Tax Reform

11/29/2017 12:10 pm ET

Unjustified Tax Manipulations -- by Jerry Jasinowski

Congress is in an uproar running out of time to raise the debt ceiling, approve a 2018 budget and, oh yes, cut taxes by the end of the current session. There is of course no consensus on tax reform. These days there is no consensus in Washington on much of anything. But there is a consensus among Republicans that they have to do something – anything – to justify their majority status and the tax bill is their last chance for major action. But the tax changes are unjustified from a policy perspective.

Without question tax reform is long overdue. Our tax system is hugely inefficient, weighed down by thousands of pages of special tax breaks for influential groups that distort financial markets and discourage productive investment. To be sure there are some provisions in the tax legislation now under consideration that have merit. For example, there would be some limitations on the deduction for home mortgages which would affect mainly the well to do.

Even so, the current legislation moving through Congress with undue haste and without bi-partisan support is not the serious reform we so desperately need. It is rather a blatant attempt to award more tax breaks to the people who need it least. According to Congress’s own non-partisan Joint Committee on Taxation, by 2027 every income group under $75,000 would on average experience a tax increase.

Both the House and Senate bills are heavily weighted to benefit large business on the assumption that it will use the extra money for capital investment. It would more likely be used to bolster dividends and buy back stock. But while there would be some economic benefits to the tax cuts, the net loss to the treasury will not be offset by increased economic activity. The tax bills being considered by Congress will clearly add to the budget deficit.

This is a particularly poor time for deficit financing since the economy is close to full employment. Thus, both the House and Senate tax measures are primarily likely to stir inflation and raise interest rates.

The bigger question is how much of GDP the government will spend. From 1946 through 1980, federal revenue was about 17 percent of GDP. Since then it has averaged 17.3 percent. But most of the increase has come from payroll taxes, not income taxes. We are still drowning in red ink but that is due to the growth of spending. From 1946 to 1980, it averaged 18.1 percent of GDP. From 1981 until the present it has averaged 20.6 percent. Growing spending on defense is a major cause of the increase along with interest on the national debt. But the real issue is entitlement programs – Social Security, Medicare and Medicaid.

To the extent we have a taxing problem, it is clear that we are undertaxed in relation to what we spend. In terms of total burden of federal, state and local tax burden, the U.S. ranks 31st out of the 35 OCED nations. Neither the House nor Senate tax bill would do much to encourage economic growth and even less to address the fiscal challenge of growing entitlements and deficits.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. November 2017

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