Tax cuts damage economic growth?

Only if they are not paired with spending cuts.

Ever since the seventies, Republicans have argued that the economic growth spurred by tax cuts would raise enough government revenue to overcome any negative effects on the deficit. But Peter Suderman, writing at Reason Magazine, argues that tax cuts may harm economic growth if they increase deficits — and that the GOP does not care:

Republican leaders, however, dismissed these estimates, saying that economic growth spurred by the tax cuts would make up the difference. Never mind that Republicans had made similar claims about the likely deficit effects of the tax cuts passed under George W. Bush, and those claims had proven wrong. This time would be different. As Ryan said last year while the tax plan was moving through Congress, "We believe that . . . with economic growth that gives us more revenue with where we need to be." The tax bill passed. The deficit increased and is now on track to hit $1 trillion years earlier than previously expected.

Once again, there is scant evidence to support the notion that economic growth would compensate for the deficit effects of a second round of tax cuts. On the contrary, there is reason to believe the opposite. Although the Joint Committee on Taxation (JCT) projects that making those tax cuts law would produce a modest growth bump in the next decade, it would not come close to offsetting the total deficit increase. Even accounting for that growth, it would still leave a deficit impact of about $545 billion by 2028. That is in addition to the impact of last year's tax law.

More importantly, the JCT projects that adding to the debt would likely raise interest rates, especially in the following decade, resulting in adverse effects on the economy. According to the JCT, after 2028, under a second round of tax cuts, "while employment will continue to be somewhat higher than projected under present law, investment and GDP will be lower than under present law, and the budgetary feedback from this effect will become negative." This is in line with a Penn-Wharton Budget Model analysis published earlier this year that found extending the individual tax cuts from last year's bill would add $5 trillion to the debt by 2040 "and actually reduces GDP during the first 10 years and beyond." Under the GOP's preferred tax plan, in other words, the economy ends up smaller than it would be otherwise.

Over and over again, Republicans have claimed that their tax plans will reduce the deficit by increasing economic growth. But the promised deficit reductions have never materialized, thanks in part to the fact that the GOP has repeatedly paired revenue-reducing tax cuts with federal spending increases. Just last week, in addition to the tax bill, the House GOP passed an $853 billion spending bill. Under Republican control, Congress added $2.4 trillion to the national debt during the 2018 fiscal year.

Going forward, rising debt and deficits are likely to become a significant burden on the economy and should a further round of deficit-financed tax cuts occur, it will only increase the drag. Yet that is what Republicans say they want. The available evidence suggests that in the long term, Republican tax policy is now anti-growth.

Read the whole piece here.

So, you might ask, if you agree with Suderman (and I do), then why did Campaign for Liberty support the tax cuts?

Because tax cuts put more money into the people’s hands and less in the hands of politicians and bureaucrats. Individuals know better how to spend their money to meet their needs than government officials.

So libertarians should always support tax cuts because they enhance liberty. We should never adopt the supply-side argument that tax cuts are good because they grow the economy, as if people should only be allowed to keep their own money if politicians think allowing them to do so will benefit the economy. We must never embrace the argument that because tax cuts generate more revenue for the government, they are good. Instead, we should work for tax cuts below the point in the “Laffer curve” where they maximize government revenue. We want to minimize government revenue.

We must also never get caught in the D.C. game of offsetting tax cuts with other tax increases to make sure the government does not lose revenue. After all, you would not say a thief should only return stolen property if they can steal enough from others to make up for the loss.

To even speak of tax cuts as a loss for the government is to accept the statist premise that government has a moral right to our income . . . where, in fact, it actually owns all property, and so-called private property is merely a gift from government.

So how do we avoid increasing deficits? By offsetting tax cuts with spending cuts. We don’t have a tax problem. We have a spending problem, and critics of GOP tax policy are right to point out the benefits of tax cuts will be short lived if they are not paired with spending cuts. But that does not mean we should oppose tax cuts. It means we should put more pressure on them to cut spending.

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