Michael Hicks is the George and Frances Ball Distinguished Professor of Economics and the director of the Center for Business and Economic Research at Ball State University. His column appears in Indiana newspapers.
There’s nothing like a significant piece of legislation to shed light on the hypocrisy of many who make claims about tax policy. Just nine years ago, the entire Democratic Party made claims in unison about the benefits of fiscal stimulus and a large tax cut, while the GOP voted in lockstep against it.
Quite the reverse occurred just last week, with the GOP voting in unison on large reforms, with the Democrats voting unanimously against it. Shills on both sides made the empirically unsupportable claims that these policies would generate more taxes than they cost. In today’s sound-bite vernacular that means the policies "pay for themselves." Americans are rightfully tired of this hokum.
As it turns out, the economic models underlying the economic effects of tax cuts and spending increases rely on the same set of assumptions and the same lengthy body of empirical research. So, if you put the size of the cuts and the average of the taxpayer response into an equation, a surprising result occurs. You get precisely the same answer every time whether or not you are a Republican or Democrat. Certainly, think tanks often cherry pick assumptions about the likely size of the tax cut or the response of taxpayers, but that’s the only way to get a different answer. That is if you can do the math in the first place.
In lieu of a constructive discussion about the most likely effects of tax policy changes, we get pure nonsense with the loudest, least informed and vilest voices getting the grandest stage. Perhaps we are trapped in a prisoner’s dilemma, where only the most polemical and vacuous claims are offered by our political class. As voters, we deserve nothing better than the fruits of our electoral choices. There’s a good New Year’s resolution here.
To be sure, there are good reasons to support and oppose both the stimulus and current tax reform policies. For the record, I supported both the 2009 stimulus in this column and in published studies. I also support the most recent tax reforms. I feel both policies were right for their times, given what we could know about them when they were passed. I suspect this is a common sentiment among economists.
As it turned out, among the flaws of the 2009 stimulus were hidden disincentives to work. Unlike the New Deal, this legislation paid folks to remain idle during the Great Recession. This had unfortunate side effects on families and the economy. The 2009 stimulus looks a lot less valuable in hindsight than it did at the time. Still, it was the right call for the times.
The 2017 tax reforms simplify, rather than complicate, the tax system and so are less likely to generate unexpected consequences. But, understanding its impact relies upon predictions about behavioral responses to tax rate changes by households and firms. Right now, this looks like a policy that will generate economic growth and more equity across taxpayers. How much it fulfills this promise won’t be known for several years. Still, it is the right policy for the times.
Among the many changes in the new tax law are the elimination of many deductions that only impact high-earning households. It is important to keep in mind that households who earn more than $250,000 a year pay more than half of all income taxes, while those who earn under $50,000 actually receive a negative income tax. So, any tax cut will return more money to higher-earning households, even if middle class taxpayers receive a greater proportionate cut, as is the case in this legislation. These facts are easy to demagogue, but it is good to keep in mind that the much-maligned top 1 percent of households pay a quarter of all income taxes. It is almost certain that share will go up under the new tax plan. How odd it is that no one who criticized this tax plan mentioned these facts. Hopefully the New Year brings us better politics; oh wait, 2018 is an election year.