks to this elephant blocking the door, Trump can't have a serious, productive conversation with with Speaker Ryan (RINO-WI) and Senator McConnell (?-KY). 

Therefore, his only option is the other door, the one that leads to the room where Schumer & Pelosi are waiting. 

And here is where the trouble begins. Fox Business explains:
Top Republican lawmakers, including Texas Senator Ted Cruz, are pushing to cut taxes and simplify the tax code. GOP leaders are expected to roll out their tax reform plan within weeks, and House Speaker Paul Ryan (R-WI) has said that he is aiming to finalize a new plan by the end of the year. However, Democratic leaders oppose any tax cuts for high earners. A letter signed by 45 of 48 Senate Democrats declared that they were willing to pursue a bipartisan reform of the tax code – under the condition that the plan does not include tax cuts for the wealthiest Americans.
It is a good, basic rule that any tax cuts are better than no tax cuts. However, that is not the standard that we should hold ourselves to. We could do much better. Unfortunately, the outlook for real tax reform is no more, so the best we can hope for is probably a Trumpocrat reform deal. 

The problem with the kind of deal Democrats would be comfortable with, is that it would solidly squander the positive effects of its own tax cuts. The reason has to do with the distributive profile of a tax deal that Democrats would demand in order to get onboard. By cutting taxes only for low-to-middle income earners, the Trumpocrat reform would reinforce the strong redistributive slant already pervasive in our federal tax code. As economist Walter E Williams explains, the top-ten percent income earners pay 70 percent of all federal income taxes, while the bottom-50 percent pay as little as three percent.
Let us get a bit more detailed. According to IRS tax filing data, Americans filed 148.6 million individual income-tax returns in 2014 (the latest year for which comprehensive data is available). Of those returns, 142.3 million - or 93.7 percent - reported an income of less than $200,000. Together, those tax filers earned almost $4 trillion, out of which they paid just over half-a-trillion dollars in taxes ($575 billion). 

The rest of the taxpayers, with a per-return income of $200,000 or more, earned a total of $2.9 trillion. Out of that income, which was 42 percent of all income earned, they paid 58 percent of all individual income taxes.

A total of 6.3 percent of all income earners paid 58 percent of all personal income taxes, while only earning 42 percent of all income. 

If President Trump has to work with Democrats to get tax cuts through Congress, that share will grow even higher. We already have a tax system where - as Walter Williams points to - the number of taxpayers among working people is dwarfed by the number of working people who do not contribute to the funding of the federal government. 

With a Trumpocrat tax reform, the imbalance between taxpayers and working non-taxpayers is going to grow even bigger.

There are several problems with this. First, we run the major risk of creating strongly discouraging marginal effects in our tax code. Fewer people will think it worth the while to transition from the large community of working non-taxpayers into the exclusive club of taxpayers. The fallout, obviously, will be fewer small businesses (whose owners file under personal income) and those who exist will be less interested in expanding. As a result, our economy creates fewer new jobs, the tax base shrinks (in relative terms) resulting in less tax revenue and slower economic growth.

Secondly, when a shrinking group of people fund government spending, members of Congress open themselves up even more to lobbying. The fewer the taxpayers, the more leverage they will have to ask for loopholes, exemptions and other means to reduce their actual tax burden. In addition to further erosion of the tax base, this creates an increasingly complex tax system where filing costs rise and compliance becomes more and more difficult. All this while lobbying money increases its influence over Congress.

Third, the growth in the population of working non-taxpayers inspires more entitlement reforms. Already the good old Romans knew that you would buy votes by handing people money from government; when the large majority of working Americans no longer pay any federal taxes, they no longer have any stake in the funding of entitlements. Therefore, they are much more susceptible to proposals of new entitlement programs to their favor. 

When Paul is paying the entire bill for Pete's government handout, Pete has no incentives to alleviate the burden on Paul's shoulders. From a Congressional viewpoint, this means that it will be easier for Congress to buy more votes with more generous entitlement programs. More people become more dependent on fewer of their fellow citizens, but also feel increasingly entitled to what those few can deliver. (Churchill's words, "Never before have so many owed so much to so few" suddenly take on a new, much more sinister meaning...)

Fourth - and this is a point I do want to emphasize - the ideological argument that opposes cuts to high personal incomes is the same argument that wants to stop cuts to corporate income taxes. While there is no technical relationship between personal and corporate income taxes, there is certainly an ideological tie between them, and when it comes to corporate earnings, focus is on profits. By the Marxist playbook, profits are evil; no matter how much today's Democrats would like to deny it, their basic egalitarian ideology is a direct derivative of Marxist political thought. That includes the notion that profits somehow steal money away from workers and consumers. Since high incomes are also considered unfair - for much the same reasons as profits are evil - the outer left rim of the political spectrum is home to deeply rooted resentment toward any kind of tax cut for "the rich". 

In other words, if Trump is forced to strike a tax-cut deal with the Democrats, the consequences will be a bit more money in some people's pockets, but to the price of: 

--growing tension between those who provide for entitlements and those who consume them; 
--a cement foot on our current corporate tax structure;
--hardened ideological dividing lines; and
--an even faster increase in our federal budget deficit.

Let us not be deceived by the nominal Republican majority in Congress into believing that a Trumpocrat tax deal cannot happen: the president and the Democrats could easily win over enough RINOs to get it through the House. 

As for the Senate, the Democrats already have a de facto majority there, including Maine-ly liberal Susan Collins and John the Statist from Arizona. 

Here in Wyoming, we need to pay close attention to the tax-reform debate in Washington. We have our own problems with tax hikers running around the state looking for more taxpayers. A Gross Receipts Tax, or a fundamental re-design of the Gross Products Tax (into another kind of Gross Receipts Tax), would increase the burden on businesses in our state. If at the same time we get a Trumpocrat tax deal - which currently seems to be the only route to any federal tax cuts - and Obamacare remains in place, then the net effect of our in-state inflicted tax hikes would be decidedly negative for all Wyoming businesses, large and small. 

Needless to say, even if, through some political miracle, Republican political inertia ended and the GOP made President Trump's original tax plan law of the land, that would not be a green light for higher state taxes here in Wyoming. Our state has the worst macroeconomic performance in the country, which in itself is a solid reason for many businesses not to set up shop here. 

To put more distance between us and the rest of the country would be a thoroughly bad idea, regardless of what happens in Washington. But the longer the Republican inertia lasts, the more important it becomes that we, here in Wyoming, work to shrink the burden of government - not grow it. 

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