Tax Cuts As Tragedy, Then Farce
And more from this week in America...
For the second week in a row, we’re starting with the Wall Street Journal editorial page. What can I say, when the orthodoxy of a discredited fundamentalism crumbles, the happenings within the High Temple are rather interesting to observe.
ONE THING TO READ
Your one thing to read this week is from Mike Pence and Pat Toomey at the Wall Street Journal: “If Republicans Don’t Win, Get Ready for a Tax Hike.”
In key and timbre, it has the character of a typical incantation. Tax cuts create growth. We must do more. But the notes struck are so, well, wrong, that one worries for the well-being of everyone involved in its publication. Consider their data, and the real world’s data, on economic performance before and after passage of the Tax Cuts and Jobs Act (TCJA) in December 2017:
1. Growth. Pence and Toomey write that “the Obama years had offered only lethargic recovery,” with “weak growth from 2009 to 2016.” From the recession’s end in the third quarter of 2009 to the end of 2016, annual GDP growth averaged 2.3%, according to the Bureau of Economic Analysis. Growth rose to 3.0% in 2017 but then, after passage of TCJA, it fell the following year to 2.1%.
2. Employment. “Within two years the U.S. gained an extraordinary seven million jobs.” This is false. Employment in December 2019 was 4.3 million jobs higher than when TCJA passed in December 2017, according to the Bureau of Labor Statistics. That rate of increase was below the annual average for the “lethargic recovery” and “weak growth” of 2010–16. For instance, the economy added 5.3 million jobs during 2013–14 period and 5.0 million jobs during 2015–16.
3. Tax Revenue. “Growth was so significant that government revenue as a percentage of gross domestic product increased, driven by higher earnings and booming business activity.” Seeing as growth was not “so significant” (in fact, it slowed), the rest of this statement is unsurprisingly wrong, too. Revenue as a percentage of GDP was 17.1% in 2017 according to the Congressional Budget Office. After TCJA’s passage, it fell to 16.3% in 2018 and remained at 16.3% in 2019.
4. More Tax Revenue. “More than six years after the TCJA took effect, tax revenue has exceeded CBO projections from June 2017.” In June 2017, CBO’s projection for 2023 tax revenue was 18.2% of GDP. Actual 2023 revenue was 16.5% of GDP.
5. Yet More Tax Revenue. “By 2023 annual tax revenue had … returned to its historical average of about 16.5% of GDP.” That’s not the historical average, not even close. Prior to TCJA, a figure that low was recorded in the three years after the Great Recession (2009–12), the two years after the second round of Bush tax cuts (2003–04), and one other time since 1960 (in 1965, I don’t know why). Average tax revenue as a share of GDP from 1960 to 2017 was 17.4%.
What facts did the op-ed get right about growth, job creation, and tax revenue? Literally none. The reality, as I explain in Tax Cut Did What?, is that TCJA failed miserably on the metrics chosen by its proponents. What it did do is send the federal budget further into deficit. Now the same proponents are trying to make the case for a tax cut twice as large, and they have no case for it that isn’t just made up.
Speaking of failed ideologies, it seems Karl Marx was on to something here: Pursuing TCJA after the failure of the Bush tax cuts was indeed a tragedy. This time around, it has devolved into farce.
BONUS LINK: The Peterson Foundation’s Solutions Initiative 2024 brings together recommendations for addressing the U.S. fiscal situation over the next 30 years from seven organizations across the political spectrum. The conservative proposals from the American Enterprise Institute, the Manhattan Institute, and the American Action Forum all land at spending between 19.4% and 20.1% of GDP, and revenue between 18.8% and 20.1% of GDP. This will not be surprising to readers of American Compass’s collection on “Return of the Fiscal Conservatives,” which lands on what I call the “19-20 Solution.” As I explained on Twitter last month:
What is the 19-20 solution? It's pretty easy to understand. The only way to bring our budget back to balance is to get taxes and spending back to between 19 and 20% of GDP. Read between the lines, you discover there's actually incredibly broad agreement on this…
As always, if you want to know what will be happening in conservatism tomorrow, read American Compass today. And hey, speaking of American Compass…
THIS WEEK AT AMERICAN COMPASS
The Compass Point is from the incomparable Michael Lind, on a just economy as the ends and efficiency and progressive taxation as merely means: So What If Tariffs Are Taxes?
