As the financial world waits with bated breath for details of Donald
Trump’s “phenomenal” tax plan, it’s important to understand that regardless
of what Trump announces on the tax front there will be no genuine tax cut.
The reason is that for a tax cut to be genuine it must be funded by reduced
government spending.
Tax cuts are unequivocally beneficial to the economy if they are genuine,
but if a tax cut isn’t funded by reduced government spending, that is, by the
government consuming less resources, then one way or another it will have to
be funded by the private sector. It will just be another Keynesian stimulus
program, and like all Keynesian stimulus programs it will potentially boost
economic activity in the short-term at the cost of slower long-term progress.
It should be obvious that the private sector cannot benefit from a tax cut
that it will have to pay for, but apparently it isn’t obvious because most
people seem to believe that the government can consume more resources and at
the same time the private sector can end up with more resources. This is an
example of believing the impossible. Unfortunately, it’s not the only such
example in the world of economics, in that many aspects of Keynesian theory
involve belief in the impossible.
The cost of government is determined by what the government spends, not
how much it collects in taxes. And we can be sure that during the next four
years there is going to be a large rise in the cost of the US federal
government, meaning that with or without a so-called tax cut the private
sector (as a whole) is destined to end up with reduced resources under the
Trump regime. We can also be sure that it would have ended up with reduced
resources under a Clinton regime.
The reason, as explained in the article posted at http://crfb.org/papers/lame-duck-president-2017,
is that spending increases in excess of revenue increases were ‘baked into
the cake’ prior to the November-2016 Presidential election thanks to budgets
dictated by previous presidents and Congresses. Getting a little more
specific, the linked article points out that 150 percent of new revenue a
decade from now is pre-committed to spending growth scheduled under laws that
were in place prior to the 2016 election. Moreover, this should be viewed as
an unrealistically-optimistic forecast because it assumes steady
inflation-adjusted revenue growth. A more realistic forecast would account
for the sizable decline in inflation-adjusted revenue that will be caused by
a recession within the next few years.
The bottom line is that any cuts in the rates of US individual and
corporate income taxes announced/implemented over the coming 12 months will
be ‘smoke and mirrors’, because government spending is going to increase. It
will essentially be a money-shuffling exercise to temporarily create the illusion
that the burden of government is shrinking at the same time as it is growing.
