Republican Tax Bill Is a Prelude to Higher Taxes
EDITOR'S CHOICE | 21.12.2017

Republican Tax Bill Is a Prelude to Higher Taxes



Yesterday the Republican controlled U.S. Senate passed a gigantic tax bill. The House will today agree to it and Trump will sign it as soon as possible.

The bill lowers the corporate tax rate from 35% to 21%. It lowers the top tax bracket from 39.6% to 37%. It will burden at least half of the poor people. It is wholesale looting:

When fully-phased in, the bill will give 83 percent of its benefits to the top 1 percent. Incredibly, it raises taxes on half of working families.

Republicans always argue along the fraudulent theory of supply side economics. They claim that higher income for companies will allow them to invest more and to thereby increase economic activity. It is a stupid argument. There is no empirical data to support it and no real social scientist takes it seriously. Most companies do not lack money. They can also borrow at record low rates. No company holds back on investing if there is additional profitable demand for its products. Without additional demand there is simply no justification for any additional investment.

Demand can not increase if the people have no money to buy. To increase demand, disposable income has to rise via higher wages, more welfare distribution or less taxes in the lowest tax brackets. (An increase of consumer debt can only work so long and has negative long term consequences.) 

The new tax law will increase the federal deficit by roughly $1.5 trillion over ten years. The giant rise in debt is intentional. It will be the justification for step two of the republican plan to bring the U.S. back to the Gilded Age. Speaker Paul Ryan already announced such plans:

Congressional Republicans and the Trump administration are eyeing sweeping legislative and regulatory changes to the country’s welfare system next year.

Speaker Paul Ryan (R-Wis.) said he wants to use the fast-track reconciliation process next year for entitlement reform, with a focus on promoting work and career-based education. 
There’s broad support in the Republican conference for changing the federal safety net to impose stricter work requirements on programs like Medicaid and food stamps.

For now the Republicans will likely hold back on medicare and social security. These are earned benefits, not "welfare". Even Republican voters want to keep them without major changes. Any attempt to touch these programs would lead to a heavy electoral backlash. It is thereby unlikely that the Republicans will be able to steal enough from the poor to compensate for all the money they now hand to the rich. Instead they will increase the federal debt.

While most voters do not like the current tax bill, the Republicans might benefit from it in the 2018 midterm election. Most of the negative effects of the bill will only be felt in 2019 and later years. It is those future years that the republicans have to fear. As long as interests rates are low an increase in federal debt has little effect. But when interest rates rise, as they will, the federal budget situation will become way more difficult.

The mini-Reagan in the White House and Republican Congress members like to compare their current bill with Ronald Reagan's 1981 tax bill. That one went into a similar direction than the current one. The top tax rate decreased from 70% to 28%. But by 1982 and in later years Reagan had to introduce the highest tax increases ever to keep the budget at least somewhat stable. Tax revenue as a percentage of GDP did not decrease at all under Reagan.

The two steps of decreasing taxes and slashing welfare the Republicans planned for will likely be followed by third (and forth) step that will decrease the impact of the original bill. Historically the overall positive and/or negative impact of this pandering to their rich sponsors will likely be much less than both sides of the aisles are predicting.