The regressivity of this or that specific tax—or even of the tax system as a whole—is irrelevant as long as workers share equitably in the gains from a growing economy and as long as the necessary functions of government are adequately funded. Moreover, while creating “losers” by deregulating product and labor markets is easy, raising taxes on the “winners” to fund higher government spending on the “losers” is politically perilous. And even when it succeeds, such transfer payments prove to be poor substitutes for family-supporting paychecks. If reducing inequality is the objective, the priority should be raising pre-tax wages, not after-tax subsidies.
ALSO ON THE COMMONS
Patrick T. Brown highlights work from the Economic Innovation Group showing the good news for workers in the economic data of recent years.
Aaron Renn argues that, both as electoral targets and as centers of governance, cities hold untapped potential for conservatives.
Yours truly observes that, when economists talk about immigration, the economics is beside the point. The point is more immigration.
And, on the American Compass Podcast this week, Financial Times columnist Ruchir Sharma joins me to discuss his fascinating book, What Went Wrong with Capitalism?, and the ways regulation causes modern markets to malfunction.
WHAT ELSE SHOULD YOU BE READING?
At First Things, Compass advisor Michael Toscano writes about the divide “between those who can get a break from their devices and those who cannot. Perhaps genuine social justice demands a redistribution of this freedom to every social class in the country.”
Much as the pandemic brought into focus the woeful state of American supply chains, Russia’s invasion of Ukraine, and U.S. efforts to aid its defense, have made clear the extent to which our defense industrial base has collapsed. Reuters provides an in-depth report on “the sorry condition of the West’s munitions industry” and the resulting problems on the battlefield.
Sohrab Ahmari interviews Teamsters president Sean O’Brien in the wake of his speech at the Republican National Convention. “There’s a lot of people on the left are attacking [the speech],” he says, “saying I should never have been there. But they don’t have a problem when we donate $500,000 to the left. … Our members, 1.3 million members, I can’t just represent one party or affiliation. I gotta represent every single party and respect that process.”
The Left’s reaction to JD Vance’s selection as Trump’s vice presidential nominee has been mostly to sneer. A good example is this effort from OnLabor, which argues that while Vance “has frequently portrayed himself as a pro-worker, conservative populist,” he in fact “displays a repeated practice of claiming to support workers and their right to organize while practicing business-as-usual anti-union and anti-worker politics.” In this view, questioning the effect of a transition to electric vehicles on U.S. autoworkers is not “pro-worker” but rather “climate denialism.” Those analysts are lying to themselves and doing a great disservice to the readers with whom they share an ever-thickening epistemic bubble, from within which the real world outside will only become more confusing. Here are more serious and informative analyses from different political perspectives:
The GOP’s Big Working-Class Bet (Compass advisor Ruy Teixeira at the Liberal Patriot)
Democrats Might Want to Take J.D. Vance Seriously (Simon van Zuylen-Wood at New York Magazine)
And finally, from Aaron Slodov, founder and CEO at Atomic Industries, a striking video contrasting work in the gig economy with the future of maritime industry jobs.
Enjoy the weekend!
Balanced budget? As long as we are the reserve currency of the world, we will never be able to balance the budget and not run deficits. Not possible. Now, we have to be the reserve currency if we want to keep dictating and controlling the world's financial institutions. So...
Besides taxes the republicans have nothing else to really say. The party is a blank?
The democrats? Let's see who owns them? Silicone Vally, Hollywood, Wall Street, bankers, and now the multi-nationals that Trump drove out. Which he was correct about. I think the democrats will even scoop up the military-industrial complex too as the republican's squabble and sleepwalk. Crazy and will keep getting crazier. The peaceful years since the end of WW2 are over. We can't protect the world anymore and we don't really want to. Back to the way the real world worked before WW2.
Recent events have led me to a deeper sense of cynicism about the US political parties and their media advocates. Tax cuts on higher income brackets certainly advance the self-interest of the wealthy. Probably tax brackets were too high after WWII, but the obvious problems we now face are insufficient government income, along with too rapid a growth in entitlements. How can this even be controversial?