While it is tempting to devote an essay with this title to the State of Illinois, I am not yet ready to deal with that topic calmly. What I wish to address here is fiscal policy at the national level. Although he has directed Congress to produce “tax reform” legislation as soon as they return to session, President Trump has provided only the barest outline of a program to both reduce taxes and reform the revenue system. The tax reduction policy that has been hinted at appears to be based up the “supply side” economic theory that, if one lowers taxes, spending will increase and the economy will grow. This growth will produce more revenue. President George H.W. Bush pronounced this to be “voodoo economic policy” as long ago as 1980. Yet it continues to be an article of faith in many quarters.
In addition to tax cuts, President Trump is proposing major spending increases on defense, infrastructure and border protection. Spending reductions in other areas of the proposed budget do not appear to equal these increases (although I must confess to a less than complete analysis of the administration’s proposed budget). Indeed, it is highly unlikely that all of the proposed spending reductions will survive Congressional scrutiny. This means that more revenue will be required.
Even if one assumes that the “supply side” taxation works as advertised, it is unlikely that it will work immediately. However, spending will increase immediately leading to larger deficits, more borrowing and more haggling over raising the debt limit. This is not what has been promised to the American people. The theory does not tell us how long it will take to work, and it does admit to any problems with deficits.
What is more troubling is the fact that the theory has never worked as advertised. Defenders of the policy insist, to the contrary, that the tax cuts during the Reagan administration were not responsible for the negative results that followed. They blame the monetary policy of the Federal Reserve and its efforts to control inflation by imposing very high interest rates. The evidence in this case is murky at best. The evidence with respect to efforts in the State of Kansas to adopt such a policy has been much clearer. Deficits have ballooned and forced the state to the verge of bankruptcy. If tax cuts are going to work for Kansas in the long term, that will be small consolation for her suffering citizens today.
A devout supply sider might argue that, “ceteris paribus”, their theory would work better. Sadly, in this complex world, all other things are never equal. Isn’t it simpler to replace complex economic theory with another idea?” If you want to spend money on some perceived public good, then you must impose taxation to pay for the expenditure. This is a truly conservative approach to public finance. The question then narrows down to “Who is going to be taxed for how much?” In answering that question, it would be entirely reasonable to focus on effective rates of taxation rather than nominal rates. Regardless of “tax brackets”, our Federal taxes have hovered around 16%. Strangely enough, that is the same as the average effective corporate tax rate.
Tax reform is needed. Do we wish to tax individuals and corporations at different rates? Should income taxes have graduated rates, and what should they be? What exemptions and deductions should be permitted and for whom? On what basis are these tax expenditures justified? This is not a task that the Administration and Congress can complete between now and September 30th. It is a task that each party should have undertaken long ago. It is difficult, but it lies at the heart of the democratic process. We elect public officials to address these difficult problems in a serious way. What we too often get is a series of grandiose pronouncements. “I will cut taxes.” “I will eliminate waste.”
This is closely tied to my argument in an earlier essay on the balanced budget. Revenue for capital expenditures may come from borrowing. Taxes will have to cover annual principal and interest payments. This is not rocket science. We all do it when we wish to buy a house or a car. We reach a clear and open agreement with lenders as to the amount of down payment and annual principal and interest payments are within our means. If we simply cannot do without, and the bank won’t lend us the money, we can alway get another job. In the public sector that translates as raising taxes.
The policy makers in Washington may be thinking about these things. However, I have seen nothing in the public discussion so far to give me much hope. An argument between Congressman Cut Taxes and Senator Tax the Rich fails to get at the heart of the matter. They are trading slogans and not discussing alternatives.