The Retaliation Game In Congress

12/18/2017 03:36 pm ET Updated Dec 19, 2017

This chart shows there has been little historic relationship between federal tax revenues as a percentage of GDP and  average
Chart: StatistaCharts. Data: Slemrod, Bakija, Gale
This chart shows there has been little historic relationship between federal tax revenues as a percentage of GDP and average growth in per capita GDP. It raises doubts about the claims of President Trump and congressional Republicans that their tax cuts will stimulate the economy and create jobs.

There are several things wrong with the Republican tax reform bill that Congress is expected to pass this week. At this late hour, two in particular are worth emphasizing.

First, neither history nor many of our best analysts agree with Republican assertions that tax cuts will boost the economy and create jobs. Nor is there reason to believe that the tax bill will help close the wealth and opportunity gaps in the United States. Consider these conclusions from various nonpartisan analyses of the “Reagan tax cuts” in the 1980s and their parallels with tax “reform” today:

  • In the Economic Recovery Tax Act of 1981, Congress tried to spur economic growth by cutting tax rates for individuals, creating incentives for small businesses, decreasing marginal tax rates across the board, reducing estate taxes and rolling back corporate taxes by $150 billion over 5 years. These changes drove up the federal deficit so that a year later, interest rates rocketed from 12% to more than 20% and the economy sank into the second dip of the 1978-82 recession. The Dow Jones average dropped from over 1000 to 770. Nevertheless, today’s Republicans promise great positive results in the economy even though their tax bill is expected to increase federal debt by $1 trillion.
  • In 2014, the Congressional Research Service (CRS) found that when tax rate reductions add to the federal deficit, as the GOP’s tax-reform bill will do, interest payments crowd out private investment – the kind of investments Republicans say their tax bill will encourage to boost the economy and create jobs.
  • In 2012, the CRS studied the effects of changes in tax rates over 65 years, from 1945 to 2010. It concluded that rate reductions had little effect on economic growth, savings, investments, or growth in productivity. However, reductions in top tax rates “appear to be associated with the increasing concentration of income at the top of the income distribution”. In other words, history shows that cutting top tax rates widens the wealth gap. As the Federal Reserve reported last month, wealth inequality is now at record levels in the United States. It could grow even wider if Republican leaders carry out their plan to pay for the tax bill by reducing entitlement programs next year.
A new study by the Federal Reserve finds that while the median net worth of American families has been improving across all i
Pew Research Center analysis of Federal Reserve Data
A new study by the Federal Reserve finds that while the median net worth of American families has been improving across all income brackets, the median upper-income family has 75 times greater wealth than the median low-income family. That’s up from 40 times as much wealth in 2007 and 28 times as much in 1989.
  • According to an analysis published last month by Brookings, recent studies by the Tax Policy Center, Wharton and Moody’s, as well as a poll of leading economists, indicate that the tax cuts in the GOP bill will have “minimal impact on overall U.S. economic growth.”

We will see, and the American people should watch, whether President Trump and congressional Republicans have found a way to defy history and the advice of contemporary analysts, or whether tax reform was meant all along to benefit America’s wealthiest individuals, including Trump himself.

The second issue worth mentioning is the process in recent years with which Republicans and Democrats have shut one another out of writing major legislation. Congressional Republicans shoved through their version of tax reform this year without public hearings, with no time for public scrutiny, despite cautionary projections about deficit spending, and without allowing any input from Democrats. If and when Democrats gain control again, it is likely that they will attempt to reform the reforms in the GOP bill not only to reflect more liberal economic philosophy but also to pay back Republicans from running roughshod over them.

Democrats are not blameless. In 2009, they controlled the House of Representatives, the Senate and the presidency, the reverse of what we have today. They used their advantage to ram the Affordable Care Act through the legislative process. While giving the appearance that passage of the Act was preceded by plenty of opportunity for debate and amendments on the floor of the Senate, the details were actually hammered out behind closed doors in the office of Majority Leader Harry Reid of Nevada. Using a variety of parliamentary procedures to block Republican input, Reid finally pushed the bill to passage at 7 a.m. on Christmas Eve morning.

Now with control of Congress and the White House, Republicans have done everything they can to repeal and replace Obamacare, finally using their tax bill to scrap the part of the law designed to keep insurance premiums low – the requirement that all Americans obtain coverage. The Congressional Budget Office estimates that 13 million Americans will end up without health insurance while the premiums for everyone else go up 10%.

The issue here is not only that bipartisan collaboration would most likely produce better public policy. Bipartisan collaboration would produce more enduring public policy. It may be that the last major tax reform has lasted 30 years because it was developed in a split Congress that made bipartisan cooperation necessary.

One truism in the economy is that investors do not like uncertainty. Neither do health insurance companies, which are expected to raise their premiums as much as 37% next year if they have not dropped out of the Obamacare insurance market completely. The current uncertainties, by the way, are caused not only by Congress’s attacks on the law, but also by Trump’s continuing efforts to sabotage it by holding back subsidies and significantly reducing the sign-up window to fulfill his own prediction that the Affordable Care Act would “implode”.

We are witnessing the politics of retaliation in Washington. The instabilities this causes in the economy ultimately cause instability in the lives of the American people. It is a large price for us to pay when politics becomes all about winning rather than doing the jobs we send people to Washington to do.

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