Thursday, November 30, 2017

Republican tax cuts will hurt Americans. And Democrats will pay the price

Bruce Bartlett worked as an adviser for Ronald Reagan and George HW Bush. His new book is The Truth Matters

Bruce Bartlett
Nov. 20, 2017

I think many Democrats and independent political observers are puzzled by the intensity with which Republicans are pursuing their tax cut. It’s not politically popular and may well lead to the party’s defeat in next year’s congressional elections. So why do it?

The answer is that Republicans are pushing the tax cut at breakneck speed precisely because they know they are probably going to lose next year and in 2020 as well. The tax cut, once enacted, however, will bind the hands of Democrats for years to come, forcing them to essentially follow a Republican agenda of deficit reduction and prevent any action on a positive Democratic program. The result will be a steady erosion of support for Democrats that will put Republicans back in power within a few election cycles.

The theory was laid out almost 30 years ago by two Swedish economists, Torsten Persson and Lars EO Svensson. In a densely written article for the Quarterly Journal of Economics in 1989, they explained why a stubborn conservative legislator would intentionally run a big budget deficit.

It has to do with what economists call time inconsistency – the consequences of actions taken today may not appear until the future, when a different political party will be in power. Thus the credit or blame will accrue to that party rather than the one that implemented the policy, because voters tend to attribute whatever is happening today to the party in power today even if that party had nothing to do with it.

Thus Barack Obama got blamed for a recession and resulting budget deficits he had nothing to do with originating. No matter how many times the Congressional Budget Office showed that the vast bulk of the budget deficits in his administration were baked in the cake the day he took office, Republicans nevertheless blamed him and his policies exclusively for those deficits.

Of course, another reason for those deficits is that Republicans systematically decimated the federal government’s revenue-raising capacity during the George W Bush administration with one huge tax cut after another. All of these were sold as necessary to get the economy growing again. The failure of the economy to respond positively was never taken as evidence of the failure of those tax cuts, but rather as showing the need for even more and bigger tax cuts.

By 2022, Republicans will be back in control of Congress and in the White House by 2024

The payoff for this orgy of tax-cutting came when Obama took office. All of a sudden, Republicans noticed that there were large deficits and insisted that Obama do something about them right this minute! They even made the nonsensical argument that spending cuts would stimulate growth by reducing the burden of government.


I believe that the same cycle will rerun over the next few years. Should Democrats get control of the House and/or Senate next year, Trump and his party will insist that deficit reduction be the only order of business. Automatic spending cuts resulting directly from the tax cut will start to bite, hurting the poor and middle class primarily, according to the Congressional Budget Office, and making them forget that they resulted from a huge tax give-away to the wealthy that increased the deficit by $1.5tn. Democrats will get much of the blame due to time-inconsistency.

It’s possible that Trump’s appointees to the Federal Reserve may be so alarmed by the inflationary potential of the growing deficits that they will raise interest rates in response. This could trigger a recession that will be blamed on a Democratic president taking office in 2021, just as happened with Obama. But that president may not be able to enact any stimulus at all because deficits crowd out any fiscal space. By 2022, Republicans will be back in control of Congress and in the White House by 2024. In 2025, they will demand still more tax cuts.


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